Laix Inc (LAIX) Q4 2019 Earnings Call Transcript

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Laix Inc (LAIX)
Q4 2019 Earnings Call
Mar 12, 2020, 9:00 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 fourth-quarter and full-year 2019 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. Ms. Chuhan Wang, you may now begin your conference.

Unknown speaker

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

Questions & Answers:

Operator

Yes. OK. One moment and I'll try to answer her line.

Unknown speaker

OK. Yeah. If she joins, you can...

Operator

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

Chuhan Wang -- Investor Relations

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 at ir.laix.com. Dr. Yi Wang, our CEO and founder, 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'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 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 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 complementary courses as a way to support this fight and help those in the most impacted regions.

In particular, we offered 150,000 complementary Liulishuo course packages to our users in Hubei province. Our hearts go out to our users, employees and communities affected by this public health crisis. And we hope our offerings will bring encouragement to our users through our effective online language learning products. Internally, we have been adjusting our operations with employees in Wuhan, who were working from home since the outbreak.

However, we believe there will be very limited impact on our operational and 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 Moments, we remain and will continue to remain focused on product improvement and the provision of a comprehensive and effective learning experience by leveraging our steadfast commitment of 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 learning experience. We believe that with the sharp emphasis on these fundamental areas, we are continually setting ourselves apart in providing ourselves as the best opportunity to succeed in the long run. Net revenues for the fourth quarter of 2019 came in at CNY 231.4 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 our gross margin. As we continue to invest in the product mix, including new products targeting the kids 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 returns this year. Looking into 2020.

We see great opportunity in strengthening our leadership position in China's adult's English learning market as the overall market size of online learning continues to grow and the trend from off-line 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 learners. Additionally, the expected growth of our paid course offerings with a wider range of prices will drive user conversion to enhance user lifetime value.

While remaining focused on our product improvement, we are also working hard to improve our operating efficiencies. Towards this end, we are 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 of proactive control and optimization on user acquisition spending during the online shopping season such as the Double 11 event 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 average selling price. We have strong pricing power in the adult English learning market with annual student price lower than CNY 10,000, 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 Liuli Reading product after the impact of the tightened WeChat Moments sharing policy. Further, we have been proactively adjusting the pricing model and growth strategies of Liuli Reading. As a result, the gross billing of Liuli 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 of 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 language learners, we have a number of initiatives under way 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 DongNi English for the kids English learning market and designed to improve their overall language skills in a highly interactive and personalized way. This core 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 then 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, have all equipped our AI teachers with the most sensitive ears, the sharpest eyes and the most intelligent brains, enabling us to provide users a personalized learning experience and real-time language proficiency assessment. It 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 teacher 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 empowered by our advanced pronunciation, writing recognition engines, and AI teachers.

We see opportunities in how technology can transform the way 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 planned, and we believe the industry has a myriad of significant insufficiencies that can 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 onboard. 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.

Net revenues were mainly CNY 1,023.2 million, a 60.6% increase from CNY 637.2 million for the full year of 2018. Gross billings were CNY 1,294.3 million, a 31.2% increase from CNY 986.6 million for the full year of 2018. Average selling price per paying customer increased 9.3% to CNY 431.4 for the full year of 2019 from CNY 394.6 for the full year of 2018. Gross margin was 73.3%, compared with 72.6% for the full year of 2018.

Total operating expenses were CNY 1,336.8 million, a 44.4% increase from CNY 926.0 million for the full year of 2018. Net loss was CNY 574.8 million, compared with CNY 488.1 million for the full-year 2018. Adjusted net loss was CNY 548.1 million, compared with CNY 442.6 million for the full-year 2018. Basic and diluted net loss per ordinary share attributable to ordinary shareholders for the full year of 2019 was CNY 11.64, compared with CNY 19.17 for the full year of 2018.

As of December 31, 2019, the company's cash, cash equivalents, restricted share and short-term investments totaled CNY 552.6 million compared with CNY 747.8 million as of December 31, 2018. The company has deferred revenue, current and noncurrent, of CNY 696.1 million as of December 31, 2019, compared with the CNY 477.6 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 CNY 190 million to CNY 210 million, which would represent a decrease of approximately 25% to 17.1% from CNY 253.3 million for the same quarter last year.

The 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 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 -- Morgan Stanley -- Analyst

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

Yi Wang -- Chief Executive Officer and Founder

You want to answer the first part? OK. 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 market, which includes DongNi standard or DongNi Select and Darwin.

Darwin is the upgraded version of DongNi, which already started replacing the published version of DongNi since late last year, where we're moving from level 1 to level 2 and go on. And so that's a work in progress. And Liuli Reading's 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 unit growth of Liuli Reading as its contribution of top line has rebounded quite nicely as a result.

So overall, for 2019, obviously, the aforementioned product lines, target 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 is much faster. OK. 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 the growth rate is quite nice. We just recently launched the kids core course, as I mentioned in the call earlier. It's designed to improve as systematic core course for kids ages three to nine, OK? 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 we expect to see more top-line growth contribution from our kids products here for sure, yes.

And overall, we continue to evaluate opportunities to expand into different markets in terms of age group and in terms of demographics, geolocations and the specific interests and skill-based learning. So we do plan to grow as the top choice for English learners in China, starting from the adult space but also gradually moving to the kids space. Yes, we have different projects in the pipeline that we'll update the market once we achieve a certain announcement. 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 a particular demographic group as some of the K-12 players in the space, too, so I think, overall, the magnitude of growth for our adult traffic is probably less significant than that of some of the K-12 players. That being said, 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 at the same time. 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 -- Goldman Sachs -- Analyst

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 -- Chief Executive Officer and Founder

OK. Hey, Christine, thank you for the question. I think this virus outbreak obviously is a very concerning public health crisis now, actually, not just in China but extending throughout the world. But as one of the consequences of this now pandemic, I think that 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 kids -- well, students to college students to adults to spend a lot more time learning a lot, which we think is a positive signal in terms of what the societies please -- accessibility to quality education. And I think that's the right direction and that started moving anyway, moving toward 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 online industry. And this also confirms our long-standing strategy and choice of really betting online learning and specifically AI and technology-enabled interactive learnings. So yes, you see a lot of players, even the off-line players, they are introducing online ways of delivering that service. But most of these players, I believe, are still leveraging Internet-only as delivery method of really linking their previously off-line teachers with the students online.

But as LAIX has long been doing, we focus mostly on building AI-enabled interactive learning experience, product-driven learning experience. We believe this can definitely capture the movement from off-line to online very, very nicely. We see now a very clear trend that both in adult space and also in the kid space, we believe a more accelerated movement from pure off-line to online or online and off-line combined, online mobile. So we think we are very well-positioned to capture this opportunity.

And lastly, I just want to mention the virus situation, I believe, 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, more people have tried for the first time in their life a new way of online learning. And from our assessment, the option was pretty good. So I think that definitely speaks 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 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: 32 minutes

Call participants:

Unknown speaker

Chuhan Wang -- Investor Relations

Yi Wang -- Chief Executive Officer and Founder

Sheng Zhong -- Morgan Stanley -- Analyst

Christine Cho -- Goldman Sachs -- Analyst

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