Q1 2021 17 Education & Technology Group Inc Earnings Call
[music].
Yeah.
Good evening, and good morning, ladies and gentlemen, and thank you for studying by for 17 X Teck's first quarter 2021 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 will now turn the meeting over to your host for today's call Mr. Raymond Huang 17, Ed.
Ed Tech Investor relation start Victor Please first agreement.
Okay.
Thank you operator, Hello, everyone and thank you for joining us today our earnings release.
As for Bill here earlier today.
Available on our IR website on the call with me today, Amit for Andy Italian <unk>, founder, Chairman and Chief Executive Officer, and Mr. Michael Chow to Erika on the Chief Financial Officer, Andy will walk you through our Lady its business for permits and strategies, followed by Michael who will discuss our financial procurement on 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 20 <unk> of the picture.
Security trend at Nike.
<unk> 30 for and the U S. Private Securities Litigation Reform Act of 1995 before work and statements are based upon management's current would give backs station and for current market and operating conditions and average late 2 events.
No on a non risk 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 for permits achievement to differ materially.
Information regarding sales 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.
Now my pleasure to introduce our chairman and Chief Executive Officer, Andy Pease go ahead.
Thank you Raymond Hello, everyone. Thank you for joining us for our first quarter, earning calls.
We had another quarter of free robust top line growth net revenues increased by 107% year over year to RMB, $474.2 million, which exceeded the high end of our guidance by RMB $2.2 million.
2.7.
$2.2 million.
270 for 2 minutes for the.
Part of the quarter, our MA use of <unk> applications for students demonstrated strong resilience among the latest changes in regulatory environment.
Average and we use of in school applications for students for the first quarter only decreased by 5.5 points.
5% year over year to $80.9 million and the use of inks grew applications for strength in March decreased by 21, 3% year over year to <unk>.
$18.6 million.
If you compare students meus in March 2021, which was the first months of the 2 sales in 'twenty once spring semester with students Emma use in semester 2020, which was the first month of the 2020 force method, it's only decreased by 8% the decline in March.
Particularly on par.
It's really a result of high levels.
In March 2020, as a result of COVID-19.
Demick once we were encouraged to use more tools like all of US to continue this study at home.
There was concern in the market about the regulatory environment since the start of the year. We are closely monitoring the policy changes very carefully from ink school perspective, we saw policy regulating digital homework moderating over the over the last few months from the initial notice on strengthening sales.
Management in primary and secondary schools published on January 18th debt strictly limits self from us and prohibits assigning homework on cell phone to a more tend to 5 year working plan published on April 28, that's debt not to rely on digital products to assign homework we.
Also see further notices promoting using there is information technology measures to diagnose students homework you can notice on our student homework management published on April 8.
We clearly see there are still a strong demand for schools incumbent to use technology to improve in school learning experience and efficiency in various scenarios, including homework. We are still confident that the room for gross of our in school applications for students remain strong in the next few years.
2021 marks the 10th anniversary of our company, which reflected on what we set out to do have this updated our vision based on the latest strength in education.
Over the past decade, driven by our mission to make learning beautiful we started helping primary school students to practice English listening and speaking Skus with technology, we're rapidly expanded our services to a full range of executions narrowed across subjects and grades including clubs preparation cost delivery.
Homework related activities and academic assessment.
3 years ago, we launched our online after school tutoring business.
To further enhance the learning experience for our users as our business continues to grow our vision Crystal line, Dennis through integrating <unk> and after school scenarios to become a platform that delivers high quality education, driven by technology and artisan spirit.
We believe that with our technology and insight into students in school learning progress, we are well positioned to help Chinese hundreds of thousands of public schools to improve the learning experience efficiency for the students. We believe this only improvements for listing the public schools can find that they bring about industry wide reform.
Debt come truly alleviate the burden on students and parents.
What defines a beautiful learning experience, where she was ideal application looked luck on <unk>.
For these improved as our business and then do you have a view this group.
2 high quality education should specify through key words.
Alrighty personalization and ability oriented.
From 977 to 2021, China's education system has made tremendous achievements.
3 key factors remain to be improved after positive 45 years equality personalization and ability oriented education first b quality generally speaking China has achieved a lot in delivering basic execution to almost all Chinese citizens are first.
Equal team for the next few decades, the focus will be on how to provide equal access to quality education.
In the past and Luckily over the next day decades ago, lower tier cities with Steve its rightful improvement in the quality education resources, especially content and teachers.
Based on the current status in China's education system. The most feasible solution to the equal distribution of educational resources is by leveraging high quality educational content and technology, rather than just volume on teachers.
The real need for companies to enter China, hundreds and thousands of Skus to provide tailor made high quality educational content for every teacher. So that teachers can teach and students can learn more effectively and efficiently I believe that this would probably be the most practical way to narrow the resource GAAP in education between low.
<unk> and top tier cities.
We see clearly with high quality content can bring to educational equality, we have been and will continue to invest in our English business content and technology.
This is not limited to content related homework assignment.
Homer activity, but also cover areas like cross preparation cost delivery and academic assessment.
The second key words, it's personalization public school will still continue to play a dominant role in China's education system large classes with more than 40 or even 50 students will remain the cases at most of the public skus.
There is a still a long way to go before the quasi public schools in China will be reduced to around 20 students.
Personalized insurance for more effective and features students will be difficult on this such a situation without the help of technology.
Evolution accretion is 1 of the most important stepping stone to achieve higher levels of personalized education last year tens of millions of students in China completed academic assessment on our platform. Please note that what I referred to were not homework.
Academic assessment.
The future more on the more positive data will increasingly replace summative data to generate a more comprehensive profile of the learning progress of each student.
The evaluation of our students' academic performance will be less reliant on a single zone, but all Keith.
<unk> along the way.
These profiles public schools teachers, as well as instructed and futures and bottom line large closets converter subsidence in a personalized way.
The provision of targeted learning recommendations on tutor and based on through and accurate understanding of each student's learning progress on weakness on the key to personalized education. This is also what we are striving for to achieve with our investment in <unk> technology and products under our integrated model.
<unk>.
Our ability oriented applications is the thing that will help make learning beautiful day.
Spike limitations exist, we are pleased to see debt the tune call and call out reforms have made a lot of progress over the years and modules designed to measure the capability and personal development of students were introduced for example, listening test were introduced as a new session for English test across China.
All road test introduced at although the total studies reading has become more and more important in tiny pets and problem solving and application of mass formula in data live scenarios have become more and more important in med tech.
Going forward test designed to access students real world capabilities, we will for sure let's take out for greater weight of the tool on the Gulf Coast Exempts, China will for sure make major progress.
Education system over the next 10 years with the assistance of Internet technology content and data.
Over the next decade, our company will have a huge growth opportunity. If he can first leverage technology and precisely recommend content tailored to the needs of teachers and students in both in scoop and optical centers and to help narrow the gap gap for educational resources.
Second for citizens personalized education through comprehensive and educate accurate student assessment.
Third meet for the underlying need for ability oriented education, and all around personnel, which are the emerging trends in more than education.
Yeah.
Next I would like to talk about how I can see low education industry. The longer ramp there are helping a lot of attention around potential regulatory policies on the education sector. However, I would like to direct everyone's detection attention to look at the industry for a longer term perspective.
China is an efficient system has reached a stage where on the education and the Internet has become indispensable. This is a well recognized in the 14th 5 year plan debt with approved this March English the government clearly stated its intention to actively development develop.
Unlike classroom and utilized.
The advantages of on the education, the online classroom and online education mentioned in the Fourteens 5 year plan on not limited to online Scoop, but also includes the digitalization of various in school education scenario.
The education authorities also rolled out a series of supporting policies online education on the homework and personalized home or for example in the opinions on strengthening the construction and application of online education resources in primary and secondary school Joey Umar <unk> touch on term charters essential until you're telling me.
Again to answer that <unk>, yet and the annuities are threatening commerce management in schools and the compulsory education for your cash on E, which always vishal so everybody that's moving.
The government introduced new requirements to leverage technology to make <unk> more efficient and tailored to the needs of students in the guidance are curbing.
Kirby.
Among students among schoolchildren urgency on the <unk> ship on conforming loans you've already.
Issued on April 20, <unk> the operating at peak.
Net approach to allow teaching time, using digital products, which should be less than 30% of total teaching time. We believe these policies will benefit the industry in the long range and supports ultimately healthily and sustainably group. It is also clear that the education authorities now have a clear vision.
About the current situation and the future direction of the education system.
China is also included in its 14th filed year plan, our long term goal of becoming a strong country education by 22000 net 35 guided by our vision. We believe that we can support the government's efforts to improve education, we aim to improve the learning experience for students address.
The challenges of educational equality tailored education to meet students individually educational needs and the stimulus students to pursue all around development through ability oriented education.
Ultimately education is to serve students whether it is done in school or office group, whether it's delivered by teachers instructors off by futures After school and whether it is conducted online or offline only by improving.
Efficiency and truly alleviating the burden on the students and parents can we maximize the effectiveness and the efficiency of education. We believe that the best approach is to truly connect in school and office group learning identify the problems and a rising scoop and solve them in school and after school in a more.
Personalized manner.
For futures Nowadays are able to see the in school lending data of students understand there are weak points and excess premium localized educational content in various regions in China, the premium localized content and unique insights into the learning process of students on the huge value brought to suit by the in school and office.
Integrated model. Our next priority is to deepen these functions and to cover more students from regions.
This is the rationale behind our integrated model the essence of integrated model, it's not just the low customer acquisition costs, but to leverage our integrated integration of <unk> and after school operations technology and data in after Q3 to address the issues identified.
In scoop in a more personalized way so that eventually we can help students improve their academic performance in effectively efficiently and alleviate the burden nomad.
No matter your SKU and optical products and so we will always focus on creating value for our users.
This is the only way for us to develop leading products and maintain our leading position in both <unk> and <unk> markets and become a great company.
Now I will turn the call over to Michael our CFO to walk you through our latest financial performance. Thank you.
Yeah.
Thanks, Andy and thank you everyone for joining our call I will now walk you through our financial and operating results. Please note that all financial data I'm going to talk about will be presented in RMB terms on.
I'm here to report strong results for the first quarter of 2021.
We have achieved strong top line gross net revenues increased by 107% year over year to RMB 470 for milling in the first quarter 2 on in 'twenty 1.
Seeding the high end of our guidance by around $4.2 million.
Net revenues from online K 12, tutoring services increased by 118% 2 to RMB $463 million in the first quarter up to 1.2 per watt.
Before I review, our first quarter financials in details I would like to remind everyone about the seasonality in our quarterly financial performance.
That we have sharing on the quarters.
Your first and third quarters and to incur high amounts of sales and marketing expenses as these 2 quarters includes summer and winter holidays.
On a large scale promotion on policies to take place and.
And death associated with promotion associated promotional cost expenses.
<unk>.
The corresponding major increase in revenue, however will only be primarily reflected in our second and fourth quarter.
So we typically required relative a lower quarter to quarter revenue gross rates for the higher selling and marketing expenses for since third quarter, leading to a larger losses in such quarters, adding a second fourth quarter debt.
Quarter over quarter revenue gross is much higher while incurring lower sales and marketing expenses, leading to lower loss ratio for being such quarters.
Internally, we typically compare consecutively for instance, third quarter together.
While our second half fourth quarter versus each other to see the chance given the seasonality.
During this past winter vacation.
We have successfully manage our promotional cost strategy and efficiency.
So our operations achieving high gross while controlling while the new student acquisition expenses were controlling for ought to be well. Our overall operational efficiency continued to improve and we scaled up after taking into consideration on seasonality.
The number of full price students converted during the winter conversion cycle increased significantly which was more than double the number in the winter 2020 and around 30% more on Dana so much on 'twenty despite industry competition.
This was reflected in our paid cost enrollments.
We're primarily new PE crossing enrolment converted.
During the winter 2021 conversion cycle.
Our paid course enrolment in the first quarter increase year over year to 543000.
This was all achieved while our new enrollment cash remained relatively stable.
An increase only by around 10% when compared to December 2020, our rates.
Significantly lower than the industry average.
We believe this demonstrates a significant benefit in the edge of our integrated model.
The gross billing on.
Online K 12 tutoring services in the first quarter Thomson, 1 while RMB $603 million for presenting on year over year increase of 126% from <unk>.
<unk> 277 billing day transport on time.
From a revenue recognition perspective, we would like to point out net net revenues from debt.
The online K 12 tutoring services in the first quarter on the top 21, who would have been slightly higher but the revenue recognition on schedule was delayed by a late Chinese new year, you touched on 'twenty, 1, which led to a 1 week delay in accompanies spring semesters starting date.
And Thats a whole week less of revenue recognized in March on 'twenty, 1 as companions.
Our total <unk>.
But such revenue will be recognizing a second quarter in 2021.
The company will also like to note that such variation in cost starting day and revenue recognition schedule are likely to happen over the years.
Now I will go through our first quarter financials in greater detail.
In addition to the revenue and pain coursing borrow money from income I shared earlier, our cost of revenue.
RMB $188 million, representing an increase of 128 year on year increase from the first quarter on top 20, <unk> was primarily due to the increase in compensation costs for instructors in Q2's and teaching material costs.
Which increase was largely in line with the gross of our on net revenue from online K 12 tutoring services. During the same period as it would provide service for 2 more students.
The increase in compensation costs for instructors and tutors.
Also partially increase because we hire more tutors to prepare for an expected increase in enrollments.
2020, sorry, Thomas on tier 1.
Spring semester.
Okay.
Gross profit was RMB $283 million, representing on year over year increase of 95% from the first quarter was on 'twenty.
The increase was primarily driven by an increasing net revenue.
Our gross margin was 64% compared to 64 percentage is going to first quarter on time on 'twenty.
And the decrease was attributed to.
As hiring more teachers to prepare for the spring semester.
Moving on to the expense side, our total operating expenses were RMB $953 million.
Including 17.1 million of share based compensation expenses.
And this represents a year over year increase of 154% from 375 million for first quarter on top of 20.
Total operating expenses as a percentage of net revenue increased to 201% from 160 for casinos first quarter.
So on 'twenty.
Selling and marketing expenses were RMB $614 million, including $5 million of share based compensation expenses. This representing his circumstance on year over year increase of 218%.
From RMB 193 million in the first quarter on 'twenty.
This increase.
Was primarily due to the increasing promotional cost expenses and salaries and welfare for sales and marketing personnel as well as branding related activities.
This was consistent with the fact that a number of new student and converted in winter 2021 more than double.
What was converted in the wing tips on 'twenty.
R&D expenses were.
RMB $210 million, representing on year over year increase of 58%.
This was primarily due to an increase in salary and welfare for research and development.
Personnel.
Our R&D expenses included an RMB 11 million of share based compensation.
Our G&A expenses were RMB $113 million for.
Presenting on a year over year increase of 165% from the first quarter on time on 'twenty.
Primarily due to an increase in our salaries and welfare for G&A person now and also including increases in share based compensation expenses.
Our loss of operations was RMB 667 million compared with RMB $228 million at first quarter on <unk>.
Net loss ratios as a percentage of net revenues was negative 148%.
<unk> 41 for Tim.
Our net loss was RMB $616 million.
On your first quarter on 'twenty 1.
Our non-GAAP adjusted net loss was RMB $589 million.
And your first quarter from 21, our non-GAAP adjusted now with percentage of net revenue was negative 124% cash.
Compared with <unk>, 78% for first quarter on 2020.
Yeah.
As of March of first for.
21, our cash on cash equivalents.
RMB $2.2.2 billion.
Sure.
And finally deferred revenue was RMB $723 million, representing an increase of 21% from RMB $598 million as of December 31st So on <unk>. The increase was primarily attributed to our rep per business gross which generally.
And thus our deferred revenue continued to grow as we convert more students.
With that I will now provide our business outlook based on on current estimates.
Total revenue for the second quarter on 'twenty 1.
Expected to be between RMB $614 million and RMB $616 million for presenting on year over year increase.
Of the 100 Cynthia.
36% to 143 per cent from the second quarter.
From 26.
These estimates represent our current and preliminary view, which are subject to change.
With that.
We conclude our prepared remarks, thank you.
Operator.
We are now ready to begin the Q&A session.
Yes.
As a reminder to ask a question you will need to press star 1 on your telephone to withdraw your question press the pound or has.
Please standby, while we compile the Q&A roster.
Once again and for wanted to ask a question.
Okay.
Your first question comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.
Yeah.
Hey, good morning, Thank you for taking the question.
So we understand that you're after school after school tutoring students, meaning from your east with Sandy.
<unk> Convention and also your offline operation.
On the on the <unk>.
Your line position. Thank you.
While we see them from a regulatory.
Regulation debt.
Each tighten the advertisement apothecium for online companies.
So we see many now.
Many on like company on that came from companies that during the.
Comes from acquisition export nation.
So I want to Hum can your teeth.
Sir your.
Site share from collapse.
Current customer acquisition efficiency.
And May you conversion on the off line and do you see any net.
Change recently.
And.
You also mentioned that in the U S.
Lack any flat because of high based on last year. So what's your outlook for the U a E.
Next 1 to 2 years. Thank you.
Yes sure.
Hi, I'll try to answer a question by question. So first in terms of your overall.
A question about latex efficiency.
Bose be it.
As a result of the regulatory environment change order.
On our institutions attempting to do offline explorations.
I think overall.
We usually have larger conversion cycles in winter into summer.
But a much smaller cycle is doing this spring and for C matters.
So during the spring conversion cycle too far we don't see any major change in terms of efficiencies or as you've said how we.
We're able to debt.
Causes sign on for many years, we don't see major changes in those trends as well as in CAC. When you are talking about.
Our immediate impact from the regulatory tangible out as a participating in offline exploration.
But on 1 thing we are happy to see is actually.
The latest trend is basically proving the benefits of integrated model, where we believe more and more people.
People, we actually deleveraging.
We'll be we'll be trying to 2.2 to recognize and to improve the teaching as well as conversion efficiencies through offline presence.
In addition.
First the integral model that.
You have to have to go to product just there was still a good product to serve the teachers and students and parents that means you have the opportunity to set the parents and with serving the parents you can get the user for paid for enrollment. So I don't think it's easy for them to compare.
Return to build up the content data and the product.
It's too.
Almost 10 years due debt.
So that means for our CSP for this semester.
We will not change and then maybe even though with them before just because of efficiency has become higher and higher.
So it just because the Chinese government want to improve the in school teaching in school learning.
And with that became current first wave all the parents to reduce debt burden flops, who tutoring dot net means.
Line more and more rely on our <unk> product to improve the teaching efficiency. They were more and more use out of home meridian assessment to make to make the tasks to 2 finished on us.
For in school, so that means I do think we have a free tier.
Opportunity to improve and they used for future.
Okay.
Yeah.
Your next question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question.
Yeah.
R&D Hi, Michael on for the presentation and taking my questions on 2 questions here.
1 is on your share loss could be driven about utilization of the.
In school education scenario.
Could you provide some point out with some color on your potential monetization model in the Insco goodness and could you give.
Give us some update on the progress of your content on validation.
And secondly regarding the regulatory requirements on the Beijing government on tuition collection and security produce share us what is the latest requirement that you have for so far and how will this impact your operating cash flow as Danny Thank you.
Yes.
Timothy I just wanted to clarify on your first question you were asking about any monetization plans for inks cooperation.
Right.
Okay, Yes, I think our strategy in terms of charging fees for any school operations still remain the same debt, we will largely remain free within schools and that I think.
<unk>.
That would be for our basic functions.
A woman Katrina doses.
Theta and I'll share the paydown into a downhole that for me.
And aside from going to see from from whether it be home for that.
So hung up on the cancel Mi achieved make me on top of huge if without some chairman that you don't feel like on that number for you.
Yeah on me in school.
What's your share photos on board at this time, but I know, we didn't fund until she had no 17.
For the future or should we be on the <unk> for the T&D Shah please well listen for now handle on them a good work on again share team would achieve on shell neither sufficient out from there.
<unk> went on their own timberland zone downtown come on is yet to know that you're on the gen..4.
Yes, we've seen that.
For the basic function within schools, we have been free but we have also seen multiple districts like.
Ashish on district on me in Beijing, and Hangzhou, Sri in Shanghai.
They were paying for premium services and integrity projects for us at a price of around $10 million per year for each district and.
We do see some on the.
This picture will become the more models for auto subsequent cities.
As we rollout and the demand for educational services with English schools will continue to rise.
I hope this answers your first question the second question.
Yes, you are right.
We've seen day notice from the Beijing government.
In terms of on tuition collection as well as our as well as deposit relative funds assets.
For the custodian bank.
We are closely monitoring it and we're also monitoring on what's being now likely to happen in Shanghai. Because you know we are retrofitting Shanghai on all of the actual cash flow impact on and a lot of impacts will be directly dependent on what's the actual policies in Shanghai. So.
So far we can only share that.
We will be preparing for any potential policies coming out here in Shanghai, but at this stage it will be difficult for us to speculate on what's the actual policy will be in China.
Thank you that's very helpful.
Once again, if you wish to ask a question. Please press star 1 on your telephone and wait for them to be announced once again its star 1 to ask a question.
Okay.
Okay.
Once again, if you wish to ask a question. Please press star 1 on your telephone.
Okay.
Yeah.
There are no further questions at this time I would like to turn the conference back at least for.
Mr. Curious these continue.
Thank you operator in closing on behalf of 17 <unk> management team.
We like to thank you for your participation on today's call. If you require any further information feel free to reach out to us directly. Thank you for joining us today that concludes the call.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
[music].
[music].
Good evening, and good morning, ladies and gentlemen, and thank you for standing by for 17 ex Texas first quarter 2021 earnings Conference call.
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 will now turn the meeting over to your host for today's call Mr. Raymond Huang.
Ed Tech Investor Relations Director. Please proceed Greenland.
Okay.
Thank you operator, Hello, everyone and thank you for joining us today, our earnings release what is true.
You'll get earlier today and available on our IR website on the call with me today, Amit for Andy Italian founder Chairman of the chips, if that'd be officer and Mr. Michael Child to Erika on the Chief Financial Officer, Andy will walk you through our Lady its business by permits and strategies followed by Michael will discuss.
Our financial procurement on guidance.
We'll be available to answer your questions during the Q&A session. After their prepared remarks before we begin I'd like to remind you as assets conference call contain forward looking statements as defined in section 20, <unk> security trend. After all 1930 for and the U S. Private Securities Litigation Reform Act.
1995.
Before work and statements are based upon management's current views in fac patients and for 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. This grid may cause the company's actual results performance or achievements to differ materially for the information regarding this and other risks uncertainties and.
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. It is now my pleasure to introduce our chairman and Chief Executive Officer, Andy Pease go ahead.
Thank you Raymond Hello, everyone. Thank you for joining us for our first quarter, earning calls.
We had another quarter for robust top line growth net revenues increased by 107% year over year to RMB 470 for 2 months, which exceeded the high end of our guidance by RMB 2 point in a minute.
2.7.
$2.2 million.
274 for 2 minutes for the past quarter, our MA use of useful applications for students demonstrated strong resilient among the latest <unk> new regulatory environment.
Average and we use our <unk> applications for students for the first quarter only decreased by 5.5 points.
By percentage year over year to $89 million and the use of <unk> applications for strength in March decreased by 21, 3% year over year to 18.6.
$6 million.
If you compare our students' meus in March 2021, which was the first month of the 2020 once spring semester was students Emma use in semester 2020, which was the first months of the 2020 for Smackdown. It only decreased 5.8% the decline in March.
Particularly partially a result of high levels.
<unk> in March 2020, as a result of COVID-19 pandemic, while obviously, we're encouraged to use more tools like all of US to continue this study at home.
There was concern in the market about the regulatory environment since the startup at midyear we are closely.
Closely monitoring the policy changes very carefully from ink school perspective, we saw policies regulating digital homework moderating over the over the last few months from the initial notice on strengthening self from management in primary and secondary schools published on January 18th Street.
For the limit cell phone use and prohibits assigning homework on cell phone to a more gentle 5 year working plan published on April 28th that's debt not to rely on digital products to assign homework. We also see further noted that promoting using there is information technology and measures to diagnose.
It Didnt homework you got notice on our student Homeward management published on April <unk>, We clearly see there are still a strong demand for school was incumbent to use technology to improve in school learning experience and efficiency in various scenarios, including Hulbert, we are still confident that the room for gross.
Our in school applications for students remain strong in the next few years.
2021 marks the 10th anniversary of our company, which reflected on what we set out to do have the updated our vision based on the deliberate strength in education over the PA.
Past decade, driven by our mission to make learning beautiful, we started helping primary school students to practice their English listening and speaking Skus with technology, we're rapidly expanded our services to a full range of artificial scenario across subjects and grid, including class preparation cost delivery hub.
Related activities and academic assessment.
3 years ago with loans, our online after school tutoring business.
To further enhance the learning experience for our users and our business continues to grow our vision Crystal line Dennis through integrating in Scoop and after school scenarios to become a platform that delivers high quality education, driven by technology and artisan spirit.
But believe that with our technology and insight into students in school learning progress, we are well positioned to help tonnage hundreds of stores in the public schools to improve the learning experience efficiency for the students. We believe this only improvements, but we're seeing the public schools can find that they bring about industry wide reform.
Debt come truly alleviate the burden on students and parents.
What defines a beautiful learning experiences for shoes, Baidu education looks luck amongst India for these improved as our business and on Sandy I'll give you this group.
2 high quality education should testify through key words.
Personalization and ability oriented.
From 977 to 2021, China's education system has made tremendous achievements.
3 key factors remain to be improved after positive 45 years equality personalization and ability oriented education first quality generally speaking China has achieved a lot in delivering basic execution to almost all Chinese citizens are first.
Daphne quality for the next few decades, the focus will be on how to provide equal access to quality education.
In the past and Luckily over the next 2 decades ago, lower TSA fees with steel its rightful improvement in the quality education resources, especially content and T cells.
Based on the current status in China's education system. The most feasible solution to the equal distribution of educational resources is by leveraging high quality educational content and technology, rather than just volume on teachers.
The real need for companies to enter Thailand, hundreds and thousands of Skus to provide tailor made high quality educational content for every teachers. So that teachers compete and students can learn more effectively and efficiently and believe that this would probably be the most attractive ways to narrow the resource GAAP in education between low.
<unk> and top tier cities.
We see clearly with high quality content can bring to educational equality, we have been and will continue to invest in our scoop business content and technology.
This is not limited to content related homework assignment.
Homer activities, but also cover areas like class preparation cost delivery and academic assessment.
The second key words, it's personalization public school will still continue to play a dominant role in China's depletion system large classes with more than 40 or even 50 students will remain the case at most of the public schools.
There is still a long way to go before the quasi public schools in China will be reduced to around 2000 students.
Personalization for more effective on any future students will be difficult on this such situations without the help of technology evolution.
Yeah.
<unk> is 1 of the most important stepping stone to achieve higher levels of personalized education Lafayette tens of millions of students in China completed academic assessment on our platform. Please note that I referred to were not homework academic assignment.
In the future more on the more positive data will increasingly replace summative data to generate a more comprehensive profile of learning progress of each for it.
The evaluation for students academic for bonus will be less reliant on a single zone, but all Keith.
<unk> along the way.
These profile public schools.
As well as instructed and futures all line large closets converter subsidies in a personalized way.
The provision of targeted learning recommendation on <unk> based on through and accurate understanding of each to the learning progress on.
On the key to personalized education. This is also what we are driving for to achieve with our investment in technology and the products under our integrated model.
Ability oriented education is the thing that will help make learning beautiful despite.
Despite limitations exist, we are pleased to see that the <unk> and golf reformed how it made a lot of progress over the years as modules designed to measure the capability and personal development of students were introduced for example, listening test were introduced as a new session for English test across China.
Oral test introduced debt, although the total studies reading has become more and more important in tiny pets and problem solving and application of magic formula in data lives in their routes have become more important in med tech.
Going forward test designed to excess students real world.
Mobility, we will for sure, let's take a greater weight of the Duke on the Gulf of exempt China will push for major progress in its basic education system over the next 10 years with the assistance of Internet technology content and data over the next decade, our company will have a huge growth opportunity if he can.
First leverage technology, and precisely recommend content tailored to the needs of teachers and students in both scoop and optical centers and to help narrow that gap gap for educational resources.
Second for citizens personalized education through comprehensive and educate accurate student assessment.
<unk> meets the underlying need for ability oriented education, and all around personnel, which are the emerging trends in more than execution.
Next I would like to talk about how I can see low.
Industrial is a longer ramp there are helping a lot of attention around potential regulatory policies on the education sector. However, I would like to direct everyone's detection attention to look at the industry for a longer term perspective.
Artificial system has reached a stage where on the execution and the Internet has become indispensable. This is a well recognized in the 14.5 year plan debt with approved this March English the government's clearly stated its intention to actively development develop on.
<unk> cartoon and utilized.
Advantages on the education low.
Unlike classroom and online education mentioned in the Fourteens 5 year plan on not limited to <unk>, but also includes the digitalization of various in SKU educations zero debt.
Education authorities also rolled out a series of supporting policies, all education on that homework and personalized home or for example in the opinions on strengthening low construction and the application of online education resources in primary and secondary schools Joe for you.
Todd ill touch on from charges changes on until you told me to answer that <unk>, yet and the annuities are threatening commerce management in schools and the compulsory education for you touched on <unk>, So everybody thats on.
The government introduced new requirements to leverage technology to make in school teachings more efficient and tailored to the needs of students in the guidance on curbing.
Were being made.
Among students among schoolchildren urgency on the <unk> ship on conforming senior loans you have argued.
Issued on April 20, <unk>, the operating peak I'll take that approach to allow teaching time, using digital products, which should be less than 30% of total teaching talent. We believe these policies will benefit the industry in the long range and support ultimately healthily and sustainably growth.
It is also clear that the education on <unk> now have a clear vision about the current situation and the future direction of the education system.
China is also included in its 14th year plan, our long term goal of becoming a strong country in education by 22000 net 35 guided by our vision. We believe that we can support the government's efforts to improve education, we aim to improve debt.
Turning experience for students to address the challenges of educational equality tailored education to meet students' individually educational needs and the stimulus students to pursue all around development through ability oriented education Ulta.
Ultimately education is to serve students whether it's targeting school for after school, whether it is delivered by teachers instructors all by futures After school and whether it is conducted online or offline only by improving.
The efficiency and truly liberating the burden on the students and parents can we maximize the effectiveness and efficiency of education. We believe that the best approach is to truly connect in school and office group learning identify the problems and a rising scoop and solve them in school and after school in a more.
Personalized manner, our futures nowadays are able to see the in school learning data of students understand the weak points and excess premium localized educational content.
Regions in China, the premium localized content and unique insight into the learning process of students on the huge value brought to suit by the <unk> SKU in our fiscal integrity model. Our next priority is to deepen these functions and to cover more students from regions.
This is the rationale behind our integrated model the essence of integrated model, it's not just the low customer acquisition costs.
To leverage our integrated integration of <unk> and after school operations technology and data in uptick Q3 to address the issues identified in scoop in a more personalized way. So that eventually we can help students improve the academic performance in debt.
Effectively efficiently and alleviate the burden.
No matter your SKU and optical products and so we.
We will always focus on creating value for our users.
It is the only way for us to develop the leading product and maintain our leading position in both <unk> and <unk> markets and become a great company.
Now I will turn the call over to Michael our CFO to walk you through our latest financial performance. Thank you.
Thanks, Andy and thank you everyone for joining our call I will now walk you through our financial on the operating results. Please note that all financial data I'm going to talk about will be presented in RMB terms.
I'm here to report strong results for the first quarter of 2021.
We have achieved strong top line gross net revenues increased by 107% year over year to RMB 474 million in the first quarter on 2021 exceeding the high end of our guidance by around $4.2 million now.
Net revenues from online K 12, tutoring services increased by 118% 2 to RMB $463 million in the first quarter of 'twenty 1.
Before I review, our first quarter financials in detail I would like to remind everyone about the seasonality in our quarterly financial performance.
Now we have share in earlier quarters.
The first and third quarters tend to incur higher amount of sales and marketing expenses as these 2 quarters includes summer and winter holiday.
On large scale promotional policies take place and.
And death associated with promotion associated promotion cost expenses accounted for.
The corresponding major increase in revenue, however will only be primarily reflected in the second and fourth quarter debt.
We typically required relative to a lower quarter to quarter revenue gross rates for the higher salary and marketing expenses interest in third quarter, leading to larger losses in such quarters, ending the second the fourth quarter quarter over quarter revenue growth is much higher while incurring lower sales and marketing expenses leading to low.
Your loss ratio being such quarters.
Thus internally, we typically compare consecutive for instance, third quarter together.
Second our fourth quarter versus each other to see the channel given the seasonality.
During this past winter vacation, we have successfully manage out promotion on cost strategy and efficiency.
We saw our operations achieving high gross while controlling <unk>.
The new student acquisition expense for control granted me well, our overall operational efficiency continued to improve and we scaled up after taking into consideration on seasonality.
The number of full price students converted during the winter conversion cycle increased significantly which was more than double the number in the winter 2020 and around 30% more on Dana so much on 'twenty despite industry competition.
This was reflected in our paid cost enrollments.
Which were primarily new pay crossing enrolment converted.
During the winter of 2021 conversion cycle.
Our paid cost enrollments in the first quarter increased year over year to 543000.
This was all achieved while our new enrollment cash remained relatively stable in.
An increase only by around 10% when compared to the cinema on 'twenty our rates.
Significantly lower than the industry average.
We believe this demonstrates the significant benefit Andy edge of our integrated model.
The gross billing on.
Online K 12 tutoring services in the first quarter on 'twenty, 1 while RMB $603 million for presenting on year over year increase of 126% from <unk>.
<unk> $267 million of transport on tons.
From a revenue recognition perspective, we would like to point out net net revenues from debt.
<unk> online K 12 tutoring services in the first quarter on what's on 'twenty, 1 would have been slightly higher but the revenue recognition on schedule was delayed by a late Chinese new year and towards 'twenty, 1, which led to a 1 week delay in accompanies spring semesters starting date.
And does a whole week less on revenue we recognized in March on 'twenty, 1 as compared with <unk>.
Total <unk>.
But such revenue will be recognizing a second quarter in 2021.
The company will also like to note that such variation in cost starting dates and Robert recognition schedule are likely to happen over the years.
Now it goes for our first quarter financials in greater detail.
In addition to the revenue and pay causing borrow money from Ethan I shared earlier, our cost of revenue.
On the $188 million, representing an increase of 128 year over year increase from the first quarter was on 20 <unk> was primarily due to the increase in compensation costs for instructors in Q2 and teaching material costs.
Which increase was largely in line with the gross of our on net revenue from online K 12 tutoring services. During the same period as it will provide service for 2 more students.
The increasing the compensation costs for instructors and tutors was also partially increase because we hire more tutors to prepare for an expected increase in enrollments.
2020, sorry with thoughts on tier 1.
Strength in market.
Okay.
Gross profit was RMB $283 million, representing on year over year increase of 95% from the first quarter on slide 20.
The increase was primarily driven by an increasing the net revenue.
Our gross margin was $60.4 per cent compared to 64 percentage is going to first quarter on slide 20.
And the decrease was attributed to.
As hiring more teachers to prepare for the spring semester.
Moving on to the expense side, our total operating expenses were RMB $953 million.
Including 17.1 million of share based compensation expenses.
And this represents a year over year increase of 154% from $375 million for first quarter on top 20.
Total operating expenses as a percentage of net revenue increased to 201% from 164% in the first quarter.
So on 'twenty.
Selling and marketing expenses were RMB $614 million, including $5 million of share based compensation expenses. This representing tissue represents a year over year increase up to 118%.
From RMB $193 million first close on Sunday.
This increase.
Was primarily due to the increasing promotional cost expenses and salaries and welfare for sales and marketing personnel as well as branding related activities.
This was consistent with the fact that the number of new student and converted in winter child on 'twenty, 1 more than Apple.
What was converted in the winter on 'twenty.
R&D expenses were RMB $210 million, representing a year over year increase of 58%.
This was primarily due to an increase in salary and welfare for research and development.
Personnel.
Our R&D expenses included an RMB $11 million of share based compensation.
Our G&A expenses were RMB $113 million, representing a year over year increase of 165% from the first quarter on 'twenty.
Primarily due to an increase in salaries and welfare on G&A personnel and also including increases in share based compensation expenses.
Our loss of our operations was RMB 667 million compared with RMB $228 million of transport on Tom <unk>.
Net loss ratios as a percentage of net revenues was negative 148%.
141 for Tim.
Our net loss was RMB $616 million.
In the first quarter thoughts on our.
Our non-GAAP adjusted net loss was RMB 589 million.
And your first quarter out from 'twenty, 1 our non-GAAP adjusted NAV with vantage of net revenue was negative 124%.
<unk> was negative 78% interest cost on 2020.
Okay.
As the March of.
While our cash on cash equivalents.
RMB $2.2.2 billion.
Sure.
And finally deferred revenue was RMB $723 million, representing an increase of 21% from RMB $598 million as of December 31st So on <unk>. The increase was primarily attributed to our rep per business gross with generally.
And thus our deferred revenue continued to grow as we convert more students.
With that I will now provide our business outlook based on our current estimates.
Total revenue for the second quarter 'twenty, 1 are expected to be between RMB $640 million and RMB $616 million for presenting on year over year increase.
100 <unk>.
136% to 123 per se from the second quarter of Tom <unk>.
These estimates represent our current and preliminary review, which are subject to change.
We conclude our prepared remarks, thank you.
Operator.
We are now ready to begin the Q&A session.
Yes.
As a reminder to ask a question you will need to press star 1 on your telephone to reenter.
For all of your question press, the pound or hashed.
Please standby, while we compile the Q&A roster.
Once again for 1 to ask a question.
Your first question comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.
Hey, good morning, Thank you for taking the question.
So.
We understand that you're after school.
After school tutoring students moving from your east with Sandy and thank you conversion and also you're on.
Mine operation.
Yeah on the Asquith acquisition.
Keith.
While we see on from that.
Regulatory.
Regulation debt Inc.
Each title.
Advertisement.
In addition for online companies and so we see.
Many online company, all 90 kitchen company debt during the.
Comes from acquisition exploration.
So I want to Hum can you please share your.
All.
Tonight I'll share some color.
Current customer acquisition efficiency.
On the <unk> conversion from the offline and do you see any now.
Change.
And.
You also mentioned that <unk> 1.
Latin is flat because of high based on last year. So what's your outlook for the U a E.
Next 1 to true yes. Thank you.
Yes sure.
Hi, I'll try to answer your question by question. So first in terms of your overall.
A question about our latest efficiency.
Bose be it.
Ah.
As a result of the regulatory environment change order on our.
Institutions attempting to do offline explorations.
I think overall.
We usually have larger conversion cycles in winter into summer.
A much smaller cycle is doing this spring and.
For sea matters, so during the day.
Spring conversion cycle to file we don't see any major change in terms of efficiencies or as you've said how we.
We are able to debt.
Our cloud causes sign on for many years, we don't see major changes in <unk>.
Those trends as well as in CAC.
You are talking about.
Immediate impact from the regulatory tangible out as a participating in offline exploration, but on.
1 thing we are happy to see is actually.
The latest trend is basically proving the benefits of integrity model, where we believe more and more.
People, we actually deleveraging.
When we will be trying to 2.2 to recognize and to improve the teaching as well as conversion efficiencies.
Offline pregnant.
Yes.
First the integral model debt and.
You have to have the product just there was for a good product to serve the teachers and students and parents that means you have the opportunity to set the covenants.
We're serving the parents you can get the user for <unk>.
For enrollment so I don't think it's easy for the competitor to build up the content data and the product.
Because it's too.
On almost 10 years due debt so.
So that means for our CSP for this semester.
<unk> not changed and maybe even though with them before just because of efficiencies become higher and higher.
Third just because the Chinese comment on to improve the in school teaching in school learning and with debt become current persuades all the parents to reduce the operating flops grew 2.3 net means.
Means.
Line more and more rely on our <unk> product to improve the teaching efficiency.
And in mortgages out of the home risk assessment to make to make the tasks to 2 finished on us.
For in school, so that means I do think we have a free.
Opportunity to improve and they use in the future.
Okay.
Yeah.
Your next question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question.
Hi, Andy Hi, Michael Austin for the presentation and taking my questions on 2 questions here.
1 is your share losses could be driven about utilization of the.
In school education scenario could you provide some pointed out with some color on your potential monetization model in school badness and credit.
True.
Give us some update on the progress of your content recommendation.
And secondly regarding the regulatory requirements on the Beijing government tuition collection and security produce share us what is the latest requirements that you have for so far and how we will do with hardware impact your operating cash flow like Dani. Thank you.
Yeah.
Yes.
Timothy I just wanted to clarify your first question you were asking about any monetization plan for inks cooperation.
Right.
Okay, Yes.
I think our strategy in terms of charging fees for any school operations still remain the same debt, we will largely remain free within schools and that I think.
That would be for our basic functions.
Women Katrina doses.
I'll share the paydown into downhole.
For me, it's I don't go there.
I see from me.
Home for that.
Cellulosic handle major achievement for the entire hydrogen for Santana on that you don't feel like.
Oh man.
Detail on me into a day on the new.
New tissue for those on board has done it and I wouldn't mind until she had no 17.
I'll tell you the future <unk> will be on the <unk> for the tender to dwell for lithium for now.
Now I'm a good work on that.
She our team will achieve on xiaomi the sufficient out on the <unk> rental channel and Tom Gentile from them as yet to know that you're on the jet fuel.
Yes, we've seen that.
For the basic function within schools, we have been free but we also seen multiple districts like.
The switch on district on me in Beijing, and Nanjing, Hangzhou Shenyang Shanghai.
They were paying for premium services and integrate apologize for us at a price around $10 million per year for each district, and we do see some of the.
This feature will become the more models for auto subsequent cities.
As we rollout and the demand for educational services was English schools will continue to rise.
I hope this answers your first question. The second question, Yes, you are right.
You've seen the notice from the Beijing government and.
In terms on tuition collection as well as.
As well as deposit relative funds as per their custodian bank.
We are closely monitoring index and we were also monitoring on what's being now likely to happen in Shanghai, because you know we are retrofitting Shanghai and all of the actual cash flow impact on an order impacts will be directly dependent on what's the actual policies in Shanghai.
So if we can only share that we will be preparing for any potential policies coming out and in Shanghai, but at this stage it will be difficult for us to speculate on what's the actual policy will be in China.
Thank you that's very helpful.
Once again, if you wish to ask a question. Please press star 1 on your telephone and wait for name to be announced once again star 1 to ask a question.
Okay.
Okay.
Once again, if you wish to ask a question. Please press star 1 on your telephone.
Yeah.
Yeah.
There are no further questions at this time I would like to had a conference for today's presenters. Please continue.
Thank you operator in closing on behalf of 17 <unk> team, we'd like to thank you for your participation on today's call. If you require any further information feel free to reach out to us directly. Thank you for joining US today. This concludes the call.
This concludes today's conference call. Thank you for participating you may now disconnect.