iHuman Inc.
Q1 2021 Earnings Call Transcript

Published: 8 Jun 2021

[Operator:]

Good morning, and good evening, ladies and gentlemen. Thank you for standing by for iHuman's First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. Now, I will turn the call over to your speaker host today, Ms. Cynthia Tan, Senior IR Director of the Company. Please go ahead, ma'am.

[Cynthia Tan:]

Thank you, operator. Hello, everyone, and welcome to iHuman's first quarter 2021 earnings conference call. Our earnings release was distributed earlier today and is available on the Company's IR website as well as our PR Newswire.

[Dr. Peng Dai:]

Thank you, Cynthia. Hello, everyone. Thank you all for joining us on the call today. We are pleased to report another strong quarter as we reported a strong top line growth and further strengthened our leading position in the childhood edutainment sector. Over the past quarter, China's online education market has continued to grow rapidly as parents and kid becoming increasingly receptive to online learning as a result of the ease of use flexibility and a variety of educational offerings that are available. Online learning apps have grown in popularity, especially among millennial and Gen-Z parents. As digital native, they tend to view technology favorably and are more willing to use tech solutions to help their kids learn. Meanwhile, we are also seeing increasing demand among Chinese parents for high quality edutainment content that inspires their kid's natural learning interest while having fun. Looking ahead, we continue to believe that the use of a variety of online tools for education is not a short-lived phenomenon, but it will be a long lasting and essential component of education that effectively serves the broader population. During this quarter, we continued to expand our brand awareness and user base in online childhood edutainment market. We have always been committed to transforming learning into a fun journey for every child while lightening the burden for parents.

[Vivian Wang:]

Thank you, Peng, and thank you everyone for joining the call. I will now walk you through our financial results. With no doubt, all the financial data that I talked about will be presented in RMB. First, I will briefly recap our financial performance for the first quarter of 2021 with robust growth. Quarter revenues in Q1 came ahead over expectations increasing 191% year-over-year to 227 million. This was mainly due to a rapid growth in revenues from our learning services, which leads 233% so hit a record high of 192 million. The robust growth was powered by our user based expansion and enhanced the user engagement as we continue to build on our unrivalled reputation for superior product quality. During the quarter, we further strengthen our leading position in the childhood edutainment sector and saw increased attraction for our products among millennial and Gen-Z parents who appreciate the curiosity that our products promote. Average total MAU of our online business reached a record high of 16.5 million in Q1, an increase of 97% from the same quarter last year. The number of paying users also reached a record high of 1.68 million. We have delivered four consecutive quarters of triple digit top line growth year-over-year, which speaks to our proven educational products and constant innovation capabilities and industry leading edutainment technologies. Revenues from learning material and devices were 35 million, an increase of 71% year-over-year, primarily due to resumption of offline business activities as a result of the alleviation of COVID-19 pandemic. Along with the rapid growth of our online business which has the higher gross margins, our gross profit and gross margin remained solid. Gross profit was 161 million, an increase of 212% year-over-year. Our gross margin reached to 71% in Q1 compared with the 66% in the same period last year. I'll move on to our operating expenses now. Total operating expenses were 158 million, which increased to 191% year-over-year. Excluding SBC, our total operating expenses were 151 million, an increase of 178% year-over-year.

[Operator:]

We will now begin the question-and-answer session . The first question comes from Mark Li from Citi. Please go ahead.

[MarkLi:]

Hi, management. Congratulations on the results and thanks for the presentation. I have two questions. Number one, may I ask how the development for our AI course preparation, and can you share a bit more on the outlook update? And secondly, would you share any view on the potential recreation and our initiatives to work around that? Thank you.

[Dr. Peng Dai:]

Thanks Mark. I will answer the first question. So about our first AI course, which is iHuman Chinese Reading, we have done a few trial runs starting from April and up to now the conversion rate is better than our expectations. And based on our current data, the first month completion rate was as high as high 90%, so which already outweighed the performance of the other similar products available in the market. And also, from the first couple of weeks, we also get a lot of positive feedback from kids and their parents who recognize that our product innovation help kids learn while having fun. The young kids like to play with our content and like to learn using our products repeatedly almost every day, so -- which naturally improves their reading skills and also enhances their comprehensive Chinese literacy through our design, fun and interactive activities. And going forward, we will also continue to build out more capabilities and functions within this product and further optimize the performance and adding more content going forward, yes

[Vivian Wang:]

And, Mark, this is Vivian. I will answer the second question about the regulations. So based on our understanding of policies currently in place, recent supervision of after-school tutoring is basically reinforcing our government's previous focus on a few key areas of concern. So, the first one is the prime courses ahead of syllabus, which adds significant pressure to students. And second one would be the regulations related to advance payments for tuitions and fees, as well as high pricing of the courses, some of which are too high and place extra burden on parents and also raise public concerns about the fairness or equality of education. And third one would be false and excessive advertising, which causes heightened anxiety for parents and kids, and so on. So while the recent, more detailed policies gave us further guidance in those areas, we believe what we offer to parents and children are in line with the healthy online education that the policies aim to address. So on the content side for our current products and business lines also self-directed learning apps, we mostly operate in the edutainment segment, which combines both education and entertainment elements, our core value of offering innovative edutainment content echoes with the government's call for a fun learning experience. We creatively made content that is designed for each knowledge point within our app, which are full of creative elements and interactive designs that really helped to cultivate creativity in children, help them to explore the joy of learning, and the -- and nurture their curiosity and passion for knowledge. So this is something -- those memorizing and priming courses for exams or competitions can never do. In addition, our apps also allow parents to effectively manage the children's screen time to help protect their eyes and ensure that the kids are learning at a desired proportionate pace. Even for kids who live in less developed areas and don't have access to high-quality education resources, as long as they have a mobile device and access to the internet, they can actually enjoy a great educational experience with our products. So in essence, our products support general education, foster a love of learning, and care for children's mental and physical health, which is the direction we believe the current policies and regulations and successful trends are heading. And on the advertising side, we have been a content and product focus company and have always aimed to build a healthy business model. We have mostly relied on our superior product quality and word-of-mouth referrals to grow our user base. Our products keep ranking No. 1 in the Apple attached app store education category almost every day since the end of 2018 and we also get recommended by our third-party channels. So although we've been a bit more active in terms of branding and marketing as a sophisticated supplement recently, majority of our user growth feel came from organic growth. We're not blindly burning cash for customer acquisition, but rather focus on R&D to constantly optimize our products to keep our differentiation and sustain our long-term growth. So, we believe regulations on promotional apps and a number of these other areas will actually help the industry become more rational and sustainable going forward. So to summarize, our potential regulations could actually help to bring the industry back to a healthier and more sustainable. And as proven repeatedly by historical experience, it could also accelerate consolidation, and in the longer term, potentially benefit leading companies like us who are always aiming to be compliant with all the regulations and bring the best-in-class product to our customers. I hope this answered your question, Mark. Thanks.

[Mark Li:]

Thank you, Peng and Vivian.

[Operator:]

Our next question comes from Lauren Zuo from Credit Suisse. Please go ahead.

[Lauren Zuo:]

Hi. Thanks, management, for taking my question. Congrats on the strong results. So I have two questions regarding your product. First, would you share more color on the new product and how would you differentiate your product content or quality with competitors? The second is about the R&D expenses. What would be your expectation on the R&D spending this year and next year, and would you share more color on the magnitude of R&D? Thank you.

[Dr. Peng Dai:]

Thanks, Lauren. This is Peng. So about the first question, our new product, actually, as we mentioned earlier, we do have several new products in sight. As we mentioned earlier, we just launched our first-generation AI product, iHuman Chinese Reading in April. And as I introduced earlier, we do see a lot of good early but promising results from our trial runs. And for these products, we believe it helps children to learn about classical Chinese literature and culture and improving their reading skills and boosting their confidence with public speaking. And our key feature, our major difference versus the competing products is that, we do create a more immersive and interactive way of learning with our products so that children can enjoy a lot of fun with our enhanced animations and with more diversified interactions during the learning progress. And the second new product is iHuman Readers, which I also introduced earlier. So it's a co-work with Oxford University Press. And in general, there will be an interactive library containing Oxford's most comprehensive reading series of over 1,000 books. And also, there will be a customized AI-powered assessment module. So, these two parts will both be very differentiating factors versus all the other English-level reading products available in the market because this is -- the Oxford Reading Tree is a very famous brand among the English-level reading brands. And also, this is the first time to we co-create a children-focused English reading assessment tool. So I do believe this will be a very important innovation for this whole industry. And also, we do have the co-creation of 100-level reading books of the new series, which is called Fantastic Friends. And for these new IP, we will create a lot of interactions and animations so that we can create an even more engaged reading experience for children. So with that part, we do get a lot of good feedback and even the Best Innovation Award from Oxford this year. So -- and also, as we mentioned earlier, we are building a more comprehensive portfolio that better supports the all-around development of children. So as the first step, so this summer, we will launch a new app, iHumanpedia, and this will help to illustrate a hard-to-understand STEM topics with the short cartoons and a lot of aim gamified innovation. So kids can interact with animated characters and also learn about STEM-related topics by watching those fun animations and exploring the dynamic interaction. At the same time, we are also planning and working on some other apps about our coding and other topics, which will be released later this year or next year. Yes, these are basically our new product plan in the pipeline. Thank you.

[Vivian Wang:]

And regarding your second question, Lauren, about the R&D expenses, so currently, in Q1, R&D expenses is around 82 million, and we do plan to further increase our investment into the R&D going forward. So as an R&D-centric company, we will keep reinvesting a lot into R&D because not only by which can we sustain our long-term growth by providing differentiated products and keep ahead of on our technology advantages. So yes, we believe this devotion to high-quality content and advance edutainment product should differentiate from our competitors. So we'll keep investing pretty aggressively into R&D going forward. Thanks.

[Operator:]

Our next question is from Betty Zhou from Essence Securities. Please go ahead.

[Betty Zhou:]

Hi, management. Thank you for taking my question. I have two questions. First one is about the staff situation. Can management elaborate on the staff profile of our company now? Also, it would be better if you give us more color about the personnel plan this year. My second question is related to the flagship product, GoPlay Chinese. Can management assure the operation trackage of this product this year? Thank you.

[Vivian Wang:]

Thanks, Betty. So regarding the personnel or headcount plan, we do plan to kind of add pretty aggressive in terms of headcount. So currently, we already have roughly 1,200 people, and the majority of which are R&D people. And I said earlier, we will invest pretty aggressively into R&D. So, we do plan to increase our headcount because we have a lot of the new product in our pipeline. We also want to continue to enhance and optimize our existing products and continue to provide better experience for our customers. Yes, so we do plan to increase our headcount pretty aggressively.

[Dr. Peng Dai:]

And thanks, Betty, for your second question about our plan for our flagship apps, iHuman Chinese. Yes, we do have a lot of initiatives to further drive these apps. The first one, we will continue to update the new content within the newly introduced package, which is the traditional Chinese medium package. So we are we launched that, but we are still working on some new content and new product in that part. And the second one will be we will also introduce another new package, which is the traditional Chinese coding package. Yes, this will also further expand our content offerings for the children. Number three, we will add more reading and practicing functions within these apps because we do believe while they learn the kids will do need more opportunities to get more practices and reading exercises. And number four, we will continue to refresh the previous character learning units based on big data analysis because as we mentioned earlier, we are continuously optimizing and updating those in our course element based on the user feedback and based on our data analysis, so that we can make this whole app a new -- always in a new way. As the last one will be we will create more physical learning materials and a companion product for iHuman Chinese because we do see a lot of good momentum with these -- on those selling package or bundle selling strategies because we do see the parents will need more companion and physical learning products for the children beyond the online offerings. So, yes, these are our major initiatives for iHuman Chinese app moving forward. Thanks.

[Operator:]

Our next question comes from PRN Asia. Please go ahead.

[Unidentified Analyst:]

Hi, management. Could you please add some colors about the traffic acquisition? Yes. Thank you.

[Vivian Wang:]

I'm sorry. I didn't quite hear your question.

[Dr. Peng Dai:]

For our customer acquisition, we believe we have our own principles. So the first one is in terms of this customer acquisition, we always believe that product quality is the dominant driver of our business. So, these kinds of good products and high-quality content bring us strong word-of-mouth referrals and further drive our massive organic user growth. So, this is the foundation of our business model. And the second one will be we do have a lot of strength in channels. So our app has been ranking very high on Apple app store or the other major Android store. So this will help us to give us some more high exposure to users in those different channels. And third one will be moving beyond, we are also exploring new growth channels, for example, like OTT and other smart devices and also social committee. And also, we will leverage our online-offline channel synergies because we do have a huge offline network. We see kindergartens and the educational organizations all around China. So this will also help us to get more access to more user base. And going forward, we will follow the same user growth principles and continue to expand and roll out the high-quality product to fulfill their demands so that this kind of organic growth model will be sustainable. Yes, thanks.

[Operator:]

This concludes our question-and-answer session. I'd like to turn the conference back over to Ms. Cynthia Tan for any closing remarks.

[Cynthia Tan:]

Thank you, operator. In closing, on behalf of iHuman management 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.

[Vivian Wang:]

Thank you everybody.

[Dr. Peng Dai:]

Thank you.

[Cynthia Tan:]

Bye-bye.

[Dr. Peng Dai:]

Bye-bye.

[Vivian Wang:]

Bye.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.