Laix Inc (LAIX) Q1 2019 Earnings Call Transcript

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Laix Inc (LAIX)
Q1 2019 Earnings Call
May 28, 2019, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for LAIX Inc.'s 2019 first-quarter 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 -- Investor Relations

Hello, everyone, and welcome to the 2019 first-quarter earnings conference call for LAIX Inc., also known as Liulishuo. The company's results were issued by newswire services earlier today and are posted online. You can download the earnings press release and sign up for 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, will also join us for the Q&A session.

Before we continue, please note that today's discussion will 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 terminology such as will, expect, anticipate, aim, future, intent, plans, believes, estimates, confident, potential, continue or other similar expressions.

Among other things, the outlook and quotations 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 in its annual report to shareholders, in press releases and other written materials, and in other -- oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts, including, but not limited to statements that LAIX' beliefs and expectations are forward-looking statements.

Forward-looking statements involve inherent 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 is included in the company's filings with the securities and exchange commission. All information provided in this press release and in the attachments 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 -- Chief Executive Officer and Founder

Thank you for joining our 2019 first-quarter earnings conference call. We're pleased to tick up the year by delivering strong year-over-year net revenues growth of 161.7% and the gross billings growth of 174.6% in the first quarter. This outstanding performance reflects the growing popularity of our products and our continued leadership in China's AI-powered English learning market. Our mission is to empower everyone to achieve their full potential.

Since our inception and continuing today, we strive to create an immersive learning environment and enhance user interaction through advanced AI technologies. The power of AI is transforming all industries, including the education industry, and we are at the forefront of this movement and fully embracing it. We have built our AI-powered Liulishuo platform to deliver a user-centric, personalized, and effective English learning experience accessible to anyone, anywhere, at any time. Our AI teacher can provide personalized teaching guidance for all core components of a user's language learning process, as well as continuing -- it evolves and delivers the very best in learning methodologies.

Therefore, as we target an enormous addressable market in China, we have a tremendous opportunity for further market penetration. The benefits of AI technology applications in language learning are significant. During the first quarter, we continued to working on tailoring our English learning products to target a more diverse population. Our new product, Kids Liulishuo, which is a mobile-based phonics online course built for users within the age range of eight to -- three to eight years old, has generated a very positive feedback since its launch at the end of last December.

The considerable amount of user -- smart user data generated coupled by our AI tech algorithms allow us to capture and provide personalized feedback on our young user's pronunciation development. It is important to note that at the end of first quarter, we have recorded approximately 30.9 billion sentences and 2.3 billion minutes of conversations, covering numerous proficiency levels, a wide geographic range and demographic expanse from kids to adults. In early April, our proprietary placement test from flagship product, English Liulishuo, was officially mapped to China's Standards of English Language Ability, or the CSE, making Liulishuo the first and only Chinese company linking to the CSE. The CSE defines the development of language ability and serves as a foundational -- a fundamental strategy in promoting English learning, teaching and multidimensional assessment in China.

Our placement test, which evaluates user's listening, reading and speaking skills, is powered by our AI-based proprietary recognition scoring engine. We believe the linking results will enable our users to have a deep understanding of the English proficiency levels by benchmarking their learning results on our Liulishuo app with the CSE. Then, users can optimize their study plans accordingly by leveraging our customized and effective courses and services to achieve enhanced learning outcomes. The high effectiveness of our product has been demonstrated by a study measured by the British Council, which showed significant improvement in our user's English proficiency over a two-month period of study on our app.

As we move through the year, our focus remains on further expanding our user base and enhancing our user engagement. As of March 31st, 2019, the total number of registered users has increased to 123.4 million, compared with 110.3 million as of December 31st, 2018. In addition, we doubled the total number of paying users who purchase courses and services on our platform to 1.1 million, compared with 552,000 in the first quarter of 2018. Speaking about our premium courses, we launched a small class course called DongNi Select at the end of last year, targeting users who are willing to pay a higher premium for a more interactive and concentrated class environment, with the expansion of high-quality learning content and the help of our learning assistants who can answer user's learning-related questions in a real-time and highly interactive manner.

DongNi Select is rising in popularity among our users. We will continue to explore ways to satisfy our user's diverse learning needs and expand our paying user group. One of the things that makes Liulishuo unique is the scalability of our business model. With the higher learning efficacy of our products among our growing user base, we see great opportunities to not only further penetrate into lower key cities in China, but also to expand our global footprint.

Further, all the distinguished immerse learning environment in our AI technology foundation has -- have supported our international expansion initiatives. We are uniquely positioned to capitalize on the compelling opportunity penet -- presented by the growing needs of language learners worldwide. To close, we believe that our positive results from the first quarter have us well-positioned for continued success throughout the year. By providing industry-leading courses and services, exceptional user experiences with our advanced product platform, and the vibrant learning community, we will continue to be a leading destination for English learners.

This concludes my prepared remarks, and I will now turn the call over to our CFO, Ms. Bin Yu, who will discuss our key financial results.

Bin Yu -- Chief Financial Officer

Thank you, Yi, and hello, everyone. 2019 began on a strong note. Our robust top-line growth for the first quarter was primarily fueled by healthy growth -- user growth through broadened brand recognition and engaging product experience. We also saw improvements in our operating efficiency with sales in the marketing expenses as a percentage of net revenues falling significantly for the first quarter of 2019 from a year ago period.

Looking ahead, we'll continue reinvesting our brand, technology, product and user growth to further penetrate massive market opportunity, presented by the AI-powered language learning market. In addition, we'll maintain discipline in our cost management and continue leveraging the scalability of our business model. Let us now look at our key financial metrics in the first quarter of 2019. Net revenues were CNY 253.3 million or USD 37.7 million, a 161.7% increase from CNY 96.8 million for the same quarter last year.

As of March 31st, 2019, the company had CNY 594 million or USD 88.5 million of deferred revenues. The increase was primarily attributable to the overall business growth and the platformwide expansion of our paying user base, as well as to the increased adoption of our proprietary AI teacher among users in China as an effective learning approach and a better alternative to the traditional ways of English learning. House of revenues were CNY 59.7 million or USD 8.9 million, a 152.8% increase from CNY 23.6 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 the general business growth and user-based expansion.

Gross profit was CNY 193.6 million or USD 28.8 million, a 164.6% increase from CNY 73.2 million for the same quarter last year as a result of increased economies of scale. As a result, gross margin was 76.4%, compared with 75.6% for the same quarter last year. Total operating expenses were CNY 263.8 million or USD 39.3 million, a 60.5% increase from CNY 164.4 million for the same quarter last year, with expensive increase primarily resulting from business growth activities, a development and introduction of new product and the costs associated with the user-based expansion. Sales and marketing expenses were CNY 193.6 million or USD 28.9 million, a 52.5% increase from CNY 126.9 million for the same quarter last year.

The increase was primarily due to increases in commission to distribution channels such as mobile app stores and online commerce platform partners and the salaries and benefits for sales and marketing personnel, including online study advisors. Importantly, sales and the marketing expenses as a percentage of net revenue declined notably to 76.4% for the first quarter of 2019, compared with 131.2% for the same quarter last year. Research and development expenses were CNY 50.1 million or USD 7.5 million, a 101.5% increase from 24.9% for the same quarter last year, primarily due to an increase in salaries and benefits for research and development personnel. Research and development expenses were 19.8% of net revenues for the first quarter of 2019, compared with 25.7% for the same quarter last year.

General and administrative expenses were CNY 20 million or USD 3 million, a 59.4% increase from CNY 12.6 million for the same quarter last year, primarily due to increases in salaries and benefits for general and administrative personnel and professional service fees. General and administrative expenses were 7.9% of net revenues for the first quarter of 2019, compared with 13% for the same quarter last year. Loss from operations were CNY 70.1 million or USD 10.5 million, compared with CNY 91.2 million for the same quarter last year due to the aforementioned reasons, including general business growth and improved operating efficiencies. Adjusted EBITDA was a loss of CNY 52.1 million or USD 7.8 million, compared with an adjusted EBITDA loss of CNY 76.7 million for the same quarter last year.

Foreign exchange gain was CNY 0.7 million or USD 0.1 million, compared with CNY 4.2 million for the same quarter last year. Income tax expenses was CNY 0.03 million or USD 4,000, a 99.5% decrease from CNY 6 million for the same quarter last year, primarily due to the company's estimated taxable loss position in current year. Net loss was CNY 67.3 million or USD 10 million, compared with CNY 92.4 million for the same quarter last year. Adjusted net loss was CNY 54.5 million or USD 8.1 million, compared with CNY 84.1 million for the same quarter last year.

Basic and diluted net loss per ordinary share attributable to ordinary shareholders was CNY 1.4 or USD 0.21, compared with CNY 5.12 for the same quarter last year. In terms of our balance sheet, as of March 31st, 2019, the company's cash, cash equivalents and short-term investments totaled CNY 800.3 million or USD 119.3 million, compared with CNY 747.8 million as of December 31st, 2018. Turning to our outlook. For the second quarter of 2019, the company currently expects net revenues to be between CNY 280 million to CNY 300 million, which would represent an increase of approximately 106.6% to 121.4% from CNY 135.5 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 to the call to questions. As a reminder, Mr.

Zheren Ben Hu, our CTO and the co-founder, is joining us for the Q&A session. Operator, please go ahead.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Timothy Zhao from Goldman Sachs. Your line is open.

Timothy Zhao -- Goldman Sachs -- Analyst

Hi, management. Congrats on another set of strong results, and thank you for taking my questions. I have two questions. One is on the sales and marketing cost, which can be much lower compared to the previous two quarters.

Per user basis, it's also getting lower. Could you elaborate more on the drivers behind this? And how should we think of the change going forward? And second question is on the new product that you mentioned, such as Kid Liulishuo and DongNi Select. Could you share more color in terms of the enrollment or the revenue contribution of these two products? And also, we note that recently, there was a peak hike in the downloading volume of the Liuli Reading product. Is there any new developed on it? Thank you.

Bin Yu -- Chief Financial Officer

Thank you, Timothy. This is Bin. I will take your first question about the CSE cost and telemarketing expenses. Yeah, you are right, in first quarter, we are able to maintain a quite healthy investments in user acquisition.

As you know, traffic is generally a very expensive around the Chinese new year. And we continue to evaluate and utilize our combination of different customer acquisition channels, and to optimize our ROI on the CSE. As a result, as you can see, we were able to maintain a robust user growth and also keep a reasonable low CSE spending. Moving forward, we expect to continue this investment in our brand technology, and user growth before they captured massive market opportunity.

We will remain disciplined in our sales and marketing cost management, and closely monitor our CSE ROI and continue to leverage the scalability of our business model. In addition, we also closely monitor the unit economics of our CSE, and I'm glad to tell you that in the past few quarters, we are able to see a very healthy trend on the unit economics in the CSE side. Thank you.

Yi Wang -- Chief Executive Officer and Founder

Hey, Timothy, this is Yi. I'm going to answer your question with regards to Kids Liulishuo. You know the new product was launched at the end of last year. It's specifically built for users in age range of three to eight years, which is sort of beginner -- beginning face of [Inaudible] in China.

The app has since generated very positive feedback since launch. And given its early phase, the relative scale of user numbers, as well as revenue is still quite small compared to the total user base of revenue top line. That being said, it is targeting what we believe a very large and a promising market. You know on the one hand, our flagship product English Liulishuo and AI-powered learning courses are best suited for users who are aged 10 or above.

So on the other hand, the Kids Liulishuo product is one of our key initiatives and expanding our product offerings, and penetrating to a younger age group, which we are very excited about.

Zheren Ben Hu -- Chief Technology Officer and Co-Founder

Hi, Timothy. This is Ben. I will take the question with regards to DongNi Select courses and the Liuli Reading. DongNi Select courses was launched middle last year.

So for the past three quarters, it's been going relative healthy and stronger. And we are providing this DongNi Select courses to to our -- to specific style of the users who are pillowed toward their needs. So in terms of future growth, we strongly believe that there always going to be a certain specific group of the users who are willing to pay for the premium content, such as DongNi Select. We think the growth of the DongNi Select course will be -- accordingly to our traffic because you know in general, our whole commercialization is at the commercial funnel, right? There's always a free user, commercial paying customer, and certain paying customer issue will come at the DongNi Select content.

And on the other hand, we are still developing other SKUs as well on top of that to further complete our ASP. And for the Liuli Reading product, the first quarter of the Liuli Reading product is actually doing pretty well, and as probably some of the public notification like couple of weeks ago, there was a public announcement from the retail platform regarding certain regulation on retail platform, and the Liuli Reading product was on the top of list of the public notification. And there's two sides of story. On the one side is that, the fact we are on the No.

1 shows the tremendous growth and the momentum of the product. On the other side, there is a very strong stand and strong announcement from retail platform. So we swiftly did our public announcement from our end and very promptly to change your strategy over the night according to the announcement. So retail platform is a very important marketing channel for us, but it is still just one of them.

Of course, from all our product lines, Liuli Reading probably is mostly effected by this announcement, right? But our swift and prompt change is going to help us to change this forward growing strategy and marketing strategy accordingly. So we think, overall, it should be manageable.

Timothy Zhao -- Goldman Sachs -- Analyst

Thank you. That's very clear. Thank you, you've been [Inaudible]. Thank you.

Operator

[Operator instructions] As there are no further questions now, I'd like to turn the call back over to Chuhan Wang for closing remarks.

Chuhan Wang -- Investor Relations

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

[Operator signoff]

Duration: 0 minutes

Call participants:

Chuhan Wang -- Investor Relations

Yi Wang -- Chief Executive Officer and Founder

Bin Yu -- Chief Financial Officer

Timothy Zhao -- Goldman Sachs -- Analyst

Zheren Ben Hu -- Chief Technology Officer and Co-Founder

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