LAIX Inc.
Q3 2019 Earnings Call Transcript

Published: 20 Nov 2019

[Operator:]

Hello, ladies and gentlemen, thank you for standing by for LAIX Inc.’s 2019 Third Quarter 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.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 2019 third quarter earnings conference call for LAIX Inc. 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 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.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 the 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:]

Thank you for joining our 2019 third quarter earnings conference call. The overall market competition has become increasingly intense in the past few years. However, with our eyes set on the long-term, we believe our technology empowered product-driven and the user-centric approach will allow us to stand out from the competition.During the third quarter, we remain committed to product development and user experience enhancement. While the tightened WeChat moments sharing policy continued to impact our top line and user growth, we were able to deliver third quarter net revenues of RMB262.1 million, beating the high-end of our previous guidance range.Our company has – was founded when the intelligent learning industry was undergoing a fundamental transformation from human teacher-based learning to AI-powered adaptive learning. The desire for effective, personalized and affordable learning solutions, along with the rise of mobile Internet and the development of AI and Big Data technologies have created exciting opportunities, as well as new standards for effective learning.Backed by our strong R&D and technology innovation capabilities, as well as our massive user data, our AI teacher products was developed to accomplish our mission to empower everyone to achieve their full potential and become a global citizen.As of the end of the third quarter, we have recorded approximately 40.2 billion sentences and 3.0 billion minutes of conversations, spanning numerous proficiency levels, geographic regions and demographic groups from kids to adults.Like every growth company, we have gone through ups and downs over the last few years of development. Dealing with current headwinds, we have been proactively exploring alternative marketing channels and optimizing our marketing strategies to restore our user growth.In the third quarter, 0.9 million unique paying users purchased our courses and services. And as of September 30, 2019, we have more than 153 million total registered users on our platform, reflecting a healthy growth of our user community. We appreciate the vote of confidence cast by every one of our users through their downloads and purchases.We have been striving to deliver products to address the unique needs of each of our users and we’ll continue to invest in our technologies and products, raising the bar from product quality and improving the learning experience. A recent launched a product Bell, an upgraded version of the Authentic Pronunciation product provides a one-stop shop for users to improve our overall spoken English. We also introduced an upgraded version of our DongNi product, Darwin, which has proven to effectively increase user engagement and drive a better learning outcome.Further, in addition to our continued efforts in adult English learning business in the market, we are building up our position in the kids market and expanding our international presence. With encouraging early results, these new initiatives are expected to contribute to our user and top line growth in the coming quarters. With our conviction in the strength of our business, as well as a healthy long-term outlook of the company, we recently announced $20 million share repurchase program.As we execute on our strategic growth initiatives, we will remain confident in our future perspectives of prospects, business fundamentals and a strategy for further solidify our competitive edge in the AI-powered language learning market. In addition, we believe this is a prudent use of our cash and reinforces our ongoing committed commitment to enhancing shareholder value.Looking ahead, while the headwinds of WeChat’s sharing policy is expected to linger into the coming quarters and weigh down our user – revenue growth, we remain confident in our long-term growth plan and are committed to fulfilling our vision.This concludes my prepared remarks. I will 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. While we continued to experience headwinds in our marketing channels in the third quarter, we delivered net revenues surpassing the high-end of our guidance range.As we keep investing in and exploring effective marketing channel alternatives, we recorded a higher sales and marketing expenses as a percentage of net revenues in the third quarter. However, we’ll remain disciplined in cost management with an ongoing goal to improve operational efficiencies and strive for long-term sustainable growth.Let us now look at our key financial metrics in the third quarter of 2019. Net revenues were RMB262.1 million, or US$36.7 million, a 45.2% increase from RMB180.5 million for the same quarter last year.As of September 30, 2019, the company had RMB591.2 million, or US$82.7 million of deferred revenues. The increase was primarily attributable to the overall business growth and the increased adoption of our proprietary AI teacher, among users in China, as an alternative learning approach and a better alternative to the traditional ways of English learning.Cost of revenues was RMB71.8 million, or US$10 million, a 49.4% increase from RMB48.1 million for the same quarter last year. This change was primarily due to increases in salaries and benefits for certain full-time employees and IT service cost, with all such costs resulting from general business growth and user base expansion.Gross profit was RMB190.3 million, or US$26.6 million, a 43.7% increase from RMB132.4 million for the same quarter last year as a result of increased economies of scale. As a result, gross margin was 72.6%, compared with 73.4% for the same quarter last year.Total operating expenses were RMB404.8 million, or US$56.6 million, a 52% increase from RMB266.4 million for the same quarter last year, primarily resulting from business growth activities, the development and introduction of new products and the costs associated with the expansion of company’s user base.Sales and marketing expenses were RMB289.2 million, or US$40.5 million, a 41.9% increase from RMB203.8 million for the same quarter last year. The increase was primarily due to the increases in branding and marketing expenses and salaries and benefits for sales and marketing personnel, including online study advisors. Sales and marketing expenses as a percentage of net revenues declined to 110.3% for the third quarter of 2019, compared with 112.9% for the same quarter last year.Research and development expenses were RMB57.7 million, or US$8.1 million, a 42.5% increase from RMB40.5 million for the same quarter last year, primarily due to an increase in salaries and benefits for research and development personnel. Research and development expenses 22% of net revenues for the third quarter of 2019, compared with 22.4% for the same quarter last year.General and administrative expenses were RMB57.9 million, or US$8.1 million, a 162.6% increase from RMB22 million for the same quarter last year, primarily due to discretionary bonus for key employees, increases in salaries and benefits for general and administrative personnel, and professional service fees. General and administrative expenses as a percent of net revenue were 22.1% for the third quarter of 2019, compared with 12.2% for the same quarter last year.Loss from operations were RMB214.5 million, or US$30 million, compared with RMB134 million for the same quarter last year due to the aforementioned reasons, including general business growth and user base expansion.Adjusted EBITDA was a loss of RMB203.6 million, or US$28.5 million, compared with an adjusted EBITDA loss of RMB116.6 million for the same quarter last year.Foreign exchange loss was RMB2.6 million, or US$0.4 million, compared with a foreign exchange loss of RMB3.5 million for the same quarter last year.Income tax expenses were RMB0.2 million, or US$29,000, a 96.3% decrease from RMB5.7 million for the same quarter last year, primarily due to the company’s estimated taxable loss position in current year.Net loss was RMB214.1 million, or US$30 million, compared with RMB142.4 million for the same quarter last year.Adjusted net loss was RMB209.7 million, or US$29.3 million, compared with RMB123 million for the same quarter last year.Basic and diluted net loss per ordinary share attributable to ordinary shareholders was RMB4.33, or US$0.61, compared with RMB7.66 for the same quarter last year.In terms of our balance sheet, as of September 30, 2019, the company’s cash, cash equivalents, restricted cash and short-term investments totaled RMB621.2 million, or US$86.9 million, compared with RMB747.8 million as of December 31, 2018. Due to the dynamic nature of the underlying business, the company will maintain flexibility in funding by sustaining adequate cash and cash equivalents.Turning to our outlook. For the fourth quarter of 2019, the company currently expects net revenues to be between RMB230 million to RMB250 million, which would represent an increase of approximately 2.4% to 11.4% from RMB224.5 million for the same quarter last year. This forecast reflects the company’s current and preliminary view on the current business situation and market conditions, which is subject to change.This concludes our prepared remarks. We’ll now open the call to questions. As a reminder, Mr. Zheren Ben Hu, our CTO and Co-Founder; and Mr. Hui Lin, our Chief Scientist and Co-Founder are joining us for the Q&A session. Operator, please go ahead.

[Operator:]

Thank you. [Operator Instructions] We do have a question. The first question comes from Christine Cho from Goldman Sachs. Your line is open. Please go ahead.

[Christine Cho:]

Hi, thank you. So could you just give us some color around your guidance or guidance for eh fourth quarter, and also some details as to how you see the sales and marketing trend evolving going forward, please? Thank you.

[Bin Yu:]

Yes. As you see the guidance for Q4 is still quite conservative. The net revenues is between RMB230 million to RMB250 million. In Q3, in the past quarter, we continue to experience the impact of the tightened WeChat sharing moments policy and the increased traffic acquisition costs.Therefore, as you can see, our customer acquisition expenses are still relatively high compared with previous quarters in Q3. We will continue to closely evaluate our ROI across our mixed different channels, marketing channels to explore effective ways to grow our user base.At the meantime, we also will commit – we are also committed to improve our product experience. And we believe our rich and engaging content, different product mix and increased brand awareness will help us to attract more organic traffic in the future, which will hopefully drive down our overall sales and marketing expenses in the future. Anything, Christine?

[Operator:]

Your next question comes from Elsie Sheng from Morgan Stanley. Your line is open. Please go ahead.

[Elsie Sheng:]

Thank you, management. I have a question also on the margin side, your – on your on G&A expenses as presenters [indiscernible] also goes up in the third quarter. I’m just wondering, do you have any guidance on the G&A expense [indiscernible]?

[Bin Yu:]

Yes. As I mentioned just now, this quarter, G&A is comparatively high of the previous quarter. It’s mainly due to a one-time of discretionary bonus to some key and senior employees to appreciate their contribution in the past years for the company, and we do not expect such discretionary bonus in the future quarters. So the G&A in future quarters will remain stable as the previous quarters.

[Operator:]

[Operator Instructions] As there are no further questions now, 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.