LAIX Inc.
Q4 2018 Earnings Call Transcript

Published: 27 Feb 2019

[Operator:]

Hello, ladies and gentlemen, thank you for standing by for the LAIX, Inc.'s Fourth Quarter and Full Year 2018 Earnings Conference Call. [Operator Instructions]. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Chuhan Wang, Investor Relations for the company. Please go ahead, Chuhan.

[Chuhan Wang:]

Hello, everyone, and welcome to the Fourth Quarter and Full Year 2018 Earnings Conference Call for LAIX Inc., also known as Liulishuo. The company's results were issued via newswire services earlier today and are posted online. You can download the earnings press release and sign up for the company's distribution list by visiting the IR section of our website at ir.laix.com. Dr. Yi Wang, our CEO and founder; and Ms. Bin Yu, our CFO will begin with some prepared remarks. Following the prepared remarks, Mr. Zheren Ben Hu, our CTO and Co-Founder; and Mr. Hui Lin, our Chief Scientist and Co-Founder will also join us for the Q&A session. Before we continue, please note that today's discussion will continue contain forward-looking statements. These statements are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, aims, future, intends, plans, beliefs, estimates, confident, potential, continue, or other similar expressions. Among other things, the outlook and quotation from management in this announcement as well as LAIX' strategic and operational plans contain forward-looking statements. LAIX may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission and its annual report to shareholders, in press releases and other materials and the oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts, including that not limited to, statements of LAIX' beliefs and expectations are forward-looking statements. Forward-looking statements contains risks and uncertainties and a variety of factors could cause actual results to differ materially from those contained in any forward-looking statements. Further information regarding these and other risks are included in the company's filings with the Securities and Exchange Commission. All information provided is in this press release and in the attachment is as of the date of the press release. And the company undertakes no duty to update such information except as required under applicable 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:]

Thank you, Chuhan. Thank you for joining our fourth quarter and full year 2018 earnings conference call. 2018 was a milestone year for us, as we successfully completed our IPO on the renowned New York Stock Exchange on September 27, 2018. We believe the cash proceeds and additive brand recognition generated from the IPO will deliver meaningful value for our business in the years to come. We're pleased to report another strong quarter that capped off a solid year. Fourth quarter net revenues increased by approximately 195% year-over-year to RMB224.5 million. Full year 2018 net revenues and gross billings grew by approximately 285% and 215%, respectively compared with the prior year. Such outstanding performance was driven by the continued robust growth of our overall business and the user base expansion. Our cutting-edge technologies, big data and well-established education pedagogies underpin our growth strategy. In 2018, our formative feedback system was awarded first place in the Spoken Computer-assisted Language Learning challenge jointly organized by the University of Geneva, the University of Birmingham, Radboud University and the University of Cambridge, demonstrating the leadership that we have in applying AI to language learning. Over the course of full year 2018, our flagship app, English Liulishuo, experienced solid expansion powered by our AI teacher that provides personalized teaching guidance for all core components of a user's language learning process. Furthermore, our AI teacher continuously evolves and delivers more personally tailored learning programs leveraging our massive volume on label user data. As of December 31, 2018, we had recorded approximately 26.3 billion sentences and 2.0 billion minutes of conversations, covering a broad range of geographic distribution and proficiency levels. As a pioneer in AI-powered English learning market, we are benefiting from the growing trend of education upgrades in China. We are pleased to see that our advanced platform with industry-leading courses and services have appealed to a broader student population with a total of 110.3 million registered users as of December 31, 2018 compared with 61.3 million as of December 31, 2017. Our premium model is pivotal to our strategy to expand our user base and drive user conversion. The rich content and the interactive features within the free courses increased user engagement and retention, while the paid AI-based systematic learning solutions help convert active users to paying customers. A recent study by Center of Research in English Language Learning and Assessment at the University of Bedfordshire showed that approximately two months of study using English Liulishuo users proficiency was significantly improved. Benefiting by the higher learning efficacy of a product, the total number of paying users who purchased courses and service on our platform grew more than threefold to 2.5 million in 2018 compared with 815,700 in 2017. The progress we made in 2018 layed a strong foundation for us, and we expect to continue the successful momentum further expanding our user base, enhancing user engagement and improving the learning experience through the application of new technologies, content, products and features. Moreover, given the high scalability and the versatile nature of our business model, we see tremendous opportunities to expand our addressable markets in English learning and beyond. First, we have already expanded offerings within the English learning vertical to test preparation with our IELTS Liulishuo app and to the enterprise market, with our enterprise learning services. Second, we're also working on tailoring our AI-powered English learning products to target younger demographics, including K-12 students. Third, while our footprint has so far mainly been in China, we're constantly looking for ways to increase our global presence. And lastly, our AI technologies can be used in non-English languages or even for non-language learning, presenting us with huge growth potential in the long run. Notably, our speech recognition engine already supports six other languages besides English. As we start another year with excitement and optimism, we believe our dedication to advancing our proprietary AI technologies, providing innovative and differentiated products and creating a superior personalized learning experience that results in higher user engagement, learning efficiency and efficacy is what sets us apart and allows us to succeed in the long run. While we have a long way to go, as we are in the early stages of the AI-powered education 3.0, we remain committed to our mission of empowering everyone to realize their full potential. This concludes my prepared remarks. I'll now turn the call over to our CFO, Ms. Bin Yu, who will discuss our key financial results.

[Bin Yu:]

Thank you, Yi, and hello, everyone. We made significant strides in 2018 to position our company for long-term sustainable growth. Our strong financial performance, in particular our robust top line growth, was a clear indication of our compelling scalable model and our strong competitive position. As we are building our brand awareness and driving our user base, our sales and marketing expenses increased in terms of absolute dollars in 2018. This is within our expectation, and at the same time, we are striving to optimize the return on our marketing investments. Due to our scalable business model and high revenue growth, sales and marketing expenses as a percentage of net revenues declined to 111% in 2018 from 171% in 2017. Let us now begin by looking at our key financial metrics in the fourth quarter. In the interest of time, I will speak to the highlights of our results, rather than a line-by-line review and encourage listeners to refer to our earnings release for more details. Net revenues for the fourth quarter of 2018 were CNY224.5 million or $ 32.6 million, a 195% increase from CNY76.1 million for the same quarter last year. The significant increase was primarily attributable to the growth of the company's business and the platform-wide expansion of the company's paying user base as well as to the increased adoption of the AI teacher among users in China as an effective learning approach and a better alternative to the traditional ways for English learning. Cost of revenues for fourth quarter of 2018 was CNY71.7 million or $ 10.4 million, a 231% increase from CNY21.6 million for the same quarter last year. The increase was primarily due to the increase in

[Operator:]

[Operator Instructions]. Your first question comes from the line of Timothy Zhao with Goldman Sachs.

[Timothy Zhao:]

I have two questions. And the first question is on the gross margin. I see the gross margin for this quarter was around 58%, it's a little lower than the previous quarters. Could you elaborate more on the drivers behind that? And how we should expect going forward? And the second question is on the user acquisition cost or the sales and marketing cost per paying user, I'd say it's quite - been quite stable in the past few quarters. So what do you think the trend as we move into the 2019?

[Bin Yu:]

Yes. I will take this question. This is Bin Yu, CFO of the company. For your first question, the reason why the gross margin declined slightly was due to the VIP service we introduced last quarter of 2018. We offered a CNY3,000 SKU for one year. In this small class SKU, we have some human teachers to help the students. So we booked costs, the salaries and benefits paid to these human teachers in the cost of goods sold, which drives down the gross margin slightly. For the second quarter for the cost of user acquisition, as you state, we do have a quite stable trend. We have applied an integrated strategy to monitor our CAC and we believe our rich content, different product mix and increased brand awareness will help us to attract more organic traffic, which will lower our fee budget. Overall, we've been able to maintain a stable CAC despite the traffics getting more and more expensive across different channels. I hope this will help to answer your questions.

[Operator:]

Your next question comes from the line of Sheng Zhong with Morgan Stanley.

[Sheng Zhong:]

So the first question is can you give some breakdown of your paying user is growing very fast in this quarter. So want to know how much - how many of them are the first-time user and how many of them are the repurchased ones? And the average life time using your cost - the average usage time. And secondly is a follow-up on the gross margin. What's your outlook of the gross margin trend? And since you mentioned that the - this is mainly because of the VIP costs, so how much percent of the VIP cost in terms of your revenue? And last one is, Yi mentioned - Yi talked about the long-term strategy, that is very helpful. So can you please give some more time line of this strategy?

[Zheren Hu:]

Okay. This is Zheren Ben Hu. I will take the first question about user breakdown. As Bin Yu mentioned in the previous section, well, the paying customers has increased from 815,700 for the full year of 2017 to 2.5 million for the full year of 2018. The growth itself is tremendous. And at this moment, we do not close the - or literally breakdown of our first-time paying users and then the repeated paying users at this moment.

[Bin Yu:]

Yes. This is Bin. I will take the gross margin outlook. For the gross margin, as I mentioned earlier, the decline from previous quarter is mainly due to the introduction of a new higher price SKU, the CNY3,000 SKU for one year class. And because this is a new product, so we are still trying to improve the efficiency of the product by improving the OSA management procedures. But looking forward, the gross margin will be driven by different product mix. And we believe with our AI model, we'll be able to maintain a higher gross margin than the normal industry gross margin benchmark.

[Yi Wang:]

This is Yi Wang. I will answer the growth strategy question. As I mentioned before, we have a long-term commitment and excitement on this AI plus education approach, in general. As some of you guys may know that at the end of last year, we launched a new product, a new app, a new product line called (foreign language) or Kids Liulishuo. It has hit the market and the initial user feedback on the product has been pretty positive. Obviously, it's in the very early stages. We have several other products or SKUs in the pipeline, both in the adult English learning market and then the kids. We remain dedicated and - to the growth of user base for our flagship product English Liulishuo and AI-powered paid course DongNi English. And notably, our Liuli Reading product in adult English learning sector has also been growing very rapidly. We continue to be committed and - on the lookout for different opportunities to penetrate into different markets, including different demographic user groups and the geographic locations. We will update the market when we have solid developments that we want to share with you. Thank you.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Christine Cho with Goldman Sachs.

[Christine Cho:]

I just had a really quick follow-up question on the kids program that you've just launched. Can you just give us some little bit more detail around like pricing, targets, and also competitive differentiation versus a lot of the other offerings? And also on how you keep the kids engaged? Because obviously, it's a harder group to keep focused. So any color around that would be great.

[Yi Wang:]

This is Yi, again. Thank you for the question. Obviously, the kid market is very exciting and huge market for us. We are not the first player in the market obviously, but we feel excited to be coming in with all expertise that we have accumulated over the years and sort of the AI English teacher approach that we have pioneered in the market. Right now, there is only one course that users can buy within the free-to-download app, Kids Liulishuo, which is a phonics course. It's a yearlong course that teaches kids between the age 3 to 8 with all the basic concepts of phonics and also after completing the full year course, the kid will master over 700 words and being able to have a solid foundation for pronunciation. So right now, the course is priced at RMB998 for the whole year, that's the regular price. And right now, we have introductory price of RMB9.9 for the first seven day period for the users that got to taste. Obviously, we may adjust the price as needed, but that's - right now the two price points that we can close. And in terms of differentiators, it's very clear that our approach is different from a lot of the other players in the market because we don't offer that sort of in-person tutoring, online tutoring service, taught by the human teacher. But we took this AI teacher approach and we think it's going to be benefiting a lot for the younger age groups and their parents in terms of flexibility, convenience, efficacy and efficiency and affordability. So we are very excited about this new market opportunity.

[Operator:]

As there are no further questions, I'd like to turn the call back over to the company for closing remarks.

[Chuhan Wang:]

Thank you once again for joining us. If you have further questions, please feel free to contact LAIX' Investor Relations through the contact information provided on our website or TPG Investor Relations.

[Operator:]

This concludes today's conference call. You may now disconnect your line. Thank you.