17 Education & Technology Group Inc. — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone Q4 filing; quarterly results are not clearly provided in the filing text. Financial statements are prepared under U.S. GAAP. Amounts below are RMB unless stated otherwise.
Business context
The company operates an “in-school + after-school” education technology model in China. Its free smart classroom products serve schools, teachers, students and parents; paid online K-12 tutoring has become the principal revenue source. Tutoring accounted for 94.1% of FY2020 revenue, up from 88.5% in 2019. The company reports serving more than 70,000 schools and having 19.7 million average monthly active users on its in-school student applications in 2020.
Financial and operating highlights
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net revenue | RMB1,294.4m (US$198.4m) | RMB406.2m |
| Gross profit / margin | RMB798.7m / 61.7% | RMB232.8m / 57.3% |
| Operating loss | RMB1,334.1m | RMB1,000.1m |
| Net loss | RMB1,339.9m (US$205.3m) | RMB963.8m |
| Net loss available to ordinary shareholders | RMB4,177.9m | RMB1,564.3m |
| Operating cash flow | RMB(523.0)m | RMB(631.3)m |
| Cash, cash equivalents and restricted cash at year-end | RMB2,835.1m | RMB688.7m |
| Total assets / total liabilities | RMB3,389.7m / RMB1,325.6m | RMB918.3m / RMB702.6m |
- Revenue increased 218.6% year over year, driven mainly by online tutoring revenue, which rose to RMB1,218.6m from RMB359.6m. Paid course enrollments grew 178.0% to 2.018m; median course fees rose 34% year over year.
- Non-GAAP gross billings for online tutoring were RMB1,654.6m, up 202.6%. Gross billings are cash collections net of refunds, including VAT and surcharges, and are not GAAP revenue.
- Gross margin improved 4.4 percentage points. Operating expenses rose to RMB2,132.8m; sales and marketing was RMB1,097.9m, R&D RMB614.8m and general and administrative RMB420.1m.
- Share-based compensation increased to RMB356.0m from RMB93.1m, including substantial expense associated with option modifications and founder restricted share units.
- Year-end current assets were RMB3,046.6m and current liabilities RMB1,205.5m, a current ratio of approximately 2.5. Current liabilities included RMB596.3m of deferred revenue.
- Short-term borrowings were nil at year-end, following repayment of RMB85.0m in 2020. Operating lease liabilities were RMB187.5m; disclosed undiscounted operating lease commitments were RMB211.6m.
Changes, outlook and notable items
- Despite rapid revenue growth and higher gross margin, operating and net losses widened. The company reported operating cash outflow for the third consecutive year.
- Cash increased substantially mainly from financing: IPO and over-allotment proceeds of RMB2,051.7m and Series F preferred-share proceeds of RMB849.5m, partly offset by repayment of borrowings. The filing says none of the IPO net proceeds had been used by December 31, 2020; intended uses include tutoring operations, in-school products, technology, marketing and general corporate purposes.
- At the IPO, preferred shares converted to ordinary shares and mezzanine equity fell from RMB4,675.6m to nil. Preferred-share accretion of RMB2,838.0m materially increased the loss attributable to ordinary shareholders; it is distinct from the reported RMB1,339.9m net loss.
- Management said COVID-19 increased demand for online learning and accelerated school adoption, while disrupting in-person teacher support and temporarily closing offices and studios. It stated that continued COVID-19 effects did not materially affect FY2020 results, but future effects remained uncertain.
- Management believes available cash and expected operating cash flows will cover anticipated working capital and capital expenditures for the next 12 months. No numerical earnings or revenue guidance is provided. The company expects continued investment and does not expect to pay dividends in the foreseeable future.
- Regulatory compliance remains a material risk. As of December 31, 2020, 61.1% of K-12 instructors required to hold teaching qualifications had obtained them and another 10.8% had passed the qualifying exam. The company reported completing filings for its major online tutoring platform, content and instructors and was working on remaining filings.
- The business depends substantially on contractual VIE arrangements in China. The filing describes uncertainty around their enforceability, evolving education rules, licensing and filing requirements, data protection, and restrictions on moving funds from China.
- The company says a previously identified material weakness in financial reporting controls was remediated by year-end, while also disclosing other control deficiencies identified in 2020. The annual report did not include auditor attestation of internal control. The auditor was located in China and, according to the filing, was not then subject to PCAOB inspection.
- The company reported no material legal or administrative proceedings and no material off-balance-sheet arrangements. It disclosed RMB211.6m of operating lease commitments and stated it had no present dividend plan.
Important facts for investors to verify
- Whether paid enrollments, course pricing and deferred revenue convert into recognized revenue and cash collections without a material rise in refunds.
- Whether the improvement in gross margin is sustainable as tutoring scales and temporary COVID-related social-security savings—RMB89.2m across cost of revenue and operating expenses—expire.
- The drivers and likely persistence of the enlarged operating loss, cash burn and RMB356.0m share-based compensation, including the effect of founder awards and option modifications.
- Current status of instructor qualifications, provincial filings, required licenses and any subsequent education-sector regulatory changes.
- Practical availability of reported cash given its location and currency mix, VIE structure, statutory reserve requirements and PRC capital controls.
- Developments in PCAOB audit access and related U.S. listing risks, as well as the effectiveness of internal controls after remediation.