LAIX, Inc. (NYSE:LAIX) Q1 2020 Earnings Conference Call May 26, 2020 9:00 PM ET
Chuhan Wang – Head, IR
Yi Wang – Chairman & CEO
Bing Sun – CFO
Conference Call Participants
Timothy Zhao – Goldman Sachs Group
Yiran Sheng – Morgan Stanley
Hello, ladies and gentlemen, thank you for standing by, and welcome to the LAIX Inc.’s First Quarter 2020 Earnings Conference Call. [Operator Instructions].
We will now turn the call over to your host, Ms. Chuhan Wang, Investor Relations for the company. Please go ahead, Chuhan.
Hello, everyone, and welcome to the First Quarter 2020 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 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; 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.
Thank you for joining our first quarter 2020 earnings conference call. Our continuous focus on delivering the best user experience and personalized learning products drove solid first quarter performance. The first quarter saw net revenues of CNY 228 million, beating the high end of our previous guidance range by 9% and reflecting both the popularity of our products and our continued leadership in China’s AI-powered English learning market.
As of March 31, 2020, the total cumulative registered users reached 179.7 million, an increase of 18.1 million compared with the previous quarter end. The total number of unique paying users in the first quarter also increased sequentially, reaching approximately 1 million. For the first quarter, we are also pleased to see gross billing further rebounding, on track to restore user growth to the levels before the impact of the tightened WeChat Moments sharing policy. On a sequential basis, gross billing for the first quarter increased by 3%, while sales and marketing expenses decreased by 1%, demonstrating the continued trend of higher efficiency we have seen in our sales and marketing spending. We will continue to further optimize our marketing strategy with a focus on extracting the most value out of our total user acquisition spend.
In late April, we were delighted to launch an exciting upgrade to our Liulishuo app, which included a brand-new interface, an enriched user experience and a comprehensive and streamlined course offering. We also rebranded and renamed our Darwin product to DongNi A plus. A plus represents advanced and better upgrades to our older versions as we aim to provide the best learning experience and outcomes to our users.
As we mentioned in — on our last quarterly earnings call, the COVID-19 outbreak has brought certain impact on our operational and financial performance to a relatively limited extent, thanks to our online business model. We steadfastly adhered to preventative measures to ensure the safety and health of our employees and expect the remote work schedule we implemented will result in some degree of overall productivity loss. In addition, we’re expecting to see increased user acquisition costs driven by increased competition for online traffic this summer.
However, we have been preparing for this trend, and will take appropriate actions to mitigate these potential impacts. We believe our online business model will — with resolute efforts of our outstanding team will enable us to navigate through these uncertainties.
At the industrial level, we are delighted to see the accelerated penetration of online learning and increasing traffic to online learning platforms such as ours. I believe these unprecedented times will prove to be an inflection point for online learning companies. Powered by our proprietary AI technologies as well as our effective, efficient and customized online learning products and services, we believe we can help make a difference in transforming language learning for everyone.
We see promising growth opportunities in being able to enhance our leadership position in China’s adult English learning market, as the overall market size of online learning continues to grow and the trend from off-line to online learning accelerates. Our goal for 2020 is to further gain market share and deliver healthy growth for our adult business.
In addition to that market share and growth, a priority for us in the adult business is enriching our product offerings and introducing a great number of paid courses to cover a much broader demographic range and more diverse learning needs. We have built our business through our ability to identify and anticipate the needs of our growing user base. Throughout the remainder of this year, we will continue to optimize as well as diversify our strong growing product portfolio. We are also exploring additional expansion opportunities in the kids market to further extend our brand and generate new revenue streams while continuing to monetize our adult products to deliver user conversion and enhance user lifetime value.
As far as our efforts to penetrate the kids market, we launched our first phonics courses for children in early 2019, which garnered considerable popularity among hundreds of thousands of Chinese Kids in its initial phase and continue to generate more meaningful revenue contributing in the first quarter. Tailored to the specific learning needs of children at different stages, we launched our Jump Start course for kids aged 6 to 9 in early March. For young kids aged 3 to 6, an alternative beginner course designed for the primary school demographic has been recently introduced in April. Our kids courses have been receiving very positive feedback, giving us firm confidence in actively investing in this area. Leveraging our product expertise and proprietary AI technologies, our courses allow for customization by providing the appropriate content based on a kid’s English proficiency, overcoming the inefficiencies of the traditional one-size-fits-all approach.
In addition to our cutting-edge technologies that can provide real-time feedback at the sentence as well as at the phoneme levels, our kids courses are very interactive with cartoon characters and various games to teach kids in a joyful manner and keep them entertained and engaged. Differentiated from other kids products in the market, our personalized and interactive learning experience and products make us the trusted source and the learning partner for our kids users. Further, compared with off-line and other online teacher-led English classes, our kids courses are more cost effective, providing an immersive English learning setting and minimal cost or effort from parents.
Looking ahead, we plan to gradually build up our product mix towards higher end, higher pricing — price ranges and cover a fuller range of offerings, making Liulishuo a one-stop shop for young English learners and fortify our commitment to providing education for all, starting from English.
In terms of content development, we have formed an all-star team of developers, including the former Director of ELT Publishing at Oxford University Press who has worked closely to ensure the quality of our program. As far as our competitive advantage, our proprietary speech recognition engine, precise writing scoring engine and in-depth adaptive learning system enable us to provide users a personalized learning experience and real-time language proficiency assessment and feedback. It is worth noting that we have a massive database of English spoken by Chinese, carrying a broad range of geographic distribution and proficiency levels. As of March 31, 2020, we had recorded approximately 3.5 billion minutes of conversation and 47.3 billion sentences. Equipped with these engines and a large amount of new data, our AI teacher continuously reinforces and enhances itself to provide a better learning experience for our users with improved learning outcomes.
As more adult users become parents, we believe they will choose us for their kids to learn English based on their trust in our brand and the positive personalized learnings which they have benefited from. With the AI plus education capabilities that we have established over the past years, I believe our English learning products for both adults and kids will benefit from a great synergy and work well in their respective areas.
Lastly, improving our operating efficiencies is another important focus area, benefited by the AI-enabled operating systems, systematic training programs and upgraded productivity incentives for operating personnel that we developed and deployed. We look forward to further improvements in our cost structure. As we continue to offer our growing user base an ever-expanding and a superior suite of products and services, we are also making very efforts — every effort to keep improving our bottom line.
Before we discuss our detailed financial performance, I would like to provide an update on the new addition to our senior management team. Mr. Bing Sun joined us in early May as our new CFO. He is now leading our finance team and has overall responsibility for financial and accounting matters. I’m very confident that his extensive financial and capital market experience, coupled with a strong accounting background, will be a tremendous asset to us as we continue executing our growth strategy.
This concludes my prepared remarks. I will now turn the call over to our CFO, Mr. Bing Sun who will discuss our key financial results.
Thank you, Yi, and hello, everybody. This is Bing. I’m very excited to join Liulishuo’s management team, and I look forward to working closely with you all going forward. Let’s look at our key financial metrics for the first quarter of 2020. The healthy quarter-over-quarter paying user growth, fueled by our engaging products and our diverse offerings as well as increased demand for online learning during the COVID-19 period all contributed to our solid first quarter performance. Net revenue were RMB228.3 million or $32.2 million, a 9.9% decrease from RMB253.3 million for the same quarter last year. The decrease was primarily attributable to a decrease in the number of paying users as a result of the tightened sharing policy on WeChat Moments.
Cost of revenue was RMB78.8 million or $11.1 million, a 32% increase from RMB59.7 million for the same quarter last year. This change was primarily due to the increases in: first, salaries and benefits for certain full time employees; and second, IT service cost, with all such costs resulting from the company’s general business growth and user base expansion. Gross profit was RMB149.5 million or $21.1 million, a 22.8% decrease from RMB193.6 million for the same quarter last year. Gross margin was 65.5% compared with 76.4% for the same quarter last year. Total operating expense were RMB346.1 million or $48.9 million, a 31.2% increase from RMB263.8 million for the same quarter last year, with the expense increase primarily resulting from business growth activities, the development and introduction of new products and the costs associated with the expansion of the company’s user base.
Sales and marketing expenses were RMB264.7 million or $37.4 million, a 36.7% increase from RMB193.6 million for the same quarter last year. The increase was primarily due to the increase in channel and marketing expenses. Sales and marketing expenses as a percentage of net revenue increased to 115.9% for the first quarter of 2020 compared with 76.4% for the same quarter last year. R&D expenses were RMB59.2 million or $8.4 million, an 18.3% increase from RMB50.1 million for the same quarter last year. R&D expenses as a percentage of net revenue increased from the same quarter last year, representing 25.9% of net revenue for the first quarter compared with 19.8% for the same quarter last year.
G&A expenses were RMB22.1 million or $3.1 million, a 10.4% increase from RMB20 million for the same quarter last year, primarily due to increase in salary and benefits for G&A personnel. G&A expenses were 9.7% of net revenue for the first quarter compared with 7.9% for the same quarter last year. Losses from operations were RMB196.5 million or $27.8 million compared with RMB70.1 million for the same quarter last year due to the reasons including the impact of the tightened sharing policy on WeChat Moments, general business growth and the user base expansion.
Adjusted EBITDA was a loss of RMB182.5 million or $25.8 million compared with an adjusted EBITDA loss of RMB52.1 million for the same quarter last year. Net loss was RMB197 million or $27.8 million compared with RMB67.3 million for the same quarter last year. Adjusted net loss was RMB189.2 million or $26.7 million compared with RMB54.5 million for the same quarter last year. Basic and diluted net loss per ordinary share attributable to ordinary shareholders was RMB3.99 or $0.56 compared with RMB1.40 for the same quarter last year.
In terms of our balance sheet, as of March 31, 2020, the company’s cash, cash equivalents, restricted cash and short-term investments totaled RMB459.4 million or $64.9 million compared with RMB552.6 million as of December 31, 2019. The company had deferred revenue of RMB820.7 million or $115.9 million as of March 31, 2020, compared with RMB696 million as of December 31, 2019.
Let’s turn into our outlook. For the first — sorry, for the second quarter of 2020, the company currently expects net revenue to be between RMB240 million to RMB260 million, which would represent a decrease of approximately 13.2% to 5.9% from RMB276.4 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 will now open the call to Q&A session. As a reminder, Ben, our CTO and Co-Founder; and Dr. Lin Hui, our Chief Scientist and Co-Founder, will both join us for the Q&A session. Operator, please.
[Operator Instructions]. Your first question comes from Elsie Sheng from Morgan Stanley.
My first question is about — I see that the paying user actually is growing quarter-on-quarter. So can management give more details of this paying user breakdown maybe by product. And second is about the marketing. You mentioned that marketing efficiency has improved. So what are the more efficient marketing channels now? And what would be the marketing budget for the next few quarters?
Okay. This is Yi. I’ll take the question first, and others can come in. So for the increase of paying customers, I think obvious reason was the traffic increase due to the virus situation, and we were able to capture — turn a certain percentage of the free increased users into paying customers. And also, we are trying different optimization mechanism to improve the conversion efficiency from free to paying, so that — as well as renewal of existing paying customers. All this contributes to the increase of the paying customers number. Your second question is about marketing spending, right, marketing channels.
Yes, yes, right.
Hello? Okay. Yes, for — we have been actively expanding our ways to reach new users. But I think a lot of them are still under trial experiment. The primary means are still app stores, app markets and as well as the primary traffic sources such as the Tencent suite of products and the Baidu suite of products. We are testing with other channels, but right now, they are not a major source of traffic.
Your next question comes from Timothy Zhao from Goldman Sachs.
This is Timothy from Goldman. My question is on the kids product that you have emphasized a lot this quarter. Could you provide some color on the breakdown between kids product and the adult product in terms of paying users or gross billing or revenue for this quarter. And how do you compare the unit economics in terms of like ASP or user acquisition cost between the 2?
Timothy, our kids product has seen healthy growth this quarter, continuing upward trend from last year. We’re currently not providing a breakdown between the kids and the adult products because it’s still relatively small compared to the adult one. Because the core course that we recently launched in May — March and April for the different age groups in the kids market are selling at a much higher price relatively speaking to the — to the adult products. They are selling over 2,000. And previously, the phonics course was standing around 700. So that, obviously, would bring a healthy increase in the ASP for the kids business. That’s what we are seeing right now. But right now, yes, other than that, we’re not yet breaking out the 2 businesses.
As there are no further questions now, I’d like to turn the call back over to the company for closing remarks.
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.
This concludes this conference call. You may now disconnect your line. Thank you.