LAIX Inc.
Q2 2020 Earnings Call Transcript

Published: 27 Aug 2020

[Operator:]

Hello, ladies and gentlemen, thank you for standing by for LAIX Inc.'s Second Quarter 2020 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 is being recorded. I will now turn the call over to your host, Mr. Harry He, Investor Relations Director of the company. Please go ahead, Harry.

[Harry He:]

Thank you, Jason. Hello, everyone and welcome to Second Quarter 2020 Earnings Conference call for LAIX also known as Liulishuo. The company's results were issued earlier today, and you can download earnings press release and sign up for the company's distribution list by visiting our IR website at ir.laix.com. Dr. Yi Wang, our CEO and Founder; and Mr. Bing Sun, our CFO, will begin with some prepared remarks. Following the prepared remarks, Mr. Zheren Ben Hu, our CTO and Co-Founder; Dr. Hui Lin, our Chief Scientist and Co-Founder, will also join us for the Q&A session. Please note that today's discussion will contain forward-looking statements relating to future performance of the company and are intended to qualify for the safe harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's earnings release and this discussion. A general discussion of risk factors that could affect LAIX' business and financial results is included in certain filings of the company with the Securities and Exchange Commission, including its annual report. The company does not undertake any obligation to update the forward-looking information, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. I will now turn the call over to our CEO, Dr. Yi Wang. Please go ahead.

[Yi Wang:]

Thanks, Harry. Hello everyone. Thank you for joining our second quarter 2020 earnings conference call. We had quite an eventful second quarter with a number of significant strategic moves made across our business operations. These moves allowed us to realign our resources and build strength in areas where we see the most potential profitable growth. Through more streamlined operations, total net revenue came in at RMB269.4 million, a 18.0% increase from the previous quarter and exceeding the high-end of our guidance range. Gross profit margin bounced back above 70%, and the sales and marketing expenses as a percentage of net revenue declined to 74.5% compared to 115.9% in the previous quarter. Consequently, net loss narrowed to RMB92.5 million down 53.0% sequentially. Operating cash flow also declined to RMB66.4 million compared with RMB99.8 million in the previous quarter. While the total number of unique paying users decreased sequentially as a result of both the fade away of the unexpected increase in traffic due to the COVID-19 outburst in the first quarter, as well as our stringent cost controlling, advertising and optimization of user acquisition costs. Our gross billings per paying user improved by 50.6% quarter-over-quarter demonstrating our success in migrating users into targeted courses with higher ASP. We believe there is room for further improvement in these metrics in the coming quarters. I will start with our product mix and Bing, our CFO will discuss the operational aspects. We continually upgrade, innovate and adjust our products to ensure the most current and relevant technology is being implemented allowing us to tailor to our users evolving needs. During the second quarter, our DongNi A plus, the upgraded version of DongNi came into market equipped with the latest AI adaptive learning system that's being refined by our AI and curriculum design team. Thanks to the huge amount of learning data from millions of previous and existing DongNi users. DongNi A plus actively recommends personalized learning content adjusts the learning path for users based on their individual proficiency levels and this approach not only helps improve the English learning experience for our users, but also increase the retention rate. In addition, more user friendly designs have been added to DongNi A plus for example, the one key mute design will automatically ignore questions when it is inconvenient for people to conduct oral practice in public places. Moreover, for the benefit of future reference, users can collect vocabulary words and the spelling errors with just one click, generating a list of their personal vocabulary notebooks and favorite words. In addition to the DongNi series of courses designed for systematic improvement of General English capabilities at the core of our product offerings for adults, we have also been continuously investing in enriching our product mix. We understand that studying English, not the ultimate goal for our users but means to varying ends. Therefore, we identify our users various objectives and scenarios for learning and using English and offer relevant products to best help them reach those objectives. For example, they may want to further enhance their reading capabilities in order to be able to read English news articles and books just as smoothly as a native speaker, which can be accomplished by using our Liuli Reading product. A large fraction of Chinese English learners have a strong desire to improve their accent, which can effectively be achieved by using an upgraded version of authentic pronunciation course that offers a unique AI aesthetic, personalized accent correction and practice experience. For users who want to improve their English communication skills in business or travel settings, they can achieve their goals through our Business English or Travel English courses. By identifying such diverse learning needs and developing products around them, we continue to increase our users thickness and consequently increase their user lifetime value as more cross sell and upsell opportunities emerge. With the DongNi series of core course position at the core of a one stop shop for English learning strategy, we provide a wide variety of scenarios that serve as excellent direct channels to existing users to try to purchase other courses such as the ones we just mentioned. With an increasing number of users being guided into other courses internally, the dependence on acquiring new users externally for revenue growth is effectively reduced. We're confident that continuous enhancement -- enrichment of product mix can help us increase our user LTV and mitigate the impact from CAC increase from the broader market at the same time. With a strong growing product mix and a clear path and profitability for our Adult English business in 2020, we have also been actively developing our Kids English business based on comprehensive studies of children's learning motivations and characteristics in English learning as well as needs for Chinese parents. Our kids courses, empowered by a state-of-the-art AI technology are designed to create immersive learning experience where they can explore, learn and apply their language skills in personalized, fun, meaningful ways. The upgraded version of our Kids app which contains the newly launched core course ranked among the Top 10 on the iOS download chart for Kids apps within just one month of its launch. Every upgrade aims to improve the learning experience for our young users and enhance the interaction between parents and kids. For example, some recently added features include one new word per day, English songs, weekly study reports, spelling picture book, and AI foreign teachers class. Our Kids product mix is currently the only one in the market that offers different learning experiences for kids in the three to six age group and the six to nine age group. Within next year, our kids courses will extend to the age group of nine to 12, completing the product spectrum from age to 12. Differentiated from other kids products in the market, our kids courses have shown strong user retention and growth and received very positive feedback from our kids users and their parents. LAIX is not a traditional education company and it was never meant to be one. It was founded to leverage technology to make learning more personalized, effective and accessible starting from English, we’re pioneer and leader in the AI powered learning market. Our innovative and attractive learning products, rich experiencing integrating technology product program design, as well as large scale efficient use operations, and deep routing AI Learning Technologies collectively make us unique as a leader in the increasingly crowded online intelligent education market. To further strengthen our competitive advantages, we keep a strong focus on continuously developing our proprietary suite of AI powered learning technologies including our Speech Recognition Assessment Engine, writing scoring engine, and advanced adaptive learning systems which enables us to provide users with personalized effective learning. As of June 30 2020, our massive database of English spoken by Chinese has recorded approximately 3.7 billion minutes of conversation and 29.8 billion sentences covering a broad range of geographic distribution and proficiency levels. Finally, we have some exciting news to share with you. In June, LAIX won the 2020 China Golden Fingertips Best Online Education App award at a technology conference hosted by iiMedia Research, the leading data mining and analysis institution for new economy industry. In addition, LAIX was ranked as one of the top 20 Chinese AI plus education enterprises at the 2020 World Artificial Intelligence conference, one of the most highly recognized events in the AI industry. As a company dedicated to advancing proprietary AI technologies to provide innovative and differentiated learning products, these recognitions are truly gratifying. 2020 is no doubt a very unique year for all of us. For the education industry as a whole, we have witnessed an accelerated adoption of online learning and we believe LAIX is well positioned to benefit from it. Empowered by our cutting edge technology and effective efficient learning products and services, we aim to exceed our user expectations, not merely meeting them. We aspire to create products and services that our users truly love and will recommend to their friends and family. This year will also be a pivotal year for LAIX as we have already started to more aggressively implement cost control measures and refine our operations. As we continue to offer our growing user base, a superior suite of products and services, we’re also making every effort to keep improving our operating efficiency and bottom line. As we move forward, capturing the enormous growth opportunities presenting for intelligent, enhanced learning market in China, we're also looking forward to driving the development of the entire intelligent learning industry, increasing its awareness and advancing the adoption of AI power. This concludes my prepared remarks. I'll now turn the call over to our CFO Mr. Bing Sun who will discuss our key financial results.

[Bing Sun:]

Thank you, Yi and hello everybody. In terms of streamlining our operations, we're not only focused on top line growth, but also focused on reducing costs through efficient operations in an effort to improve our bottom line growth as well. I want to highlight the three strategies we’re currently pursuing first, we're currently in the process of optimizing of our organizational structure to improve all aspects of work efficiency, which includes rationalizing the company's overall headcount and improving performance management of our WeChat sales team in order to increase average total sales per group. Second, with the high penetration rate of Internet and quality broadband coupled with the rapid adoption of remote working due to COVID-19, we closed some of our offices enabling us to lower some fixed costs without losing anything in efficiency. Third, we're working on reducing our advertisement costs through refining the user acquisition channels, enhancing free learning content, and establishing more collaborative relationships with high traffic platforms and the content providers. We believe all these efforts are aligning well to drive sustainable growth for our business and we’re pleased to see that we have made a solid progress on these fronts. Let us now look at our key financial metrics in the second quarter. Net revenues are RMB269.4 million, 18% increase from RMB228.3 million for the previous quarter. The quarter-over-quarter increase was primarily attributable to the upgrade of product mix, introduction of additional courses and services with higher ASPs. Cost of revenue was RMB75.6 million, a 4.0% decrease from RMB78.8 million for the previous quarter. The quarter-over-quarter change was primarily due to decreases in salaries and benefits expenses. Gross profit was RMB193.8 million, a 29.6% increase from RMB149.5 million for the previous quarter. Gross margin for the second quarter of 2020 was 71.9% compared with 65.5% for the previous quarter. Total operating expenses were RMB289.7 million, a 16.3% decrease from RMB346.1 million for the previous quarter. The changes were primarily due to the improvement in operating efficiency and optimization of the organizational structure. Sales and marketing expenses were RMB200.7 million, a 24.2% decrease from RMB264.7 million for the previous quarter. The changes were primarily due to the company's cost of control in advertising and optimization of the user acquisition costs. Sales and marketing expenses as a percentage of net revenue decreased to 74.5% for the second quarter compared with 115.9% for the previous quarter. R&D expenses were RMB48.5 million, a 18.1% decrease from RMB59.2 million for the previous quarter. R&D expenses as a percentage of net revenue for the second quarter was 18% compared with 25.9% for the previous quarter. The changes were primarily due to the efficiency optimization in personnel management. G&A expenses were RMB40.5 million, a 82.8% increase from RMB22.1 million for the previous quarter. The increase was primarily due to the one-time charge of leasehold improvements caused by early termination of lease in hand and 19 due to change in business strategy. G&A expenses were 15% of net revenue for the second quarter of 2020 compared with 9.7% for the previous quarter. Loss from operations were RMB95.9 million compared with RMB196.5 million for the previous quarter. The improvement in operating results was attributable to first upgrade of our product mix, introducing additional courses and services with higher ASPs, second the improvement in operating efficiency and the third, our cost of control in advertising and optimization of user acquisition costs. Adjusted EBITDA was a loss of RMB77.8 million compared with adjusted EBITDA loss of RMB182.5 million for the previous quarter. Net loss was RMB92.5 million compared with RMB197 million for the previous quarter. Adjusted net loss was RMB85.3 million compared with RMB189.2 million for the previous quarter. Basic and diluted net loss per ordinary share attributable to ordinary shareholders was RMB1.87 compared with RMB3.99 for the previous quarter. In terms of our balance sheet, as of June 30, 2020 the company's cash, cash equivalents restricted cash and the short-term investments totaled RMB390.3 million compared with RMB459.4 million as of March 31, 2020. Operating cash outflow was RMB66.4 million compared with RMB99.8 million for the previous quarter. The company has deferred revenue of RMB828.8 million as of June 30 2020 compared with RMB820.7 million as of March 31 2020. Now turning to our outlook. For the third quarter of 2020, the company currently expects net revenue to be between RMB230 million to RMB250 million which will represent a decrease of approximately 12.2% to 4.6% from RMB262.1 million for the same quarter last year. This forecast reflects the company's current and preliminary view on the current business and the market conditions which is subject to change. And this concludes our prepared remarks. We will now open the call to questions. As a reminder, Mr. Hu Zheren our CTO and Dr. Lin Hui, our Chief Scientist will be joining us for the Q&A session. Operator, please go ahead.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Christine Cho from Goldman Sachs. Your line is open.

[Christine Cho:]

Yes, hello. Thank you for the presentation. Can we just get a little bit more color around your third quarter guidance and also when could we expect an inflection in terms of your gross billings growth as well as revenue growth? Thank you.

[Bing Sun:]

Thanks, Christine. Our revenue guidance as I just mentioned for Q3 is between RMB230 million to RMB250 million RMB which will represent a decrease of 4% to 12% from same quarter last year. It may seem not to be so exciting on the surface, but the extra dynamic of revenue driver is very encouraging. As we continue to enrich our paid product offerings to meet the fundamental needs, and then learning interest of our users such as Business English courses, this product offerings are supposed to help increase or have increased our user stickiness, rise user lifetime value, and in turn generate a higher revenue as it specialized courses generally come with much higher prices. However, this courses also usually lasted for much longer durations, and a related revenue cannot be fully recognized for accounting perspective within one quarter. That's why we may still have to face the trend of declining revenue in the near-term, while the quality of the revenue is actually improving underneath. In terms of GV and looking at the trend in Q3, we believe will continue to grow in the short-term and the long-term. Our DongNi series of core courses are being repositioned as the heart of our one stop shop for English learning strategy. They provide a variety of scenarios that serve as excellent to the channel and in addition our DongNi Select and other relevant target courses accounted for 42% of total GDP in Q2, which represents a much higher ASP of our normal DongNi series. And in addition to that, our case (inaudible) which launched a year-ago, which will also contribute to our gross billing in Q3 and going forward, when we look back at Q1 and Q2 accumulatively, we can see that kids products accounted for -- already accounted for 10% of our total gross billings. Yes, more than 10% and we see the trend is very, very positive. Yes. Also, we continue to evaluate opportunities to expand into different markets include different demographic user groups, geographical areas, special interest base and school based learning and so on. So we have different projects in the pipeline to enhance our future ability, and that we will update the market once we achieve our milestones.

[Operator:]

Your next question comes from the line of Elsie Sheng from Morgan Stanley, your line is open.

[Elsie Sheng:]

Thank you management on introducing lot of new products and new features. So I'm just wondering while it is our future strategy and rolling out these new products and future pipeline especially on kids and management have any target of this new product? Thank you.

[Yi Wang:]

Hello, this is Yi. Let me talk about adult first and move onto kids. On the adult side, as we mentioned earlier in the call that we intend to become the One Stop Shop choice for adult learners in China. And we think we can achieve that goal to a certain degree by the end of this year. By the end of this year, we'll have a full product mix that with price range from the lower 100s to the higher 1000s. Okay and covering a wide range of user demands, including the cornerstone core course only series, which serves as the systematic course for improved learning stabilities for adults as well as which the DongNi series also expand across different price points, including the basic standard one setting for 1,300 to the Select setting between 3,000 to 4,000 and the VIP course that we recently launched selling for around 9,000. And in between, we also have special purpose in courses such as business, travel, and I'll attend to pronounciation so on so forth and we’re also increasing the mix for lower priced introductory SKUs as a way to attract user with different interests and sell them, upsell and cross sell them to the main SKUs. Not to mention our Liuli Reading product which has very good market positioning as a leader in the category and keeping in traction. Then let me move on to kids, on the kids side we're very excited to see the launch of the core course in March and April, when I said March and April because we’re the only player in the market that offers separate learning experience for the age group three to six and six to nine. And as we also mentioned, we plan to continuously rolling out content for higher levels so that we can find some point next year, we're going to cover the full range between ages three to 12. Not only that, we’re also working on exciting new SKUs such as picture books and so on and so forth. I think by some point, next year, we will have a complete offering of products that cover the full range of needs for kids in that age group. And then because our unique strength in AI assisted learning and also product design, we believe that differentiated learning experience as well as complete and rich lineup of content really put us in a very good position to compete. I can't disclose specific numbers, but let me just say that, for the user retention figures we've seen since the launch of core course in March, and April, we were very much encouraged. We have seen very high user retention numbers, both on a weekly and monthly basis. So that we think as the foundation for our future growth, even though we’re not actually in a sort of spending mode aggressively acquiring external traffic at this point of time. Instead, we were spending a lot of time converting our internal adult customers who were parents into the buyers of the kids product, we think that organic synergy is also one of our unique strength.

[Operator:]

There are no further questions at this time, I would now like to turn the call back over to the company for closing remarks.

[Harry He:]

Thank you again for joining us. If you have further questions, please feel free to contact LAIX investor relations to the contact information provided on our website. Thank you, operator.

[Operator:]

This concludes today's conference call. You may now disconnect.