LAIX Inc.
Q4 2019 Earnings Call Transcript

Published: 13 Mar 2020

[Operator:]

Hello, ladies and gentlemen, thank you for standing by for LAIX Inc.’s Fourth Quarter and Full Year 2019 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. Ms. Chuhan Wang, you may now begin your conference.

[Unidentified Company Representative:]

Hello, Emily. Yes. If my [indiscernible] I can read for her.

[Operator:]

Yes. Okay, one moment and I'll try to answer her line.

[Unidentified Company Representative:]

Okay, yeah, if she joins, you can.

[Operator:]

Ms. Chuhan Wang, you may begin. Thank you.

[Chuhan Wang:]

Hello everyone, and welcome to the Fourth Quarter and Full Year 2019 Earnings Conference Call for LAIX, Inc., also known as Liulishuo. The company's results were issued earlier today and you can download the earnings press release and sign up for the company's distribution list by visiting our IR website @ir.laix.com.Dr. Yi Wang, our CEO and Founder will begin some prepared remarks. Following the prepared remarks, Mr. Zheren Ben Hu, our CTO and Co-Founder, and 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 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 fourth quarter and full year 2019 earnings conference call. First and foremost, with the COVID-19 outbreak in China, we're all very concerned about this evolving situation and those who are suffering. As part of our overall existing corporate social responsibility mandate, we have initiated efforts as a company to help those who have been impacted.At the end of January, we launched a nationwide initiative to offer complimentary courses as a way to support this fight, and help those in the most impacted regions. In particular, we offered 150,000 complimentary Liulishuo course access to our users in Kobe province. Our hearts go out to our users, employees and communities affected by this public health crisis. And we hope our offerings will bring courage, encouragement to our users throughout - through our effective online learning language learning products.Internally, we have been adjusting our operations with employees in Wuhan, who are working from home since the outbreak. However, we believe there will be very limited impact on our operational and the financial performance due to our online business model.At the industry level, we’ve seen increasing user traffic and accelerating popularity of online education. We believe we can help make a difference in language learning by providing an effective, efficient and customized online learning experience. While the past year has been a challenging one as a result of the tightened sharing policy on WeChat mobiles, we remain and will continue to remain focused on product improvement and the provision of a comprehensive and effective learning experience by leverage our steadfast commitment to providing education for all starting from English.In the face of external pressure caused by marketing channel headwinds, we remain dedicated to advancing our proprietary AI technologies, providing innovative and differentiated products and creating a superior personalized experience. We believe that with the sharp emphasis on these fundamental areas, we are continually setting ourselves apart and providing ourselves the best opportunity to succeed in the long run.Net revenues for the fourth quarter of 2019 came in at RMB231.4 million, meeting our previous guidance range. Gross margin was 66.7% for the fourth quarter, decreased from 68.1% for the same quarter last year. I'd like to add more color to this slight decline of gross margin. As we continue to invest in the product mix, including new products targeting the kid English learning market, we incurred ongoing content development and IT service costs, which had impacted our gross margin. However, we believe we will benefit from these investments as they begin to show return this year.Looking into 2020, we see great opportunity in strengthening our leadership position in China's adult English learning market, as the overall market size of online learning continues to grow, and the trend of offline to online learning accelerates. As part of our efforts, we will continue to enrich our product mix by offering a greater number of paid courses that meet the needs of a broad demographic range, and address a spectrum of learning interests. With a robust portfolio of diverse courses in place, we aim to position ourselves as a one stop shop for adult English learning.Additionally, the expected growth of our paid course offerings with a wider range of prices will drive user conversion and enhance user lifetime value. While remaining focused on product improvement, we're also working hard to improve our operating efficiencies. Toward this end, we're developing and deploying AI-enabled operating systems, more systematic training programs, and upgraded productivity incentives for operating personnel, including our online study advisors. We anticipate these initiatives will improve our cost structure as we serve an increasingly large number of users.Now looking at our user number, the total number of unique paying users in the fourth quarter decreased quarter-over-quarter as a result proactive control and optimization on user acquisition spending, during the online shopping season, such as the double 11 events when traffic costs increased significantly. However, we saw gross billings per paying user increase sequentially in the fourth quarter, representing a strong testament in our ability to optimize the product mix and increase the average selling price.We have strong pricing power in adult English learning market with any student price lower than maybe RMB10,000. And we plan to launch new higher priced products to the market. In the meantime, as I mentioned earlier, we will work to increase our user engagement and user retention by providing customized effective products and services.Our efforts to optimize our marketing strategy showed positive signs in the fourth quarter as we begin to restore our user growth for our reading products after the impact on the types of reach and moment [ph] sharing policy. Further, we have been proactively adjusting the pricing model and growth strategies of DVD. As a result, the gross billing of the early reading rebounded significantly in the fourth quarter.Excluding the more incentive-based refund in the same period last year, gross billings in the fourth quarter actually remained at a very healthy level, and we believe this also demonstrates the high quality of our products. Gross billings of the company over the fourth quarter increased by 24%, while sales and marketing expenses decreased by 8%, both on a sequential basis, demonstrating the trend of higher efficiency we've seen in our sales and marketing spending.Speaking about our new product initiatives, the K-12 market represents another promising segment for us with our offerings being one of the top choices for adult English learners. We have a number of initiatives underway to now penetrate into the K-12 market as well, which we believe will become an important growth driver for the company in 2020. For example, after seeing the sales of our kids' phonics course, our first paid offering in the kids market grew nicely in the second half of 2019.We recently launched kids' core course, a course modeled after normal [ph] English for the kids' English learning market, and designed to improve their overall language skills in a highly interactive and precise way. This whole course will serve as a cornerstone of our product offerings in the kids’ market as we continue to actively invest in this area.As more of our adult users become parents themselves, we believe that with our strong brand recognition, they will choose our learning products for their children, allowing us to attract new users and cross sell our product in a cost effective manner.Over the course of 2019, we have invested in our technology, built up our brand awareness and successfully established ourselves in China's intelligent learning market, the market that has experienced increasingly intense competition over the past few years.Our three proprietary technologies, our speech recognition engine, our precise writing scoring engine, and our in-depth adaptive learning system has all equipped our AI teachers with the most sensitive use the sharpest eyes and the most intelligent brains, enabling us to provide users a personalized learning experience and real time language proficiency assessments. This is worth noting that we have a massive database of English spoken by Chinese, covering a broad range of geographic distribution and proficiency levels.As of December 31, 2019, we had recorded approximately 3.2 billion minutes of conversation, and 43.3 billion sentences. Furthermore, our AI teaching continuously reinforces and enhances itself by leveraging this large and growing amount of data. Our strong research and development capabilities continue to gain industry recognition.It is a great honor that our AI lab was awarded as Shanghai key laboratory of artificial intelligence in learning and cognitive science in January 2020, as one of the first 10 non state-owned companies receiving such recognition. This industry accolade confirms our capability to provide an integrated innovative learning system and powered by advanced pronunciation writing recognition engines and AI teachers.We see opportunities in how technology can transform the way you people study and learn language globally. Throughout 2019, we're very pleased to expand our footprint beyond Mainland China to include Taiwan and Hong Kong as well as other parts of Asia and Latin America. Ongoing global expansion continues as the plan - as planned, and we believe the industry has a myriad of significant implicit deficiencies that can't be solved by technology.Before we move on to some further details on the financials as we announced earlier, our former CFO, Ms. Bin Yu has resigned from the company for personal reasons. And we are in the process of interviewing her successor. During this period, I will oversee our financials and our reporting matters and ensure a smooth transition when the new CFO comes on Board.Now, let me draw your attention to some key highlights for the full year 2019. For some detailed financial results, we encourage you to read through our press release issued earlier today. Now revenues were RMB1,023.2 million, a 60.6% increase from RMB637.2 million for the full year of 2018. Gross billing were RMB1,294.3, up 31.2% increase from RMB986.6 million for the full year of 2018.Average selling price per paying customer increased 9.3% to RMB431.4 for the full year of 2019 from the RMB394.6 for the full year of 2018. Gross margin was 73.3%, compared with 72.6% for the full year of 2019. Total operating expenses were RMB1,336.8 million, a 44.4% increase from RMB926.0 million for the full year of 2018.Net loss was RMB574.8 million, compared with RMB488.1 million for the full year 2018. Adjusted net loss was RMB548.1 million, compared with RMB442.6 million for the full year 2018. Basic and diluted net loss per ordinary share attributable to ordinary shareholders for the full year 2019 was RMB11.64, compared with RMB19.17 for the full year 2018.As of December 31, 2019, the company's cash, cash equivalents restricted share and short-term investments totaled RMB552.6 million, compared with the RMB747.8 million as of December 31, 2018. The company has deferred revenue, current and non-current of RMB696.1 million as of December 31, 2019, compared with the RMB477.6 million as of December 31, 2018.Turning to our outlook, for the first quarter of 2020, the company currently expects net revenues to be between RMB190 million to RMB210 million, which would represent a decrease of approximately 25.0% to 70.1% from RMB253.3 million for the same quarter last year. The forecast reflects the company's current and preliminary view on the current business situation market conditions which is subject to change.This concludes our prepared remarks. We will now open the call to questions. As a reminder, Mr. Zheren Ben Hu, our CTO and Co-Founder and Dr. 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 have our first question coming from the line of Sheng Zhong with Morgan Stanley. Your line is open.

[Sheng Zhong:]

Hi, thank you for taking my question. My question is one, can you give us a breakdown of your gross billing into your - into the adults and the K-12 business? And what do you expect the gross of the two business separately? And secondly, the Coronavirus, you mentioned that it's bringing a lot of traffic. So can you give more color on any specific number on what this could bring to the full year performance? Thank you.

[Yi Wang:]

Yi Wang for the first part. Okay. So I will answer this question, this is Yi. So obviously, as you probably know, the majority of our gross billing still came in from DongNi our mature product line, of the adult markets, which includes DongNi Standard, DongNi Select and Darwin, Darwin is upgraded version of DongNi, which already started replacing the previous version of DongNi since late last year, where we're moving from level one to level two and so on. And so that's a work in progress.And Liuli [ph] billings contribution to our top line was higher than 15% in Q1 2019 and the number came down significantly in Q2 and Q3 following the WeChat policy change. But actually, since the beginning of Q4, we have begun to restore the user growth of Liulishuo and its contribution of top line has rebounded quite nicely as a result. So overall, for 2019, obviously, the formation product lines targeting the adult space is a key driver, is the main contributor.But on the kids’ side, its growth rate is obviously given this relatively smaller size, current size, the growth rate is much, much faster, okay. The phonics course, which was launched in less than a year ago, has contributed quite nicely to the top line growth. It's obviously still less than 10%. But it's - the growth rate is quite nice. We just recently launched the kids' school course, as I mentioned in the call earlier. It's designed to improve as a systematic course for kids age three to nine. And we actually have a different user experience plan, for sub age groups in that range so that each kid in the smaller age group can have a better learning experience, which we think is pretty unique in the space.So yeah, we expect to see more top line growth contribution from our kids' products line for sure. And overall, we continue to work, we continue to evaluate opportunities to expand into different markets in terms of age group and in terms of demographic, demographics, geo locations and the specific interest and skill base learning. So we do plan to grow as the top choice for English learners in China starting from adult space but also gradually move into kids. Yeah, we have different projects in the pipeline that we will update the market once we reach certain milestones.With regard to the virus situation and its impact on traffic, we did see traffic grow significantly since the break, but because we did not specifically target particular demographic group as some of the K-12 space in the space do. So I think overall the growth - the magnitude of growth for our adult traffic is probably less significant than that of some of the K-12 kids. But that being said, we we've seen pretty healthy growth compared to the same period last year.So we are definitely capturing those growth and, in the meantime, optimizing our conversion efficiency and operating efficiency so that we can continue to optimize not only the top line but also bottom line impact. Does that answer your question?

[Operator:]

All right, thank you. We'll be moving on with Christine Cho with Goldman Sachs. Your line is now open.

[Christine Cho:]

Yes, thank you. So just on the virus situation, I would like to know how that's actually impacting the overall competitive landscape. And also, I know it's a little bit difficult to predict at this moment, but what's the long term implications of the situation with more and more people experiencing the online digital classroom and potentially how that will impact the penetration long term? Thank you.

[Yi Wang:]

Okay, hey Christina, thank you for the question. I think this virus outbreak obviously is very concerning for the health crisis, not actually, not just in China, but it's extending throughout the world. So as the consequence - one of the consequences of this now pandemic, I think, at least the society in China has adapted pretty quickly into a more online mode for a lot of things, including learnings.So we are seeing trends across the board, I mean, in terms of age group from kids to K-12 to students to college students to adults, to spend a lot more time learning online, which we think is a positive signal, in terms of other societies increased accessibility to quality education. I think that's the right direction the study is moving anyway, we report anyway, but with the virus situation, it's definitely accelerating a lot.So we believe this is good for the society, good for the overall industry. And we are - this also confirms our long standing strategy and choice of really betting on online learning and more specifically AI and technology-enabled interactive learning.So yeah, you see a lot of players, even the offline players out there approaching online ways of delivering a service. But most of these players I believe, are still leveraging internet only as a delivery method of really linking their previously offline teachers with the students online. But as LAIX has long been doing we focus mostly being AI enabled, interactive learning experience.We believe this can definitely capture the movement from offline to online very, very nicely. We see now, a very clear trend that's both in adult space and also in the kid space. We believe a more accelerated movement from pure offline to online or online and offline combined, online [ph] mobile. So we are very well positioned to capture this opportunity.Lastly, I just want to mention, the virus situation, it will definitely go away at some point. So that people can return to a more normal life. But the movements from offline to online learning will continue. And with this as a result of the outbreak and more people have tried, for the first time in their life, a new way of online learning and from our assessments, the adoption was pretty good. So I think that definitely speaks to the opportunity that we are facing. Thank you.

[Operator:]

[Operator Instructions] As there are no further questions now, I'd like to turn the call over back to the company for closing remark.

[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 this conference call. You may now disconnect. Thank you everyone.