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Laix Inc (NYSE:LAIX)
Q3 2019 Earnings Call
Nov 19, 2019, 8:00 p.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 third-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 third-quarter earnings conference call for LAIX Inc. also known 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 the discussion. A general discussion of the risk factors that could affect Laix's 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 at 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 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 and power product-driven and the user-centric approach will allow us to stand out from the competition. During the third quarter, we remained committed to product development and user experience enhancement.

While the tightened WeChat moments sharing policy continue to impact our top line and user growth, we were able to deliver third-quarter net revenues of RMB 262.1 million, beating the high-end of our previous guidance range. Our company was founded when 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 the 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 were 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 the 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 had more than 153 million total registered users on our platform, reflecting the 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. Our recent launch of product Bell, an upgraded version of the authentic pronunciation product, provides a one-stop shop for users to improve their 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 kid's markets 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 a $20 million share repurchase program.

As we execute on our strategic growth initiatives, we remain confident in our future perspectives of prospects. Business fundamentals and strategy will 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 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 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 -- Chief Financial Officer

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 alternative, we recorded a higher sales and marketing expenses as a percentage of net revenues in the third quarter. However, we 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 RMB 262.1 million or USD 36.7 million, a 45.2% increase from RMB 180.5 million for the same quarter last year. As of September 30, 2019, the company had RMB 591.2 million or USD 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 RMB 71.8 million or USD 10 million, a 49.4% increase from RMB 48.1 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 costs, with all such costs resulting from general business growth and user base expansion. Gross profit was RMB 190.3 million or USD 26.6 million, a 43.7% increase from RMB 132.4 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 same quarter last year.

Total operating expenses were RMB 404.8 million or USD 56.6 million, a 52% increase from RMB 266.4 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 RMB 289.2 million or USD 40.5 million, a 41.9% increase from RMB 203.8 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 revenue 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 RMB 57.7 million or USD 8.1 million, a 42.5% increase from RMB 40.5 million for the same quarter last year, primarily due to an increase in salaries and benefits of certain development personnel. Research and development expenses were 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 RMB 57.9 million or USD 8.1 million, a 162.6% increase from RMB 22 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 services fees. General and administrative expenses as a percentage 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 RMB 214.5 million or USD 30 million compared with RMB 134 million for the same quarter last year due to aforementioned reasons, including general business growth and user base expansion. Adjusted EBITDA was a loss of RMB 203.6 million or USD 28.5 million, compared with an adjusted EBITDA loss of RMB 116.6 million for the same quarter last year. Foreign exchange loss was RMB 2.6 million or USD 0.4 million compared with a foreign exchange loss of RMB 3.5 million for the same quarter last year. Income tax expenses were RMB 0.2 million or USD $29,000, a 96.3% decrease from RMB 5.7 million for the same quarter last year, primarily due to the company's estimated taxable loss position in the current year.

Net loss was RMB 214.1 million or USD 30 million compared with RMB 142.4 million for the same quarter last year. Adjusted net loss was RMB 209.7 million or USD 29.3 million, compared with RMB 123 million for the same quarter last year. Basic and diluted net loss per ordinary share attributable to ordinary shareholders was 4.3 -- RMB 4.33 or USD 0.61, compared to a RMB 7.66 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 RMB 621.2 million or USD 86.9 million, compared with RMB 747.8 million as of December 31, 2018.

Due to the dynamic nature of the underlying business, the company will maintain flexibility in funding as sustained adequate cash and cash equivalents. Turning to our outlook. For the fourth quarter of 2019, the company currently expects net revenues to be between RMB 230 million to RMB 250 million, which would represent an increase of approximately 2.4%. to 11.4% from RMB 224.5 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.

Questions & Answers:


Operator

Thank you. [Operator instructions] And we do have a question. Your first question comes from Christine Cho from Goldman Sachs. Your line is open.

Please go ahead.

Christine Cho -- Goldman Sachs -- Analyst

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

Bin Yu -- Chief Financial Officer

Yeah. As you see the guidance for Q4 is still quite conservative. The net revenues is between RMB 230 million to RMB 250 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. In 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 CAC costs, sales and marketing expenses in the future.

Christine Cho -- Goldman Sachs -- Analyst

Thank you.

Bin Yu -- Chief Financial Officer

Thank you, Christine.

Operator

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

Elsie Sheng -- Morgan Stanley -- Analyst

Thank you, management. I have a question also on the margin side. Your G&A expenses as a percentage also goes up in the third quarter. Just wondering, do you have any guidance on the SG&A expense in going forward.

Bin Yu -- Chief Financial Officer

Yeah, 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 to the company, and we do not expect such discretionary bonus in the future quarters. So the G&A in the 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 -- Investor Relations

Thank you once again for joining us. If you have further questions, please feel free to contact Laix's investor relations through the contact information provided on our website or TPG Investor Relations.

Operator

[Operator signoff]

Duration: 19 minutes

Call participants:

Chuhan Wang -- Investor Relations

Yi Wang -- Chief Executive Officer and Founder

Bin Yu -- Chief Financial Officer

Christine Cho -- Goldman Sachs -- Analyst

Elsie Sheng -- Morgan Stanley -- Analyst

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