Laix Inc (LAIX) Q2 2019 Earnings Call Transcript

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Laix Inc (LAIX)
Q2 2019 Earnings Call
Aug 27, 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. 2019 second-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 second-quarter earnings conference call for LAIX Inc., also known as Liulishuo. The company's results were issued earlier today, and you can download the earning 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-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, nor 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 press release and this discussions.

A general discussion of the risk factors that could affect LAIX's business and financial results is included in certain filings with the company with the Securities and Exchange Commission, including its annual report. The company does not undertake any obligation to update 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 -- Chief Executive Officer and Founder

Thank you for joining our 2019 second-quarter earnings conference call. During the second quarter, our top line was impacted by tightened WeChat moments sharing policy mostly applicable to our Liuli Reading product, and to some extent applicable to our DongNi product as well, which affected our word-of-mouth user growth. In addition, increased competition for traffic acquisition led by K12 players during the summer month, from late May until the end of July, drove up the customer acquisition costs, which further affected our user and revenue growth. With these headwinds, we have been taking swift actions to offset the revenue impact, by adjusting our marketing strategy and actively exploring alternative marketing channels to grow our user community.

Leveraging our high-quality products and services, we are attracting a great number of users. The second quarter represents another period of healthy user growth for our user community, with now more than 138.8 million total registered users on our platform and more than 900,000 unique paying users, who purchased our courses and services, just in the second quarter of 2019, demonstrating our monetization potential. Aside from our Liuli Reading and DongNi products, we have various initiatives in the pipeline that we've launched in adults and kids markets, as well as the global market, all of which are expected to contribute to our user and top-line growth in the coming quarters. Having the right product is the key to attracting new users and enhancing engagement.

Therefore, despite the additional expenses for these initiatives in recent month, we believe, upfront investments will better position the company for further solidify our competitive edge in China's AI-powered language learning market in the long run, and we will continue to invest in and optimize our technologies and products. Moving on to our other recent-month development. In July, we are delighted to open our second headquarters in Optics Valley in Wuhan, Hubei province known for being China's Silicon Valley due to the booming number of innovative and high-tech companies it has attracted, as well as its rich resources of talent. Optics Valley offers favorable condition for cutting-edge companies, such as ours.

We aim to hire a local talent in order to broaden and optimize our online study advisor personnel while benefiting from improved cost structure and operating efficiency. In the past few years, we've been -- we have seen adaptive learning drive -- driving innovative -- innovation in the education industry and becoming a major trend. In this evolving market, the combination of R&D capabilities, data and algorithm is key. And we are best known for our technology capabilities and massive user data.

It's worth noting that as of this -- at the end of second quarter, we have recorded approximately 35.5 billion sentences and 2.67 billion minutes of conversations, covering numerous proficiency levels of wide geographic range and a demographic span of kids to adults. With our foresight into industry trends and our years of focus on cutting-edge technologies, we'll continue to raise the bar for product quality and improve the learning efficiency. Although we expect the impact on our revenue growth will continue during the remainder of this year, we're committed to the long-term vision that AI-powered learning product will play a pivotal role in people's lifelong learning journey. 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 -- Chief Financial Officer

Thank you, Yi, and hello, everyone. The unexpected headwinds in our marketing channel resulted in decelerated top-line growth in the second quarter of 2019. While the revenue growth was lower than our previous expectation, we were able to realize a significant operating leverage improvement as our business scaled up. This was evidenced by the improvement of sales and marketing expenses as a percentage of net revenues on a year-over-year basis and gross margin remaining stable at approximately 77%.

Let us now look at our key financial metrics in the second quarter of 2019. Net revenues were CNY 276.4 million or USD 40.3 million, a 104% increase from CNY 135.5 million for the same quarter last year. As of June 30, 2019, the company had CNY 564.7 million or USD 82.3 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.

Cost of revenues were CNY 64.9 million or USD 9.4 million, a 106.6% increase from CNY 31.4 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 base expansion. Gross profit was CNY 211.6 million or USD 30.8 million, a 103.2% increase from CNY 104.1 million for the same quarter last year as a result of increased economies of scale. As a result, gross margin was 76.5%, compared with 76.8% for the same quarter last year.

Total operating expenses were CNY 300.5 million or USD 43.8 million, a 64.5% increase from CNY 182.7 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 the company's user base. Sales and marketing expenses were CNY 219.7 million or USD 32 million, a 65.3% increase from CNY 132.9 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 the sales and marketing personnel, including online study advisors. Importantly, sales and marketing expenses as a percentage of net revenue declined notably to 79.5% for the second quarter of 2019, compared with 98.1% for the same quarter last year.

Research and development expenses were CNY 52.9 million or USD 7.7 million, a 46.5% increase from CNY 36.1 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 were 19.1% of net revenues for the second quarter of 2019, compared with 26.6% for the same quarter last year. General and administrative expenses were CNY 27.9 million or USD 4.1 million, a 103.4% increase from CNY 13.7 million for the same quarter last year, primarily due to increases in salary and benefits for general and administrative personnel and professional services fees. General and administrative expenses as a percentage of net revenues remained flat at 10.1% for the second quarter of 2019 compared with the same quarter last year.

Loss from operations were CNY 88.9 million or USD 13 million, compared with CNY 78.6 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 CNY 77.2 million or USD 11.3 million, compared with an adjusted EBITDA loss of CNY 71.1 million for the same quarter last year. Foreign exchange loss was CNY 1.7 million or USD 0.2 million, compared with foreign exchange loss of CNY 5.1 million for the same quarter last year. Income tax expenses was CNY 0.03 million or USD 4,000, a 99.6% decrease from CNY 6.4 million for the same quarter last year, primarily due to the company's estimated taxable loss position in current year.

Net loss was CNY 87.8 million or USD 12.8 million, compared with CNY 89.9 million for the same quarter last year. Adjusted net loss was CNY 81.6 million or USD 11.9 million, compared with CNY 78.5 million for the same quarter last year. Basic and diluted net loss per ordinary share attributable to ordinary shareholders was CNY 1.78 or USD 0.26, compared with CNY 5 for the same quarter last year. In terms of our balance sheet, as of June 30, 2019, the company's cash, cash equivalents and short-term investment totaled CNY 729.5 million or USD 106.3 million, compared with CNY 747.8 million as of December 31, 2018.

Turning to our outlook. For the third quarter of 2019, the company currently expects net revenues to be between CNY 230 million to CNY 250 million, which would represent an increase of approximately 27.4% to 38.5% from CNY 180.5 million for the same quarter last year. This forecast reflects company's current and preliminary view on the current business situation and market conditions, which is subject to change. In addition, as Dr.

Wang just mentioned, while we expect the trend of revenue growth deceleration to continue for the second half of the year, we are continuing to invest in enriching our product portfolio in adults and kids market and explore alternative effective marketing channels to reinvigorate our user growth. 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. Lin Hui, our Chief Scientist and co-founder are joining us for the Q&A session. Operator, please go ahead.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question comes from the line of Elsie from Morgan Stanley. Your line is open.

Unknown speaker

I have two questions. First one is about the impact of WeChat policy. I just like to know what percentage of your users now comes from -- on the WeChat channel? And can you give us more details about how you plan to, like, increase the source of users from other channels? And when do we expect this impact to, like, begin to phase under the user picking the growth momentum? And second question is about the marketing expense. The marketing expense as percentage of revenue, as you just mentioned that it dropped year on year, but as you plan to increase marketing on, like, other marketing channels, does that mean that marketing expense will increase in the second half of this year? And do you have any guidance on the marketing expense full-year guidance?

Bin Yu -- Chief Financial Officer

Thank you for the question. I'll take the second question first. Currently, as you know, with the tightened WeChat moment sharing policy, we do experience a decrease in our gross revenue -- gross billing and net revenue, especially for our new leading product, which then we'll talk in detail later. But on the CAC, again, as in the past, we'll continue to invest in the customer acquisition cost going forward.

In addition to the monetary efficiency of our paid traffic, we are also focused on improving our product experience. Because we still believe with enriched content and the product mix will -- and brand awareness will attract more organic users in future. Currently, we do not give out any specific guidance on the cost of acquisition -- customer acquisition in the second half.

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

OK. This is Ben. I will answer the first question about -- on the WeChat. As we mentioned in our earning release, WeChat impact mostly to our Liuli Reading product, which contributed to about 15% of the top line for the past quarter.

And for the rest of the product, mainly -- the revenue mainly from DongNi-related products, this affect either WeChat is -- it does impact the WeChat, it does impact the growth of the product, but it's definitely not a serious impact on Liuli Reading. And also, it's mainly impact our word-of-mouth organic growth, especially when a lot of users like our product, they would love to share on their WeChat. The WeChat policy change in May, actually from our user studies that actually have impact on our user psychology of sharing, so not particularly relate to the product itself. So at this moment, our data shows it has impact but is under control.

Unknown speaker

OK. Thank you.

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 -- 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: 20 minutes

Call participants:

Chuhan Wang -- Investor Relations

Yi Wang -- Chief Executive Officer and Founder

Bin Yu -- Chief Financial Officer

Unknown speaker

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

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