Q3 2021 17 Education & Technology Group Inc Earnings Call
[music].
Good evening and good morning, ladies and gentlemen, thank you for standing by for 17, FX third quarter 2021 earnings Conference call.
Time, all participants are in listen only mode. After the management's prepared remarks, there'll be a question and answer session.
A reminder, today's conference call is being recorded I'll now turn the meeting over to your host for today's call. Mr. Raymond Huang 17 Ethics Investor Relations Director. Please proceed Raymond.
Thank you operator, Hello, everyone and thank you for joining us today.
Earnings release was distributed earlier today and is available on our <unk>.
Our web site.
On the call with me today are Mr. Andy Zhang <unk>, founder, Chairman and Chief Executive Officer, and Mr. Michael <unk> Director and the Chief Financial Officer, Andy will walk you through our Lady it's bit of a premise and strategies followed by Michael who will discuss our financial performance.
It 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 Securities Exchange Act of 1934.
Private Securities Litigation Reform Act up 1995.
Forward looking statements are based upon management's current expectations and current market and operating conditions.
And relate to events that involve known or unknown risks uncertainties and other factors all of which are difficult to predict and many of which are beyond the management's control. These risks may cause the companys actual results performance achievements to differ materially.
Further information regarding this 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.
Today, I would like to start with some updates of the company.
The company has the offering tutoring services related academic subjects.
Students from kindergarten through that last year of.
Senior High school in.
In mainland China by the end of 2021 to comply with the opinions.
Liberating the burden the Palmer and up through tutoring students.
Houseware applications also known as the double reduction policy.
Applicable rules regulations and measures.
The peak time, we how quickly one new business strategies in response to the new regulatory environment.
Leveraging our extensive knowledge and expertise accumulated through 13.
Authorities.
Teachers and students over the past decade.
We have adapted our business.
To focus on two key areas.
Kurt.
Our <unk> business, we launched our new teaching and learning.
Teaching and.
First for our inks business.
Launched our new teaching and learning offerings.
Upgrade our previous in Scoop products and services, the new offering aimed at facilitating that digital transformation and upgrade of Chinese skus with a focus on improving the efficiency and the effectiveness of core teaching and learning scenario.
Simon and <unk>.
Second while optical business, we have started to offer a personalized self directed learning product to Chinese families.
As a substitute for the original after school tutoring services that we offer it historically.
Utilizing our technology and data insights to provide personalized and targeted learning exercise.
It's aimed at improving student learning efficiency.
This is not the tutoring services and it's consistent with some of the key concepts and philosophies are one of the 10-K that is lifted by the ministry of education beyond their office.
The implementation of the opinion.
Now, let me explain in detail the logic and the progress for our business transformation and how the two businesses.
Area.
China's education market and user needs both in <unk> and optical segment.
On the income side, we are seeing three linked themes driving the development of the industry.
Right.
Education implementation kick off in 2012, while the government published the blueprint of the.
<unk>.
And two platform.
Under the initiative the government took the lead to improve internet infrastructure and build multimedia classroom full SKU.
By 2018, Scoot network infrastructures for online or digital team were mostly in place.
In the same year the government released the word.
<unk> version.
<unk> 0.0 for education, digitalization, which aim to achieve three equal coverages.
Improvement in one platform.
Since then the focus.
Patient equal monetization market has shifted from application infrastructure to digital tools with teaching and SKU management.
As well as digital teaching resources to build an internet.
Plus education platform that is aimed at improving <unk> results and efficiency.
Estimates based call numbers from National Bureau of Statistics in China, How do you budget for education Pizza.
RMB 340 billion in 2020.
Under the backdrop.
<unk> digital is decent version 2.0 with boom, we believe the growth trajectory will continue in the next few years at China's GDP expense.
Second education E Commerce season.
The average generally fall into two categories.
<unk> teaching and learning the latest and the other not.
The first category includes.
Software, which are directly using teaching and learning processes, including <unk>, a learning management system a typical.
A typical example is our management system that allows schools and teachers to evaluate at check students mastery of different knowledge point through homeward and assign personal life Accordingly, with the court approved hardware and software.
One of the two categories investment in teaching and learning the latest attribution implementation.
<unk> picking up an increasing share in the annual budget. The earlier years, the purchase non TT alerting hardware where is the biggest component.
Yes.
In recent years, we have also observed that teaching.
<unk> alerting related digital products shifted away from Mark classroom and exam.
Martin towards Hulbert focused teaching and learning products. This was the result of a few key changes in the education philosophy and guidelines from the Ministry of Education.
First let encouragement restriction on the exam and promotions of homework as the main tool to evaluate.
Performance.
Let need for advanced information based system to achieve the personalized.
Hulbert promoted under the double reduction policy.
China's latest curriculum tender tenders published in 2021, which gets refreshed every 10 years.
More emphasized computing comprehensive academic competency and the more proactive participation.
Direct cost in the form of in Scoop in Clos exercises.
All of that would not help you possible with that historical menu approach and accretive.
<unk> in demand for dedicated and the comprehensive teaching and learning management system centered around <unk> and exercises that integrates both hardware and software.
Hogarth, where does become ideal scenario evaluate student learning progress and the court to connect all other teaching and learning and teaching relevant management, our teaching and learning products focused on homework assignment and can generate data that enables comparison between classes as good for selected.
Period.
Oh very powerful tool for two principal is to manage the <unk> progress at school.
Officials to tick on the PT Benjamin Tseng district level. It also reduces the burden of those teachers and students.
Going to improve the efficiency of homework assignment that related to teaching and learning.
This has opened up enormous business opportunity for us for the technology data insights content and Brian power. We have gained through the past 10 years that's it.
<unk> development, we have been chosen by a number of regional application authority to become a partner of choice of homework book is teaching and learning management system. There is one difference. This time in the past eight years, we have provided more basics differences from a free of charge.
Now all the new TT alerting starts offered a paid product.
Integrate full software and hardware what package and also feature data.
Recommendation and other value added function and pizza to the needs of schools and education operators.
Purchases are mostly made by the district educational authority on behalf of all of our group.
Our product offerings based on either a combination of a number of centralized the modules covering classrooms question bank homework assignment self directed learning and multi role reporting to suit the needs of different users.
We are also seeing increasing acceptance of the <unk>.
Subsea production module by Goldman instead of the more prominent one time software construction products.
With more common in non teaching and learning related investment.
Date, we have successfully entered in depth cooperation with a number of regional agitation.
Cros.
<unk> district in China, including Shanghai.
This week in Beijing District, which are among the 10 case studies collected by the Ministry of Education, Denver Office for the implementation of the opinion.
Of different skills are already being implemented using our teaching and learning product across more than 50 cities.
Turning to our new business model for the optical business.
As we all know Chinese families put emphasize our students' education before the double reduction policy such emphasis on these were mostly satisfied by optical tutoring services, which created a huge market.
Estimate it to be at large at RMB one trillion.
New regulations, how to map like change the supply and the nature of product.
Education industry.
But no demand in the market previous approval to buy massive promotion campaign, where indeed discouraged by some new rig.
We see these trump core user groups.
Intact and deeply understood with the highly effective tubular services. The good news is that that user.
Using these tend to be more.
<unk>.
Due to the doublet reduction policy scoop locations weakened which used to be the major battle for us for the after school tutoring services for the first time in decades.
<unk>.
Tutoring services.
During this two months break and all subsequent call at the end we can pivot.
Chinese parents will be E urgent need for high quality Dr directed there.
Pretty content to keep their children occupied.
To address these needs we started offering a personalized self directed learning product so tiny families.
This product based on our premium content and insight into students' learning progress and difficult. It is designed with a core aimed to be compliant with new regulatory environment.
In a nutshell it is a self directed learning shelf like product.
Supplements.
That is a primary and middle school students each month of the users will receive a material package consisting of a customized exercises based on their personal academic profile.
Diversification.
Expanded learning videos.
Agitation magazine.
The monthly package provides the basic materials impediment for parents to guide their learning progress.
The court concluded our self directed learning product is a personalized and targeted exercise that.
Populate it every month based on last month's learning progress and what can it.
Which was our <unk> business.
Over the last decade, we have accumulated.
Educational content and the school and district level data insights across China, which give us a deep understanding about how the users and the content local exam. So that we can develop personalized exercise.
Their needs.
In addition, we helped design the setup effective system, the motor but to develop self directed learning habits in the Meanwhile, we also allocate a personal learning partner to each of our users and provide them with learning customization and guidance of it.
Personal lending partners customized learning materials and plans for our users or monthly basis and full up with the implementation of the learning plan.
Our self directed learning product is charged for each subject and.
The Crimson fee.
It's in the range of 2500 to 3000 RMB per year, we expect that it will take some time for the market to get familiar with the new product formats.
But we are happy to see more than 30000 paid subscriptions in the product things we launch this product around.
Once again, we believe.
Leave that we have a strong competitive advantage with our new business model. This advantage comes from the mirrors the paid user who trust us from the localized the teaching content massive data recognizing and the reputation we have built up over the past 10 years.
<unk> pre inks grew almost 7%.
It is the decade long.
Accumulation that's on the.
<unk> side.
We launched the new teaching and learning stock offering to provide personalized teaching assistants.
The personalized self directed learning product in the optical business.
This is our first module.
Transformation strategy, which is based on what.
What we believe can best leverage our decade long experience and expertise in.
The <unk> business as the industry is undergoing tremendous transformation the covenant that comply with new regulations and meet the changing user needs will emerge strong.
Now I will turn the call over to Michael our CFO to walk you through our financial performance. Thank you okay.
Thanks, Andy and thank you everyone for joining the call.
I will now walk you through our financial and operating results.
But before I begin I guess, one number I would like to correct.
In the remarks from Andy is that.
New pay subscription to our new App school self learning products over the last months is more than 300000, new users instead of 30000 users.
So now I'll continue with our financial performance.
So please note that all financial data I talked about will be presented in RMB terms.
However, I would like to note that the publication and enforcement of the opinion and applicable rules have significantly impacted our business. Both in terms of slowing down our revenue growth as well as in lodging our losses.
Subsequently, we have adopted a significant change to our business model is shared by Andy earlier, and the online obstacle to train services, which generated the vast majority of our revenue were seized by the end of December 2021.
Therefore, I would like to remind everyone that the quarterly results. We presented here should be taken with great care. If you elect to use it as a reference power potential future performance and quarterly results are subject to significant impacts from one off events due to the series of regulation introduced in the third quarter.
File in 'twenty, one and a corresponding adjustments to our business model, our organization and our workforce.
Andy has share that we have formed a clear new business strategy for future growth and have made pump adjustments how organization to accommodate this strategy.
The vast majority of adjustments thats immediate to our operation in our workforce and the associated one off expenses have taken place.
The third quarter of 2021.
We will be operating with a clear aim of quickly turning profitable in the near term.
As of September 30 totaled 21, our cash and cash equivalents.
<unk> $1 4 billion equivalent to $221 million, we believe we have sufficient sufficient capital to support the transformation of our business and to grow our new businesses.
For the results of the third quarter of 2021, we achieved continuous top line growth despite the regulatory impact net.
Net revenue increased by 62% year over year to RMB $497 million third quarter of <unk> 21, and increased by 103% year over year to RMB 1640, 2 million in the first nine months I'll talk 'twenty one.
Net revenues from online K 12, tutoring services increased by 66% year over year to RMB 478 million in the third quarter of 2021 and increased by 113% year over year to around RMB, One 6 billion in the first nine months of timeline.
The gross billing of online K 12, tutoring services, which is a non-GAAP measure decreased by 35% year over year to RMB $302 million third quarter of 221 and increased by 56% year over year to RMB, one $6 75 billion in the first nine months of.
'twenty one to slowdown was primarily due to the impact of double a reduction policies during the summer vacation.
Vacation.
During the third quarter.
Paying close enrolment decreased by 42% year over year to 226000 in the third quarter of 2021 and increased by.
6% to 7% year over year to two.
<unk> 1950, 2000 in the first nine months I'm, sorry, 'twenty, one that decreasing across building and pay cost enrollments in the third quarter was primarily as a result of the adverse impact of the tableau reduction policy introducing in July .
New student acquisition.
Average may use of <unk> applications for students decreased by 30% year over year to $11 7 million in the third quarter of 2021, and a decreased by 90% to $15 7 million in the first nine months up to 21.
The year over year decreasing Miu was actually go to the publication enforcement of the regulation.
In addition to.
Revenue growth, our operational efficiency continued to improve in the third quarter and the first nine months of 2021.
non-GAAP adjusted net loss, which excludes share based compensation expenses was RMB 457 million in the third quarter of 2021 compared with adjusted <unk> adjusted net loss of RMB $521 million of third quarter of 2020.
And it was RMB 112, 6 billion in the first nine months of 2002, one compared with RMB $849 million of first nine months of 2020.
non-GAAP adjusted net loss as a percentage of net revenue was negative 91, 9% in the third quarter 2021.
Narrowed from negative 169, 6%.
In the third quarter of 2000, and all was negative 77% for the first nine months of 'twenty, one compared with negative 100.
100 <unk>.
<unk> and <unk>, 2% in the first nine months of 2020.
Next I will go through our third quarter financials in greater detail.
Net revenues were RMB $497 million.
Which represented a year over year increase of six 2% from RMB $307 million third quarter 2020.
The increase was primarily driven by an increase in our net revenues from online K 12 tutoring services.
Net revenues from online K 12, tutoring services were RMB $478 million up 66% year over year from RMB $288 million in third quarter of 2000 and accounted for 96, 1% of our total net revenues.
The increase was primarily driven by an increasing pay cost enrollments in the second quarter of 2021.
<unk> revenues were recognized in the third quarter of 2021.
Pay course enrollments, what 226000, representing a decrease of 42%.
<unk> from approximately 393000 in third quarter of 2020.
Cost of revenue was RMB $251 million.
Which included severance costs for instructors and tutors, our workforce due to the impact of the new regulations and representing an increase of 77% year over year from RMB $142 million to third quarter of 2020.
The increase was primarily due to the increase in compensation cost for instructors to test as well as.
Which was largely in line with the growth of net revenues.
From our online K 12 tutoring services were provided.
Services to more students.
Gross profit was RMB $245 million, representing a year over year increase of 49% from 165 million in the third quarter of 2020. The increase was primarily driven by an increasing net revenues.
Gross margin was 49, 4% compared with 53, 8% in the third quarter of 2020.
The decrease was attribute to the severance costs a reduction in staffing which was recognized in the third quarter was <unk> 21 as.
As a result of the impact of the new regulations.
Moving over to the expense side.
Total operating expenses were RMB $744 million, including RMB $63 million of share based compensation expenses.
This represents a year over year increase of <unk>, 8% from RMB $738 million third quarter of 2020.
Total operating expenses as a percentage of revenue.
Was 150% significantly decreased from the 240% in the third quarter October 20.
Sales and marketing expenses were RMB $389 million, including $7 million of share based compensation expenses.
Presents a year over year decrease of 22% from RMB $496 million of third quarter, our top 20.
The decrease was primarily due to the decrease in brand advertisement and promotion cost expenses.
Which were partially offset by an increasing of salary and welfare for sales and marketing personnel.
Clothing.
Average cost for protection of such personnel in the third quarter until 'twenty one.
Due to the impact of the new regulation.
R&D expenses were 201 $201 million, representing a year over year increase of 31% from RMB 154 million in the third quarter of 2020 increase was primarily due to an increase.
And severance costs for a reduction in research and development personnel in the third quarter.
2021, due to the impact of the regulation.
The R&D expenses also included $12 million of share based compensation expenses.
Our G&A expenses were RMB $123 million.
On the $14 million of share based compensation expenses. This represents a year over year increase of 38%.
RMB $89 million.
<unk>.
Again, the increase was primarily driven by the severance costs for reduction of general and administrative personnel in the third quarter of <unk> due to the impact of the new regulations.
There is additional lining in there.
<unk> report that.
Impairments for property and equipment right to use assets and a rental deposits for the third quarter of 2021 for RMB 13 8 million.
Yes.
There was new in the third quarter of 2020.
As a result of the changing regulatory environment in online education industry combined with financial performance. We performed an impairment assessment on a long term asset and recognized impairment losses in these items in the third quarter of 2021 as a result of that we have.
They take some of our tenancy.
We'll also file operations, while on the 498 million compared with RMB $573 million third quarter of 2020 loss from operations as a percentage of net revenues was negative 103% compared with negative 186, 5% in the third quarter 2020.
This significant improvement on narrowing of losses was due to the improvement of the overall operational efficiencies. Despite the regulation change.
Net loss was RMB 490 billion narrowing from RMB 581 million in the third quarter of top 'twenty non-GAAP adjusted net loss was RMB $459 million.
Compared with RMB $521 million third quarter last year.
non-GAAP adjusted net loss as a percentage of net revenues was negative 91, 9% narrowed from negative 169, 6% in the third quarter I'm Tom Tony.
As of September 30.
So 'twenty, one cash and cash equivalents were RMB 1000, 422 million compared with RMB 2830 $5 million as of December 31, 2020, we believe we have sufficient capital to support the transformation of our business and to grow our new business.
And finally deferred revenue was $543 million as of September 30, 21, representing a decrease of nine 3% from RMB $598 million as of December 31 'twenty.
The decrease was primarily attributed to the enforcement of Diablo reduction policies.
Affecting the new student acquisition.
With that.
That concludes our prepared remarks, thank you.
Operator, we are now ready to begin the Q&A session. Thank you very much.
Ladies and gentlemen, without became the question and answer session. If you'd like to ask a question on the phone tiny press star one on your telephone and wait for a named Stan that if.
If you would like to cancel request please press the pound or hash key.
Once again to ask question. Please press star one.
There'll be a silent while question shopping collective thank you for your patients.
As a reminder, if you'd like to ask question Kelly Press Star one on your telephone and wait brand name to be announced if you'd like to cancel request. Please press to Paul.
<unk> key.
We have our question is from the line of Anthony <unk> from <unk> Holdings. Please ask.
Your question.
What are projected.
<unk> year to date.
Okay.
Excuse me would you mind repeat your initial question, you mean, where subscription yesterday.
Yes, what are the projected subscriptions year to date with the new software that's implemented.
Yes.
Okay.
You mentioned you had 300000.
New subscriptions due to the.
New software that was launched.
Yes, we have 300000.
Michael Please answer the question.
I'll explain it in detail.
Yes.
Yes.
As we are still in the process of actually.
Acquiring additional new users.
We don't actually at this stage.
We wont anticipate provide.
Accurate and you forecast for the total number of subscribers, but we do have a confidence that.
Sure.
300000 actually.
<unk> only one month's periods during the winter vacation.
We do see the additional fashion such as during the summer vacation hardware.
Acquiring new students. So we do have the confidence that this number will continue to increase however, it might be difficult for us to provide an accurate estimate for the whole year, especially dismissed and instituting at early stage, but we do see.
Relatively high potential.
Okay.
Excellent are those month to month or are those subscriptions with the year contracts to.
The 300000.
That 300000 is actually a combination of subscription of different land some of them the shortest quarter for summer half year end.
A small percentage of them are annual.
Excellent. Thank you.
Okay. Thank you for the questions.
I'd like to ask question. Please press star one on your telephone and wait for a name to be announced.
We have a new questions from the lineup very plenty of tankage Darby.
Tony Please go ahead.
Okay.
Thank you Jim I have several questions. The first question is.
When the price of the stock dropped precipitously low last time, you did a reverse split respectively by changing the number of ADR.
Stock is approaching that level again, and I was wondering are you planning to do that again, because it was very detrimental to the price of the stock.
We currently have no plans to do further reverse stock split.
Okay. My next question is.
With the.
Transferring a lot of Chinese equities to Hong Kong do.
Can you believe that you'll be able to keep the equity you listed in the United States or do you believe it will be transferred only to Hong Kong in the near future.
We have been keeping a very close eye on the policy and also the regulatory environments.
<unk>, two <unk> as well as U S domestic environments.
It is.
Our current plan to continue to remain listed and be compliant with relevant and rules and regulations from the SEC.
At this stage, we don't have any plan to.
Great I'll, let things from U S to Hong Kong will have dual listing plan.
My next question is.
Do you plan doing any.
I guess the call road shows here I mean, any coming to the United States talking to investors.
Meeting with them.
Okay.
We are trying our best trying to mix imbalance through webcast online on Btu video conferences.
Physical traveling might be difficult given the <unk>.
Obviously scenarios around.
Around the world.
Apologies for that.
Okay and my last question is.
Are you planning to have to sell any additional equity or do you have cash that will hold you for this foreseeable future.
Sure.
Yes, as we've shared earlier by B as of September 32021, our cash and cash equivalents.
Around RMB, one 4 billion or around <unk> $220 million.
And as we've also shared that we have tried to we have completed the vast majority of our adjustment to our business model our organization, our workforce, including a large chunk of one off expenses in the third quarter, which is this quarter.
This financial results.
We do have a plan to significantly increase how financial health and profitability of our business aiming to quickly turning profitable or breaking even in the near future so with that amount of cash and.
More a higher a more stringent.
Control of our financial House, we do have confidence that.
Our existing cash balance will be sufficient to allow the transformation of our business.
Therefore at this stage, we don't have any plans to raise additional equity.
Thank you for the questions.
There are no more questions on the line I would like to conclude today's meeting. Thank you management and thank you all participants.
You may now disconnect your lines.
[music].
[music].
[music].
Good evening and good morning, ladies and gentlemen, thank you for standing by for 17 at Teck's third 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, FX Investor Relations Director. Please proceed Raymond.
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 on the call with me today are Mr. Andy Each Hanmi always founder Chairman and Chief Executive Officer, and Mr. Michael <unk> director.
And the Chief Financial Officer, Andy will walk us through our ladies business premise and strategies, followed by Michael who will discuss our financial performance.
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.
The Securities Exchange Act up 19034 in the U S. Private Securities Litigation Reform Act up 1995. These forward looking statements are based upon management's current expectations and current market and operating conditions.
Related to events that involve known or unknown risks uncertainties and other factors.
Of which are difficult to predict and many of which are beyond the management's control. These risks may cause the companys actual results performance.
Shipments to differ materially further information regarding this 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.
As required under applicable law.
Now my pleasure to introduce our chairman and Chief Executive Officer, Andy <unk>.
Please go ahead.
Thank you Raymond.
Hello, everyone. Thank you for joining us today.
I'd like to start with some updates of the company.
The company has the offering tutoring services related academic subjects.
Students from kindergarten through that last year of.
Senior High school in.
In mainland China by the end of 2021 to comply with the opinions.
I'll leave it eating the burden of Palmer and up through tutoring students income.
Three application also known that the double reduction policy and applicable rules regulations and measures.
At the peak time, we how quickly one new business strategies in response to the new regulatory environment level.
Leveraging our extensive knowledge and expertise accumulated through 13 tightness highly patient authorities.
Teachers and students over the past decade.
We have adapted our business.
To focus on two key areas.
Kurt.
Our <unk> business, we launched our new teaching and learning.
Teaching and.
First for our inks business, we launched our new teaching and learning offerings.
Upgrades to our previous things screw products and services the new offerings aimed at facilitating that digital transformation and upgrade of Chinese goes with a focus on improving the efficiency and the effectiveness of core teaching and learning scenario Dr.
Simon and <unk>.
Second while optical business, we have started to offer a personalized self directed learning product.
Many families as the.
Substitute for the original after school tutoring services that we offer historically.
Product utilizing our technology and data insights to provide personalized and targeted learning and that's the type of content.
It's been that improving students' learning efficiency.
This is not the tutoring services and it's consistent with some of the key concept and philosophies are one of the 10-K that is elected by the Ministry of Education.
After the implementation of the opinion.
Now, let me explain in detail the logic and the progress.
This transformation and how the two businesses.
Oh hi.
Execution market end user needs both.
In school and optical segment.
On the in school site, we are seeing three linked themes driving the development of the index.
Great.
Kurt.
China's education implementation kick off in 2012, while the government published the blueprint of the.
Three.
<unk> two platform.
Under the initiative the government took the lead to improve internet infrastructure and build multimedia classroom fold.
By 2018, Scoot network infrastructures for online or digital team were mostly in place.
In the same year the government released the word plan version.
<unk> 0.0, well execution, digitalization, which aims to achieve three equal coverage at two <unk>.
Improvement in one platform.
Then the focus.
<unk> equal monetization market has shifted from education infrastructure digital tools with teaching and SKU management.
As well as digital teaching resources to build an internet.
Plus education platform that is aimed at improving <unk> results and efficiency.
Turning to estimate based call numbers from National Bureau of Statistics, China, How do you budget for application Pizza.
RMB 340 billion in 2020.
The back to work.
<unk> digital is decent version 2.0, we're building we believe the growth trajectory will continue in the next few years at China's GDP expense.
Second.
E Commerce season.
But generally generally fall into two categories, one teaching and learning the latest MTB. Other knocked the first category include hardware and software, which are directly using teaching and learning processes, including teaching learning management system.
Typical example is our management system that allows schools and teachers to evaluate and checks mastery of different knowledge points through homeward and assign personal life accordingly, with the support of both hardware and software.
One of the two category investment in teaching and learning related strategic implementation.
<unk> picking up an increasing share in the annual budget in earlier years, the purchased non NTT <unk>, where is the biggest component.
Yes.
In recent years, we have also observed that.
Teaching learning related digital products shifted away from Mark classroom, and exempt marketing towards homeward focus seeking and learning products.
This was the result of a few key changes in the <unk>.
<unk> philosophy and guidelines from the Ministry of Education.
Patient.
First.
Its courage restriction.
And promotion of homework as the main tool to evaluate academic performance.
The need for advanced information based system to achieve the personalized and.
Hulbert promoted conquer the double reduction policy that China's latest curriculum tender tenders published in 2021, which gets refreshed every 10 years.
More emphasized computing comprehensive academic competency and the more correct.
I appreciate.
Direct cost in the form of in school in class exercise.
All of these would not have been possible with that historical menu approach and accretive.
Indemonstrable dedicated and the comprehensive teaching and learning management system centered around <unk> and.
The titles that integrates both hardware and software.
Progress what does become ideal scenario evaluate students' learning progress and of course to connect all other teaching and learning and teaching relevant management, our teaching and learning products focused on homework assignment and can generate data that enables comparison between closet goes for selected.
Alright.
Oh very powerful tool to principal is to manage the <unk> progress <unk> and <unk>.
Officials to check on the teaching management hung district level. It also reduces the burden of those teachers and students.
Volume to improve the efficiency of homework assignment that related to teaching and learning.
This has opened up enormous business opportunity for us for the technology data insights content and Bryan power. We have gained through the proxy method in hulbert development, we helping to the vast number of regional application Oh sorry.
From a partner of choice of homework teaching.
Teaching and learning management system.
There is one difference this time in the past eight years, we have provided more basics differences falloff free of charge.
Now how the new TT alerting starts, albeit a paid product, which integrates both software and hardware what package and also featured data driven recommendation and other value added function and pizza to the needs of schools and education operators.
Purchases are mostly made by the district educational authority on behalf of all of the group.
Our product offering.
Either company <unk> of a number of centralized modules covering classrooms question bank homework assignments self directed learning and multi role reporting to suit the needs of different users.
Also seeing increasing acceptance of the thoughts.
Subsea production module by Goldman instead of the more prominent one time software construction project, which with more performance in non teaching and learning related investment.
To date, we have successfully entered in depth cooperation with a number of regional education arthritis Cross Mt.
Multiple district in China, including Shanghai.
District, and Beijing District, which are among the 10 case studies collected by the Ministry of Education General Office.
Implementation of the opinion.
Of different scales are already being implemented using our teaching and learning product across more than 50 cities.
Turning to our new business model for the optical business.
As we all know Chinese families put swung emphasize our students' education before the double reduction policy such emphasis on these were mostly satisfied by optical tutoring services, which created a huge market.
Estimate it to be at large at RMB one trillion.
New regulations out massive like change the supply and the nature of products education.
Education industry.
Martino demand in the market previous approval to buy Matthew promotion campaign.
Deed discouraged by somebody rig.
We see mainly Trump core user groups.
Intact and deeply understood.
Tubular services. The good news is that using these tend to be more resilient.
Due to the double reduction policy, Google Keisha weakened which used to be the major battlefield four the after school tutoring services will for the first time in decades become family type thing.
Up tutoring services.
During the two months break and all subsequent to all of the and we can pivot Chinese parents will be E urgent need for high quality self directed 30 content.
They are occupied.
To address these needs we started offering personalized self directed learning product so tiny family.
This product based on our premium content and insight into student learning progress and difficult. It is.
It's designed with our core <unk> to be compliant with new regulatory environment.
In a nutshell.
Directed learning shelf like product that supplements.
Studies of primary and Middle school students each month of the users will receive a material package consisting of a customized exercises based on their personal economic profile diversified learning tool expanded learning videos.
<unk> magazine.
The monthly package provides the basic materials and element for parents to guide that you're learning program.
The court concluded our self directed learning product is a personalized and targeted exercise that.
Formulate it every month based on last month's learning progress and looking at.
Which was our <unk> business.
Over the last decade, we have accumulated huge educational content and the school and district level data insights across China, which gave us a deep understanding about how the users and the content local exam.
So that we can develop personalized exercise.
Yeah.
In addition, we helped design the setup effective system the motor, but two to develop self directed learning habits.
Well, we also allocate a personal learning partner to each of our users and provide them with learning customization and guidance or is it.
Personal lending partners customized learning materials and plans for our users monthly basis, and the pull up with the implementation of the learning plan.
Our self directed learning product is charged for each subject and.
Subscription fee.
It's in the range of 2500 to 3000 RMB per year.
We expect that it will take some time for the market to get familiar with this new product format.
But we are happy to see more than 30000 paid subscriptions in the product things, we launched this product around a month ago.
Leave that we have a strong competitive advantage with our new business model.
<unk> come from the millions of paid users who trust us from the localized the teaching content massive data.
Recognize actions and the reputation we have built up over the past 10 years.
<unk> three <unk>.
It is.
Lung.
Accumulation that's on the <unk> side, we quickly launched the new teaching and learning stock offering to provide personalized teaching assistants.
Personalized self directed learning product in the optical business.
Right.
This is our transformation strategy, which is based on.
What we believe can best leverage our decade long experience and expertise.
The <unk> business as the industry is undergoing tremendous transformation the covenant that comply with new regulations and meet the changing user needs will emerge strong.
Now I will turn the call over to Michael our CFO to walk you through our financial performance. Thank you.
Thanks, Andy and thank you everyone for joining the call.
I will now walk you through our financial and operating results.
But before I begin just one number I would like to correct.
In the remarks from Andy is that.
New paid subscriptions to our new App school self learning products over the last month is more than 300000, new users instead of 30000 users.
So now I'll continue with our financial performance.
So please note that all the financial daytime talk about will be presented in RMB terms.
However, I would like to note that the publication and enforcement of the opinion and applicable rules have significantly impacted our business. Both in terms of slowing down our revenue growth as well as in lodging our losses.
Subsequently, we have adopted a significant change to our business model is shared by Andy earlier, and the online Obsequy tutoring services, which generated the vast majority of our revenue was seized by the end of December 2021.
Therefore, I would like to remind everyone that the <unk>.
Quarterly results, we presented here should be taken with great care, if you elect to use it as a reference.
Actual future performance.
And the quarterly results are subject to significant impacts from one off events due to the series of regulation, introducing a third quarter 2021, and a corresponding adjustments to our business model, our organization and our workforce.
Andy has share that we have formed a clear new business strategy for future growth and have made prompt adjustments how organization to accommodate this strategy.
The vast majority of the adjustment that's immediate to our operation in our workforce and the associated one off expenses have taken place.
In the third quarter of 2021, we will be operating with a clear aim of quickly turning profitable in the near term.
As of September 30 totaled 21, our cash and cash equivalents.
Were RMB, one 4 billion, while equivalent to $221 million. We believe we have sufficient sufficient capital to support the transformation of our business and to grow our new businesses.
For the results of the third quarter of <unk> 21, we achieved continuous top line growth despite the regulatory impact now.
Net revenue increased by 62% year over year to RMB $497 million third quarter of <unk> 21, and increased by 103% year over year to RMB 1640, 2 million in the first nine months I'll talk 'twenty one.
Net revenues from online K 12, tutoring services increased by 66% year over year to RMB 478 million in the third quarter of 2021 and increased by 113% year over year to around RMB, One 6 billion.
Nine months.
Sure.
The gross billing of online K 12, tutoring services, which is a non-GAAP measure decreased by 35% year over year to RMB $302 million third quarter of 221 and increased by 56% year over year to RMB, one $6 75 billion in the first nine months.
Tom do you want to slow down was primarily due to the impact of double reduction policy is doing some.
Vacation.
During the third quarter.
Paying close enrolment decreased by 42% year over year to 226000 hemophilia quarter of around 21, an increase by.
6% to 7% year over year to.
Two 1950 2000.
First nine months I'm, sorry, 'twenty, one that decreasing across building and pay course enrollments in the third quarter.
It was primarily as a result of the adverse impact of the <unk> reduction policy introducing in July .
New student acquisition.
Average may use op, Inc, who applications for students decreased by 30% year over year to $11 7 million in the third quarter of 2021, and a decreased by 90% to $15 7 million in the first nine months up to 21.
The year over year decreasing Miu was actually go to the publication and enforcement of the regulation.
In addition to.
Revenue growth.
Our operational efficiency continued to improve in the third quarter and first nine months of 2021.
non-GAAP adjusted net loss, which excludes share based compensation expenses was RMB 457 million in the third quarter of 221 compared with adjusted <unk> adjusted net loss of RMB 521 million in the third quarter of 2020.
And it was RMB 112, 6 billion in the first nine months of Thomson, one compared with RMB $849 million of first nine months of 2020.
non-GAAP adjusted net loss as a percentage of net revenue was negative 91, 9% in the third quarter totaled 21.
Narrowed from negative 169, 6%.
In the third quarter of 2000, all was negative 77% for the first nine months of top 21 compared with negative 100.
100 <unk>.
<unk> and <unk>, 2% in the first nine months of 2020.
Next I will go through our third quarter financials in greater detail.
Net revenues were RMB $497 million.
Which represented a year over year increase of 16% from RMB $307 million third quarter 2023.
The increase was primarily driven by an increase in our net revenues from online K 12 tutoring services.
Net revenues from online K 12, tutoring services, while RMB $478 million up 66% year over year from RMB 288 million third quarter of 2000 and accounted for 96, 1% of our total net revenues.
The increase was primarily driven by an increasing pay cost enrollments in the second quarter of 2021 and the corresponding revenues were recognized in the third quarter of 2021.
Pay cost enrollments, what 226000, representing a decrease of 42% year over year from approximately 393000 in third quarter 2020.
Cost of revenue was RMB $251 million.
Including severance costs for instructors at tusa workforce due to the impact of the new regulations, and representing an increase of 77% year over year from RMB $142 million of third quarter of 2020.
The increase was primarily due to the increase in compensation cost structures as.
As well as.
Which was largely in line with the growth of net revenues.
From our online K 12 tutoring services, we provided services to more students.
Gross profit was RMB $245 million, representing a year over year increase of 49% from 165 million in the third quarter of 2020. The increase was primarily driven by an increasing net revenues.
Gross margin was 49, 4%.
Compared with 53, 8% in the third quarter of 2020.
The decrease was actually two to severance costs a reduction in staffing which was recognized in the third quarter was <unk> 21.
As a result of the impact of the new regulations.
Moving over to the expense side.
Total operating expenses were RMB $744 million, including RMB 63 million of share based compensation expenses.
This represents a year over year increase of 0.8% from RMB 738 million in the third quarter of 2020.
Total operating expenses as a percentage of revenue.
Was 150% significantly decreased from 240% in the third quarter October 20.
Sales and marketing expenses were RMB $389 million, including $7 million of share based compensation expenses. This represents a year over year decrease of 22% from RMB $496 million of third quarter, our top 20.
The decrease was primarily due to the decrease in brand advertising and promotional cost expenses.
Which were partially offset by an increasing of salary and welfare for sales and marketing personnel.
Including the severance cost for protection of such trust them now in the third quarter until 'twenty one.
Due to the impact of the new regulation.
R&D expenses were 201 $201 million, representing a year over year increase of 31% from RMB 154 million in the third quarter of 2020 increase was primarily due to an increase.
And severance costs for a reduction in research and development personnel in the third quarter.
'twenty, one due to the impact of the regulation.
Don D expenses also included $12 million of share based compensation expenses.
Our G&A expenses were RMB 123 million.
Which includes on the $14 million of share based compensation expenses. This represents a year over year increase of 38%.
From RMB $89 million.
20.
Again, the increase was primarily driven by the severance costs for reduction of general and administrative personnel in the third quarter of <unk> due to the impact of deregulation.
As additional lining in there.
In the report that.
Impairments for property and equipment right to use assets and eventual deposits for the third quarter of 2021 for RMB $38 million.
Compared with new in the third quarter of 2020.
As a result of the changing regulatory environment in online education industry combined with financial performance. We performed an impairment assessment on a long term asset and recognizing patent office in these items in the third quarter of 2021 as a result of that we have.
Vacate some of our tenancy.
<unk> pharma operations, while on the $498 million compared with RMB $573 million third quarter of 2020.
Loss from operations as a percentage of net revenues was negative 103% compared with negative 186, five casinos third quarter 2020.
This significant improvement on narrowing of losses was due to the improvement of the overall operational efficiencies. Despite the regulation change.
Net loss was RMB $490 million narrowing from RMB $581 million of third quarter of top 'twenty non-GAAP adjusted net loss was RMB $459 million.
Headwinds on the $521 million third quarter last year.
non-GAAP adjusted net loss as a percentage of net revenues was negative 91, 9% narrowed from <unk> 169, 6% in the third quarter I'm Tom Tony.
As of September 30.
Top 21 cash and cash equivalents were RMB 1000, 422 million compared with RMB 2830 $5 million as of December 31st 2000.
We believe we have sufficient capital to support the transformation of our business and to grow our new business.
And finally deferred revenue was $543 million as of September 30th saw 21, representing a decrease of nine 3% from RMB $598 million as of December 31st some 20.
The decrease was primarily attributed to the enforcement of DARPA reduction policies.
Affecting the new student acquisition.
With that.
That concludes our prepared remarks, thank you.
Operator, we are now ready to begin the Q&A session. Thank you very much.
Ladies and gentlemen, without became the question and answer session. If you'd like to ask a question on the phone tiny press star one on your telephone and wait for a named Stan If you would like to cancel request. Please press the pound or hash key.
Key.
Once again to ask question. Please press star one.
There will be a short silence whilst question shopping collect thank you for your patients.
As a reminder, if you'd like to ask question clearly press <unk>, one on your telephone and wait brand name to be announced.
I'd like to cancel request, please press to Paul or hash key.
We have a question from July <unk> from <unk> Holdings. Please ask.
To your question.
What are projected.
<unk> year to date.
Okay.
Yeah.
Excuse me would you mind repeat your initial question.
<unk> was subscription.
Yes, what are the projected subscriptions a year to date with the new software that's implemented.
Yeah.
Okay.
You mentioned you had 300000.
New subscriptions due to the.
New software that was launched.
Yes, we have 300000.
Please answer the question and I will explain in detail.
Yes.
Yes.
Yes.
We are still in the process of actually.
Acquiring additional new users.
Don't actually at this stage.
We wont anticipate provide.
Are accurate and you forecast for the total number of subscribers, but we do have a confidence that.
This 300000 actually came only.
One month period during the winter vacation.
Session, we do see the additional fashion such as during the summer vacation hardware.
Other challenges.
New students. So we do have the confidence that this number will continue to increase hiring and might be difficult for us to provide an accurate estimate for the whole year, especially dismissed and instituting early stage, but we do see.
Relatively high potential.
Okay.
Excellent are those month to month or are those subscriptions with a year contract the 300000.
That 300000 is actually a combination of subscription of different land some of them the shortest quarter asama half years, and a small percentage of our annual plan.
Excellent. Thank you.
Okay. Thank you for the questions. That's a revived like to ask question. Please press star one on your telephone and wait for a name to be announced.
We have a new questions from the line of Berry playing offense.
Darby.
Please go ahead.
Okay.
Thank you gentlemen, I have several questions. The first question is.
When the price of the stock dropped precipitously low last time, you did a reverse split respectively by changing the number of ADR.
Stock is approaching that level again, and I was wondering are you planning to do that again, because it was very detrimental to the price of the stock.
Yeah.
We currently have no plan to do further reverse stock split.
Okay. My next question is.
The.
Transferring a lot of Chinese equities to Hong Kong.
You believe that you'll be able to keep the equity that you listed in the United States or do you believe it will be transferred only to Hong Kong in the near future.
We have been keeping a very close eye on the policy and also the regulatory environments.
Relating to the FCC as well as U S listed environment.
It's our current plan to continue to remain listed and be compliant with relevant and rules and regulations from the SEC.
At this stage, we don't have any plan to.
Migrate our lift things from U S to Hong Kong will have dual listing plan.
My next question is.
Do you plan doing any.
I guess nickel road shows coming to the United States talking to investors.
Meeting with them.
Okay.
We are trying our best trying to mix imbalance through webcast online on <unk> video conferences.
Physical traveling might be difficult given the cut.
Obviously scenarios around.
Around the world.
Apologies for that.
Okay.
Okay and my last question is.
Are you planning to have to sell any additional equity or do you have cash that will hold true for the foreseeable future.
Yes, as we've shared earlier by B as of September 30, as trial in 'twenty, one our cash cash equivalents.
Around RMB, one 4 billion or around <unk> $220 million.
And as we've also shared that we have tried to we have completed the vast majority of our adjustment to our business model our organization, our workforce, including a large chunk of one off expenses in the third quarter, which is this quarter.
<unk> financial results.
We do have a plan to.
Significantly increased how financial health and profitability of our business aiming to quickly turning profitable or breaking even in the near future so with that amount of cash and.
More a higher a more stringent.
Control of our financial House, we do have confidence that.
The existing cash balance will be sufficient for all with the transformation of our business.
Therefore at this stage, we don't have any plans to raise additional equity.
Thank you for the questions.
Yes, no more questions on the line I would like to conclude today's meeting. Thank you management and thank you all participants.
You may now disconnect your lines.