iHuman Inc. (IH) Q1 2021 Earnings Call Transcript

iHuman Inc. (IH 4.12%)
Q1 2021 Earnings Call
Jun 08, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and good evening, ladies and gentlemen. Thank you for standing by for iHuman's first-quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session.

Today's conference call is being recorded. I will -- now, I will turn the call over to your speaker host today, Ms. Cynthia Tan, senior IR director of the company. Please go ahead, ma'am.

Cynthia Tan -- Senior Investor Relations Director

Thank you, operator. Hello, everyone, and welcome to iHuman's first-quarter 2021 earnings conference call. Our earnings release was distributed earlier today and is available on our IR website, as well as via PR Newswire. Before we begin, I would like to remind you that this conference call contains forward-looking statements as defined in the U.S.

Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current management and operating conditions and related to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause our actual results, performance, or achievements to differ materially. Further information regarding this and other risks, uncertainties, or factors is included in our filing with the SEC. The company does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

Today, you'll hear from Dr. Peng Dai, director, and chief executive officer, who will provide a general overview of the business and our operations. He'll be followed by Ms. Vivian Wang, director, and chief financial officer, who will provide additional details on the company's financial results and outlook.

Following management's prepared remarks, we will open up the call to questions. With that said, I would now like to turn the call over to our CEO. Dr. Dai, please go ahead.

Peng Dai -- Director and Chief Executive Officer

Thank you, Cynthia. Hello, everyone. Thank you all for joining us on the call today. We are pleased to report another strong quarter as we recorded a strong top-line growth and to further strengthen our leading position in the childhood edutainment sector.

Over the past quarter, China's online education market has continued to grow rapidly as parents and kids become increasingly receptive to online learning as a result of the ease of use, flexibility, and a variety of educational offerings that are available. Online learning apps have grown in popularity especially among millennials and Gen Z parents. As digital natives, they tend to view technology favorably and are more willing to use tech solutions to help their kids learn. Meanwhile, we are also seeing increasing demand among Chinese parents for high-quality edutainment content that inspires their kids' natural learning interests while having fun.

Looking ahead, we continue to believe that the use of a variety of online tools for education is not a short-lived phenomenon. That will be a long-lasting and essential component of education that effectively serves the broader population. During this quarter, we continue to expand our brand awareness and user base in the online childhood edutainment market. We have always been committed to transforming learning into a fun journey for every child while lightening the burden for parents.

One of the things we really try to do is to create products from a child's point of view. We create tailor-made content that is designed for each knowledge point within our app, which are full of creative element and interactive design that greatly help to cultivate creativity in children, which cramming courses and rote memorizing can never do. We constantly look to inspire their curiosity by promoting the natural stages of their physical, intellectual, social, emotional, and moral development. Our self-directed and interactive learning product created opportunities for kids to explore the joy of learning and nurture their curiosity and passion for knowledge.

This business model gives us a unique position in the market. And our work so far has produced very high entry barriers. At the end of the day, our favorite moment is when parents give us great feedback about their children's progress. We often hear that their kids become more motivated to learn and that they develop faster because of our app.

Our products are also very useful for kids who live in less developed areas and don't have access to so much high-quality education resources that one might find in the big cities. As long as they have a mobile device and access to the Internet, they can enjoy a great educational experience without self-directed product. This inspires us to constantly roll out product enhancements; expand our content offerings; improve our edutainment technologies; innovate and launch new products that deliver truly unique, interactive, and immersive learning experiences that are both fun and educational; and achieve our goal of long-term sustainable growth. So now, I'd like to walk you through our business development and operation result.

We are pleased to see continued growth across the board. In the first quarter of this year, revenues from our learning services increased by 233% year over year to RMB 192 million. And our average total MAUs rose by 97% year over year to 16.12 million, both of which were new record high. The solid growth was driven by our unrivaled educational content and the best-in-class technology.

In terms of key recent business development, we continued to optimize and diversify our offerings by enriching the interactive content in our self-directed learning apps and expanding our content verticals. Our dedicated focus and a relentless effort to refine our products enabled us to provide a superior user experience and to further expand our competitive mode. In terms of new products in our pipeline, last quarter we announced a strategic partnership with Oxford University Press on which we codevelop and copromote a comprehensive level reading app called iHuman Readers, which combined Oxford University Press's world-class content with our advanced edutainment technologies. Currently, we are working diligently to codevelop features for an interactive library containing Oxford's most comprehensive leveled reading series of over 1,000 books, including world-renowned Oxford Reading Tree, TreeTops, and Project X CODE program.

We are also working as a first-industry partner to codevelop and digitally publish over 100 exclusive and highly interactive leveled reading books on Fantastic Friends series and a customized AI-powered assessment module. Development is well on track, and we expect to officially launch this product around the middle of this year, which we believe will further enhance our brand recognition and expand our demographic coverage. Even though that product hasn't been officially launched yet, we are particularly proud to have received Oxford Press Innovative and Empowering Partner of the Year award for all of the work we have done so far on this innovative collaboration. We are also making solid progress, developing our next-generation AI content for different subjects.

Notably, our iHuman Chinese Reading, which is currently at a trial stage, has been designed based on our belief that learning is most effective when kids are taught by combining creative educational content with AI technologies. The product will provide children with an immersive and the interactive experience to learn about classical Chinese literature and cultures, hone their reading skills, and boost their confidence with public speaking. Coupled with high-quality in-app content, our Chinese AI offering also provides crisp only offline materials such as picture books, flashcards, and mind maps, which can be read aloud with a single page of reading pane. This not only creates a closed-loop learning journey that seamlessly connects online and offline world but also addresses parents' concerns about excessive screen time when kids learn online.

In addition, we are also rolling out new products and services to further expand our comprehensive portfolio that better supports the all-around development of kids. In particular, this summer, we will launch iHumanpedia, which will help to illustrate hard-to-understand STEM-related materials with short and captivating cartoons and videos. Kids interact with animated characters who are ready to answer various questions, watch vividly illustrated videos, and learn while dynamically interacting with the characters. The AI-based testing module can track their progress and boost their motivation.

To wrap up, we are encouraged by our strong performance in the first quarter and believe it provides a firm footing for our development throughout the rest of this year. Moving forward, we will continue to follow our guiding principle of helping kids to enjoy their childhood and inspire their natural interest in learning. We will focus on developing the best edutainment content while driving industry-leading technological innovation by constantly refining and expanding our product offerings and enhancing our technical capabilities through further investments in R&D. We believe this will ensure a great user experience and a sustainable business growth over the long term.

With that, I will now hand the call over to our CFO, Vivian, to talk about our financial results.

Vivian Wang -- Director and Chief Financial Officer

Thank you, Peng, and thank you, everyone, for joining the call. I will now walk you through our financial results. Please note that all the financial data that I talk about will be presented in RMB. First, I will briefly recap our financial performance for the first quarter of 2021 with robust growth.

Total revenues in Q1 came in ahead of our expectations, increasing 191% year over year to 227 million. This was maybe due to erratic growth in revenues from our learning services, which leaves 233% to hit a record high of 192 million. The robust growth was powered by our user base expansion and enhanced the user engagement as we continued to build on our unrivaled reputation for superior product quality. During the quarter, we further strengthened our leading position in the telco edutainment sector and saw increased traction for our products among millennials and Gen Z parents, who appreciate the curiosity that our products promote.

Average total MAUs of our online business reached a record high of 16.12 million in Q1 and increased over 97% from the same quarter last year. The number of paying users also reached a record high of 1.68 million. We have delivered four consecutive quarters of triple-digit top-line growth year over year, which speaks to our proven educational products and content innovation capabilities, and industry-leading edutainment technologies. Revenues from learning material and devices were 35 million an increase of 71% year over year, primarily due to resumption of our offline business activities as a result of the alleviation of the COVID-19 pandemic.

Along with the rapid growth of our online business, which has a higher gross margin, our gross profit and gross margin remain solid. Gross profit was 161 million, an increase of 212% year over year. Our gross margins reached 71% in Q1, compared with the 66% in the same period last year. I will move on to our operating expenses now.

Total operating expenses were 158 million, which increased to 191% year over year. Excluding SBC, our total operating expenses were 151 million, an increase of 178% year over year. As an R&D and product-driven company, we have always focused on R&D to maintain our core competitive advantages. Our R&D expenses were 82 million, an increase of 149% year over year.

Excluding SBC, R&D expenses were 78 million, an increase of 138% year over year, primarily due to a rise in payroll-related expenses and outsourcing expenses as we continue to expand our R&D capabilities and to enhance and develop our executional products and services. Our sales and marketing expenses were 53 million, an increase of 237% year over year. Excluding SBC, sales and marketing expenses were 52 million, an increase of 230% year on year. This was primarily due to an increase in advertising and promotion expenses as we strategically strengthen our brand recognition as a publicly listed company and marketing efforts to supplement organic user growth, as well as an increase in payroll-related expenses.

Even though we accelerated our marketing effort in recent quarters, which was an effective supplement to our organic user growth, the vast majority of our user growth still came from word-of-mouth referrals. And as a percentage of total revenues, our sales and marketing expenses stayed at a relative low level. Our G&A expenses were 23 million, an increase of 303% year on year. Excluding SBC, G&A expenses were 21 million, an increase of 269% year on year, primarily due to an increase in payroll-related expenses and professional fees.

Operating income was 3.6 million, compared with operating loss of 2.5 million in the same period last year. Adjusted operating income was at 10.7 million compared with an adjusted operating loss of 2.5 million in the same period last year. Net income was 7.1 million compared with a net loss of 1.6 million in the same quarter last year. Adjusted net income was 14.2 million, compared with an adjusted net loss of 1.6 million in the same quarter last year.

Basic and diluted net income for ADS were both 13%, compared with basic and diluted loss of RMB 0.11 in the same period last year. Adjusted diluted net income for ADS was RMB 0.26 compared with an adjusted diluted net loss for ADS of RMB 0.11 in the same quarter last year. Deferred revenue and customer advances were 318 million as of March 31, 2021, compared with the 269 million as of December 31, 2020, primarily driven by our user expansion and enhance the user engagement. Cash and cash equivalents were 841 million as of March 31, 2021, compared with 862 million as of December 31, 2020.

As a result, we have a healthy balance sheet with a strong cash balance and no debt. The majority of our current liabilities is the deferred revenue, which actually gave us a great visibility on our future revenue growth. With that, I'll now provide our business outlook. Based on our current estimates, total revenues for the second quarter of this year are expected to be between 217 million and 227 million, representing an increase of 102% to 111% year on year.

This reflects the excited and continued expansion of the company's learning services. And also takes into consideration that the second quarter is normally a slow season for the company. These estimates represent management's current and preliminary view, which is subject to change. That concludes our prepared remarks.

Operator, we're now ready to take questions. Thanks.

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] The first question comes from Mark Li from Citi. Please go ahead.

Mark Li -- Citi -- Analyst

Hi, management. Congratulations on the results and thanks for the presentation. I have two questions. Number one, may I ask how is the development for our AI calls and our preparations? And can you share a bit more on the outlook update? And secondly, would you share any view on the potential regulations and our initiatives to work around that? Thank you. 

Peng Dai -- Director and Chief Executive Officer

Thanks, Mark. I will answer the first question. So about our first AI course, which is the iHuman Chinese Reading, we have done a few trial rounds starting from April. And up to now, the conversion rate is better than our expectation.

And based on our current data, the first-month completion rate was as high as high-90s percent, so -- which is already outweighed the performance of other similar products available in the market. And also, from the first couple of weeks, we also get a lot of positive feedback from kids and their parents who recognized that our product innovation helps kids learn while having fun. So young kids like to play with our content and, you know, like to learn using our products repeatedly, almost every day, so -- which naturally improves their reading skills and also enhances their comprehensive Chinese literacy through our, you know, designed fun and interactive activities. And going forward, we will also continue to build out more capabilities and functions within these products and further optimize the performance and adding more content going forward.

Yeah.

Vivian Wang -- Director and Chief Financial Officer

And, Mark, this is Vivian. l will answer the second question about the regulations. So based on our understanding of policies currently in place, recent supervision of after-school tutoring is basically reinforcing our government's previous focus on a few key areas of concern. So the first one is the prime courses ahead of syllabus, which adds significant pressure to students.

And second one would be the regulations related to advance payments for tuitions and fees, as well as high pricing of the courses, some of which are too high and place extra burden on parents and also raise public concerns about the fairness of -- or equality of education. And third one would be false and excessive advertising, which causes heightened anxiety for parents and kids, and so on. So while the recent, more detailed policies gave us further guidance in those areas, we believe what we offer to parents and children are in line with the healthy online education that the policies aim to address. So on the content side for our current products and business lines, also self-directed learning apps, we mostly operate in the edutainment segment, which combines both education and entertainment elements.

Our core value of offering innovative edutainment content echoes with the government's call for a fun learning experience. We creatively made content that is designed for each knowledge point within our app, which are full of creative elements and interactive designs that really helped to cultivate creativity in children, help them to explore the joy of learning, and the -- and nurture their curiosity and passion for knowledge. So this is something -- those memorizing and priming courses for exams or competitions can never do. In addition, our apps also allow parents to effectively manage the children's screen time to help protect their eyes and ensure that the kids are learning at a desired proportionate pace.

Even for kids who live in less developed areas and don't have access to high-quality education resources, as long as they have a mobile device and access to the internet, they can actually enjoy a great educational experience with our products. So in essence, our products support general education, foster a love of learning, and care for children's mental and physical health, which is the direction we believe the current policies and regulations and successful trends are heading. And on the advertising side, we have been -- our content and put our focus company and have always aimed to build a healthy business model. We have mostly relied on our superior product quality and word-of-mouth referrals to grow our user base.

Our products keep ranking No. 1 in the Apple attached app store education category almost every day since the end of 2018. And we also get recommended by our third-party channels. So although we've been a bit more active in terms of branding and marketing as a sophisticated supplement recently, majority of our user growth feel -- came from organic growth.

We're not blindly burning cash for customer acquisition, but rather focus on R&D to constantly optimize our products to keep our differentiation and sustain our long-term growth. So we believe regulations on promotional apps and a number of these other areas will actually help the industry become more rational and sustainable going forward. So to summarize, our potential regulations could actually help to bring the industry back to a healthier and more sustainable. And as proven repeatedly by historical experience, it could also accelerate consolidation, and in the longer term, potentially benefit leading companies like us who are always aiming to be compliant with all the regulations and bring the best-in-class product to our customers.

I hope this answered your question, Mark. Thanks.

Mark Li -- Citi -- Analyst

Thank you, Peng and Vivian.

Operator

[Operator instructions] Our next question comes from Lauren Zuo from Credit Suisse. Please go ahead.

Lauren Zuo -- Credit Suisse -- Analyst

Hi. Thanks, management, for taking my question. Congrats on the strong results. So I have two questions regarding your product.

First, would you share more color on the new product and how would you differentiate your product content or quality with competitors? The second is about the R&D expenses. What would be your expectation on the R&D spending this year and next year, and would you share more color on that into of the R&D? Thank you.

Peng Dai -- Director and Chief Executive Officer

Thanks, Lauren. This is Peng. So about the first question, the -- our new product. Actually, as we mentioned earlier, we do have several new products in sight.

As we mentioned earlier, so our -- we just launched our first-generation, you know, AI product, iHuman Chinese Reading in April. And, you know, as I introduced earlier, we do see a lot of, you know, good early but promising results from our trial runs. And for these products, I would leave -- you know, it helps children to learn about classical Chinese literature and culture and, you know, improving their reading skills and boosting their confidence in -- with public speaking. And our key feature, you know, our major difference versus the competing products is that we do create a more immersive and interactive way of learning with our products so that children can enjoy a lot of fun with our enhanced animations and with more diversified interactions during the learning progress.

And, you know, the second new product is iHuman Readers, which I also introduced earlier. So it's a co-work with Oxford University Press. And, you know, in general, there will be a interactive library containing -- offers most comprehensive reading series of over 1,000 books. And also, you know, we -- there will be a customized AI-powered assessment module.

So these two parts will both be very, you know, differentiating factors versus all the other, you know, English-level reading products available in the market because, you know, this is -- the Oxford Reading Tree is a very famous brand among the English-level reading brands. And also, this is the first time to, you know, we co-create a children-focused English reading assessment tool. So I do believe this will be a very important innovation for this whole industry. And also, we do have, you know, a co -- you know, the co-creation of 100-level reading books of the new series, which is called Fantastic Friends.

And for these new IP, we will create a lot of, you know, interactions and animations so that we can create an even more engaged reading experience for children. So with that part, we do get a lot of good feedback and even the Best Innovation Award from Oxford this year. So -- and also, as we mentioned earlier, we are building a more comprehensive portfolio that better supports the all-around development of children. So as the first step, so this summer, we will launch a new app, iHumanpedia, and this will help to illustrate a hard-to-understand STEM topics with the short cartoons and a lot of, you know, aim [Inaudible] innovation.

So kids can interact with animated characters and also learn about STEM-related topics by watching those fun animations and exploring the dynamic interaction. At the same time, we are also planning and working on some other apps about our coding and other topics, which will be released later this year or next year. Yeah, and these are basically our new product plan in the pipeline. Thank you.

Vivian Wang -- Director and Chief Financial Officer

And regarding your second question, Lauren, about the R&D expenses. So currently, in Q1, R&D expenses was -- or is around 82 million, and, you know, we do plan to further increase our investment into the R&D going forward. So as an R&D-centric company, we will keep reinvesting a lot into R&D because not only by which, you know, can we sustain our long-term growth, you know, by providing differentiated products and keep ahead of on our technology advantages. So yes, we believe this devotion to high-quality content and advance edutainment product should differentiate from our competitors.

So we'll keep investing pretty aggressively into R&D going forward. Thanks.

Lauren Zuo -- Credit Suisse -- Analyst

Thank you. 

Operator

[Operator instructions] Our next question is from Betty Zhou from Essence Securities. Please go ahead.

Betty Zhou -- Essence Securities Co., Ltd -- Analyst

Hi, management. Thank you for taking my question. I have two questions. First one is about the staff situation.

Can management elaborate on the staff profile of our company now? Also, it would be better if you give us more color about the personnel plan this year. My first -- second question is related to the flagship product, GoPlay Chinese. Can management assure the operation trackage of this product this year? Thank you.

Vivian Wang -- Director and Chief Financial Officer

Thanks, Betty. So regarding the personnel or headcount plan, we do plan to kind of, you know, add pretty aggressive in terms of headcount. So currently, we already have, you know, roughly 1,200 people, and the majority of which are R&D people. And I said earlier, you know, we will invest pretty aggressively into R&D.

So we do plan to increase our headcount because, you know, we have a lot of the new product in our pipeline. We also want to continue to enhance and optimize our existing products to provide, you know, continue to provide better experience for our customers. Yeah. So we do plan to increase our headcount pretty aggressively. 

Peng Dai -- Director and Chief Executive Officer

And thanks, Betty, for your second question about our plan for our flagship apps, iHuman Chinese. Yeah, we do have a lot of, you know, initiatives to drive this -- to further drive these apps. The first one, we will continue to update the new content within the, you know, the newly introduced package, which is the traditional Chinese medium package. So we are, you know, we launched that, but we are, you know, still working on some new content and new [Inaudible] in that part.

And the second one will be -- we will also introduce another new package, which is the traditional Chinese coding package. Yeah. This will also expand -- further expand our content offerings for the children. Number three, we will add more reading and practicing functions within these apps because we do believe while they learn, you know, the kids will do need more opportunities to get more practices and reading exercises.

And number four, we will continue to refresh the previous, you know, character learning units based on big data analysis because, you know, as we mentioned earlier, we are continuously optimizing and updating those in our course element based on the user feedback and based on our data analysis. So that we can make this whole app a new -- always in a new way. As the last one will be we will create more physical learning materials and a companion product for iHuman Chinese because we do see a lot of good momentum with these -- on those selling package or bundle selling strategies because we do see the parents will need more companion and physical learning products for the children beyond the online offerings. So yeah, these are our major initiatives for iHuman Chinese app moving forward.

Thanks.

Betty Zhou -- Essence Securities Co., Ltd -- Analyst

Great. Thank you again.

Operator

[Operator instructions] Our next question comes from Wei Xu from [Inaudible] Asia. Please go ahead. 

Unknown speaker

Hi, management. I want -- could you please add some colors about the traffic acquisition? Yeah. Thank you.

Vivian Wang -- Director and Chief Financial Officer

I'm sorry, I didn't quite hear your question.

Peng Dai -- Director and Chief Executive Officer

For our customer acquisition, we believe we have our own principles. So the first one is, you know, in terms of this customer acquisition, we always believe that product quality is the dominant driver of our business. So, you know, these kinds of good products and high-quality content brings us strong word-of-mouth referrals and further drive our, you know, massive organic user growth. So this is the foundation of our business model.

And the second one will be, you know, we do have a lot of strength in channels. So our ASP has been ranking very high on Apple app store or the other major Android store. So this will help us to give us some more high exposure to users in those different channels. And third one will be -- moving beyond, we are also exploring new growth channels, for example, like OTT and other smart devices and also social committee.

And also, we will leverage our online-offline channel synergies because we do have, you know, a huge offline network. We see kindergartens and, you know, the educational organizations all around China. So this will also help us to get more access to more user base. And going forward, we will follow the same, you know, user growth principles and continue to expand and roll out the high-quality product to fulfill their demands so that this kind of organic growth model will be sustainable.

Yeah, thanks.

Operator

This concludes our question-and-answer session. I'd like to turn the conference back over to Ms. Cynthia Tan for any closing remarks.

Cynthia Tan -- Senior Investor Relations Director

Thank you, operator. In closing, on behalf of iHuman management team, we'd like to thank you for your participation on today's call. If you require any further information, feel free to reach out to us directly. Thank you for joining us today.

This concludes the call. 

Vivian Wang -- Director and Chief Financial Officer

Thank you, everybody. 

Peng Dai -- Director and Chief Executive Officer

Thank you. 

Cynthia Tan -- Senior Investor Relations Director

Bye-bye. 

Peng Dai -- Director and Chief Executive Officer

Bye-bye.

Vivian Wang -- Director and Chief Financial Officer

Bye.

Operator

[Operator signoff]

Duration: 41 minutes

Call participants:

Cynthia Tan -- Senior Investor Relations Director

Peng Dai -- Director and Chief Executive Officer

Vivian Wang -- Director and Chief Financial Officer

Mark Li -- Citi -- Analyst

Lauren Zuo -- Credit Suisse -- Analyst

Betty Zhou -- Essence Securities Co., Ltd -- Analyst

Unknown speaker

More IH analysis

All earnings call transcripts