17 Education & Technology Group Inc. American Depositary Shares 2026 Q2 Earnings Call

Hello, everyone, and thank you for joining us today. Our earnings release was distributed earlier today and is available on our IR website. Joining us today are Ms. Sishi Zhou, Chief Financial Officer, and myself, Investor Relations Manager. Sishi will walk you through our latest business performance and strategic directions, and I will then discuss our financial performance in more detail. After the prepared remarks, Sishi will be available to answer your questions during the Q&A session. Before we begin, I would like to remind you that this conference call contains forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934 and the U.S. Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based upon management's current expectations and current market and operating conditions, and relate to events that involve known and unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control. These risks may cause the company's actual results, performance, or achievements to differ materially. Further information regarding these 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. I will now turn the call over to our Chief Financial Officer to review some of our business development and strategic direction. Sishi, please go ahead. Thank you, Lara.

Hello, everyone. Thank you all for joining us on our second quarter 2026 earnings conference call. Before we begin, I would like to note that the financial information and the non-GAAP numbers in this release are presented on a continuing operations basis and in RMB, unless otherwise stated. Let me begin with our second quarter business highlights. We are pleased to report another quarter of strong progress. Net revenues increased 254.6% year-over-year to RMB 90.1 million, bringing first half 2026 net revenues to RMB 189.5 million, up 302.6% from the same period last year. Gross margin expanded to 69.2%, representing a year-over-year improvement of 11.7 percentage points, which is driven by the growing contribution of our AI-powered application services and ongoing optimization of our revenue mix.

During the quarter, we achieved our first quarterly GAAP and non-GAAP profitability with GAAP net income of RMB 1.1 million and adjusted net income of RMB 4.7 million. We believe these results provide further validation of our strategic transformation into an AI-powered application service provider and demonstrate the improving economics and scalability of our evolving business model. Importantly, this progress was achieved while we continued to invest in AI capabilities, product innovation, and the expansion of our application ecosystem. Beyond our financial performance, we also made important progress in advancing our AI application service strategy. Over the past several years, we have built extensive experience serving education scenarios across districts, schools, teachers, and students. With the advancement of AI technologies, we are evolving from traditional digital solutions towards more deeply integrated agentic services. A key milestone during the quarter was the further expansion of our collaboration with the Shanghai Minhang District.

Building on our long-standing partnership and existing digital teaching infrastructure, the latest phase of our collaboration has evolved from SaaS-based services towards agentic services, providing more personalized AI capabilities to teachers and embedding AI more deeply into daily teaching workflows. An important aspect of this evolution is that the procurement model is also evolving. The Minhang project adopts a service-oriented approach, combining initial system development with ongoing service components linked to actual AI usage. We believe this model provides a potential framework for scaling AI applications in education beyond the traditional one-time software deployments. Meanwhile, this represents an important validation of our strategy, moving AI from a supporting tool towards an intelligent service layer that can actively assist education professionals in real-world scenarios. Another important milestone during the quarter was the introduction of our personalized AI agent for individual teachers.

This teacher-facing AI agent is designed to support key teaching workflows, including assessment, content generation, and learning analytics. Specifically, it helps teachers automate tasks such as essay grading and class analysis, generate personalized assessments, and translate learning data into differentiated teaching recommendations. Our vision is not to replace teachers, but to empower educators by combining AI capabilities with teachers' own experience and the classroom context. We are also expanding access to teacher-facing AI applications to broaden adoption and gather real-world feedback as we continue to validate product-market fit. Together with our student-facing personalized learning services and regional AI applications, this expands our AI application capabilities across three core scenarios: educational administration, teaching, and personalized learning, marking the establishment of an agentic ecosystem spanning the full workflow of teaching, learning, administration, assessment, and research.

Strategically, this three-layer AI agentic system also aligns with the logic of our G, B, C, and synergistic growth flywheel. To further elaborate the integrated ecosystem, our GN business allows us to validate AI applications at regional scale and establish benchmark use cases in complex education environments. For example, in Minhang District, our digital teaching systems have already been deployed across more than 3,000 classes, with teacher and student coverage of 97.8%. Based on this foundation, we are continuing to upgrade regional AI capabilities from traditional digital tools toward more proactive agentic services. Our B-end business enables us to replicate these capabilities across schools and embed AI into daily teaching workflows, creating scalable pathways for broader adoption. We are also seeing increasing interest from school-based customers in adopting more integrated AI services, which provides additional opportunities to expand beyond our existing regional deployments.

Our C-end business, led by Yiqi Aixue, continues to serve as an important commercialization engine, delivering personalized AI learning services directly to students and families. Together, these three areas reinforce one another. G validates, B replicates, and C monetizes and scales. The trust, distribution, capabilities, and education insights accumulated across these scenarios continuously strengthen our ability to develop and commercialize AI application services. Turning to our financial position, the improving business performance has also strengthened our financial flexibility. As of the quarter end, we maintained a strong cash position of RMB 456.9 million, providing sufficient resources to support continued investment in AI capabilities, product innovation, and long-term growth opportunities.

On September 3rd, our board of directors has authorized a share repurchase program of up to $10 million worth of its ordinary shares, including in the form of American depository shares, during a 12-month period starting from September 3rd, 2026, funded from our existing cash balance. The program reflects our confidence in our long-term strategy and our commitment to disciplined capital allocation and long-term shareholder value creation. Looking ahead, we believe the next stage of growth will come from expanding AI application services across more education scenarios. In G and B-end, we will continue to develop benchmark projects that demonstrate the value of AI in large-scale education environments. In B-end, we will continue to productize and replicate proven capabilities across school-based scenarios. In C-end, we will continue to enhance personalized AI learning services while exploring additional individual user applications.

Through this integrated approach, we aim to create a reinforcing cycle where real education scenarios improve our AI capabilities, and improved AI capabilities create greater value for users. We believe our accumulated education insights, AI capabilities, and growing application ecosystem provide a strong foundation for continued innovation and long-term value creation. This concludes our business update. I will now turn the call over to Lara to walk you through our financial performance in detail.

Thank you. Thank you, Sishi.

I will now walk you through our financial and operating results for the second quarter of 2026. Please note that all financial figures are presented in RMB terms unless otherwise stated. We are pleased to report strong financial results for the second quarter of 2026, highlighted by the company's first quarterly net profit on GAAP and non-GAAP basis since its strategic transformation. Let me take you through the details. Net revenues. Net revenues for the second quarter of 2026 were RMB 90.1 million, $13.3 million US, representing a year-over-year increase of 254.6% from RMB 25.4 million in the second quarter of 2025. And bringing the first half of 2026 net revenues to RMB 189.5 million, compared with RMB 47.1 million in the first half of 2025.

The substantial growth was primarily driven by the continued expansion of Yiqi Aixue, our consumer-facing AI-powered membership product, complemented by the ongoing contributions from district-level and school-based subscription projects. Cost of revenues for the second quarter of 2026 were RMB 27.8 million, representing a year-over-year increase of 157.2% from RMB 10.8 million in the second quarter of 2025, which was mainly due to the continued growth of Yiqi Aixue and the related service delivery costs. Gross profit for the second quarter of 2026 were RMB 62.3 million, compared with RMB 14.6 million in the second quarter of 2025. Gross margin for the second quarter of 2026 was 69.2%, compared with 57.5% in the second quarter of 2025, representing an improvement of 11.7 percentage points and up from 61.9% in the first quarter of 2026.