Don't Write Off China Edtech Just Yet, Says IPO-Bound YXT.com

Key Takeaways:

• YXT.com has filed for a New York IPO, aiming to sell investors on its position as China’s largest digital corporate learning company
• YXT is trying to sell investors on its big growth potential, even as its revenue contracted in this year’s first quarter

By Edith Terry

When corporate learning software as a service (SaaS) company YXT.com Group Holding Ltd. filed to list on the Nasdaq last week, the reaction was hardly one of excitement. One analyst said to “avoid it,” noting the company’s declining revenues and history of losses.

But the muted response hasn’t stopped YXT.com from moving ahead with what could be one of the larger IPOs by a Chinese company in New York this year. YXT.com plans to sell 2.75 million American Depositary Shares (ADS) for between $11 and $13 apiece, raising up to $36 million. A pricing at the middle of that range would give the company a market cap of about $650 million.

Despite its commanding position as China’s largest digital corporate learning SaaS provider, YXT.com’s financials have been relatively weak in the last two years. Its revenue fell slightly from 431 million yuan ($69 million) in 2022 to 424 million yuan last year – never a great sign for any company in a growth industry.

What’s worse, the revenue declines accelerated in this year’s first quarter, skidding 33% to 83.2 million from 122.2 million yuan a year earlier. Gross profit for the latest three-month period fell as well, from 77.6 million yuan in 2023 to 52 million yuan in 2024.

Those contractions aren’t too surprising, since many corporations have begun reining in their spending as China’s economy slows after years of rapid growth. Still, the accelerating rate of contraction this year will hardly reassure potential investors.

One brighter spot was YXT.com’s bottom line profit, which turned positive in the first quarter of 2024, to 35 million yuan from a loss of 65.2 million yuan a year earlier. But even there, that profit was only possible due to a one-time gain, and the company continued to lose money on an operating basis. Its losses in general are narrowing, falling from 1 billion yuan in 2022 to 230 million yuan last year.

YXT.com said some of its red ink owes to an ongoing legal battle involving a publisher affiliated with the highly regarded Shanghai-based China Europe International Business School (CEIBS). CEIBS Publishing was established in 2007, in an agreement between the school and venture capitalist and CEIBS board member Eric X. Li, to publish business case studies and other materials generated by CEIBS.

In 2018 and 2019, CEIBS became unhappy with the arrangement, and in 2019 Li and other shareholders sold their 39% of the company to the holding company previously behind YXT.com, called Unicentury. YXT.com later absorbed the publishing company into its subscription-based corporate business. But when CEIBS found out about that, it issued a complaint and the case went into arbitration in Hong Kong.

While the arbitration is still ongoing, YXT.com removed CEIBS Publishing’s finances from its own income statement as of last January. In the first three months of 2024, that resulted in 20.6 million yuan in lost revenue. If that figure was added back to YXT.com’s first-quarter results this year, its revenue would have declined by a milder – but still not encouraging – 15% to 103.8 million yuan this year from 122.2 million yuan in 2023.

Customer Hit

The CEIBS dispute has also affected YXT.com’s customer list. At the end of last year the company had 3,501 customers, including 200 Fortune 500 companies in China, in 20 industries, including consumer, healthcare, manufacturing, technology and electric vehicles. But the number had dropped to 2,545 customers by the end of March, after the elimination of 845 customers from CEIBS Publishing Group.

While the CEIBS dispute doesn’t look encouraging, YXT.com – whose name means “cloud learning palace” – does have a more stable story to tell with its core subscription services for corporate learning. Most of its revenue comes from such subscriptions, and revenues from that segment grew from 81.4% of the total in the first three months of 2023 to 92.5% in the first quarter of 2024. Still, that part of the business is also contracting.

The company is also a leader in its space, with five times the number of subscribers of its nearest competitors. That could position it well for growth in a Chinese corporate learning market where digital services accounted for just 19.6% of the overall market last year.

The digital services share of the corporate learning market is expected to grow to 23.3% of the total by 2028, worth about 300 billion yuan out of 1.2 trillion yuan for broader market. YXT.com is also turning its focus away from smaller customers to focus on more profitable large enterprises.

Meanwhile, the company’s cash is starting to run low, which may explain the timing of its IPO. It had just 219 million yuan in cash at the end of March 2024, down by about a third from 320 million yuan at the end of last year and 432 million at the end of 2022.

The company boasts an A-list of backers, including Tencent and Sequoia Capital, and raised $190 million in a funding round in 2021. That valued YXT.com at $1 billion at the time, meaning it has lost roughly a third of its value since then.

Anyone who follows China’s edtech sector will recall that investors got badly burned after a massive crackdown in 2021, when the government banned most after-school tutoring services from K-12 educators. The resulting bloodbath wiped billions of dollars off the market value of companies like New Oriental Education EDU and TAL Education TAL.

Some companies went on to reinvent themselves in completely different sectors, while others moved into areas like study abroad preparation and early education that weren’t affected. Providers of education for adults, including vocational education and the kinds of services offered by YXT.com, were never affected, though private education in general remains a sensitive sector in China.

A potential peer comparison for YXT.com could be San Francisco-based online corporate training company Udemy UDMY, which entered the China market in August 2022 with local partner Sanjieke, an online education platform targeting IT professionals. Udemy is aiming for 2,000 customers by 2025 – still far lower than YXT.com’s portfolio.

Udemy currently trades at a price-to-sales (P/S) ratio of 1.42. That compares with a far higher ratio of nearly 11 that YXT.com would be seeking if its shares price in the middle of their range. That suggests YXT.com it believes investors will buy into its growth story even as China’s economy runs into headwinds.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.