Q2 2020 LAIX Inc Earnings Call

Order 20 20 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 is a conference is being recorded. I will now turn the call over to your host Mister Harry investor relations director of the company, please go ahead Henry.

Thanks for a second Auto everyone and welcome to the second quarter 220 earnings conference call for lack also known as usual the company's results were issued earlier today and you can download Thursday Fridays and a sign up for the company's distribution list by visiting our website at. And a phone number and a Mist instead of CFO will begin with some prepared remarks following the prepared remarks Mister Jordan and who our CTO and co-founder doctor freedom of Chief scientist and co-founder. We're also joining us for the Q&A session. What is known that today's discussion will contain forward-looking statements relating to Future performance of the company and intended to qualify Palm Harbor from liability as established by the US private security education reform at the statements are not guarantees of future performance and are subject to certain risks.

And and uncertainties assumptions and other factors some of these risks are beyond the company's control and it could cause actual results to differ materially from those mentioned in today thousand and to this discussion a general discussion of risk factors that could affect lacks business and financial result is included in certain powering off of the company is the Securities and Exchange Commission, including each any report. The company does not undertake any obligation to update the forward-looking information except as required by law. Co management will also discuss certain non-gaap Financial measures for comparison. Perfect only for definition of non-gaap Financial Manager and a reconsideration of gaap to non-gaap financial results. Please see the earnings release you should earlier today, but now they're call over to our CEO of the events, please. Go ahead.

Its Harry hello everyone. Thank you for joining our second quarter 2020 earnings conference call.

We had a Quantum event full second quarter, but the number of significant strategic moves made across our business operation.

These moves allowed us to realign our resources and build strength in areas where we see the most potential profitable growth.

Through more streamlined operations total net revenue. It came in at two hundred sixty nine point four million 18.0% increase from the previous month exceeding the high end of our guidance range.

gross profit margin above

70% and the sales and marketing expenses as a percentage of net revenue declined to 74.5% compared to 115.9% in the previous quarter.

Consequently, not lost narrowed. I mean between 92.5 million down 53.0% sequentially.

Operating cash flow also declined to be 66.4% million sixty six point four million compared with it. Maybe ninety nine point eight million in the previous quarter.

While the total number of unique paying users decreased screenshot as a result of both the fadeaway of the expected increase in traffic due to the covid-19 Outburst in a quarter as well as our stringent cost control and optimization of use acquisition costs are gross feeling is preparing user improved by 50%. 50.6% a quarter of a quarter demonstrating our success in migrating uses include targeted courses with higher asps.

We believe there is room for further improvements in these metrics in the coming quarters.

I will start with our product mix and being our CFO will discuss the operational aspect.

We continually upgrade innovate and adjust our products to ensure the most current and relevant technology is being implemented allowing us to tailor to our users evolving needs during the second quarter hours. Only 8 plus the upgraded version of Donnie came into Market equipped with the latest adaptive Learning System that's being refined by our Ai and bring design team. Thanks to the huge amount of data learning data from millions of previously existing don't users only 8 plus actively recommends personalized learning content adjust to life use a space on the individual proficiency levels and needs these approach this approach not only helps improve the English learning experience for our users, but also increase the retention rate in addition.

More user-friendly designed have being added to the only 8 plus for example, the one key mute design will automatically ignore questions when it is inconvenient people to conduct our practice in public places moreover for the benefit of future reference users can collect vocabulary words and spelling errors with just one click on generated a list of their personal vocabulary notebooks and favorite words.

In addition to the dhoni series of courses designed or systemic Improvement of General capabilities at the core of our product offerings for adults. We have also been continuously investing English teaching our product mix. We understand that studying English not the ultimate goal for our users but means to very end. Therefore we identify our users various objects objectives and scenarios for Learning and using English and offer relevant products to best help them Reach those objectives. For example, they may want to further enhance their reading capabilities in order to be able to read English news articles and books just as smoothly as a native speaker, which can be accomplished by using our literally reading product.

A large fraction of Chinese insurances have a strong desire to improve.

Accents which can effectively be achieved by using upgraded version of a centralization course that offers a unique personalized.

accent correction and practice experience

users who want to improve their English communication skills in business or travel settings. They can achieve their goals through our business English or traveling courses.

Identifying such diverse learning needs and developing parts around them. We continue to increase our users sickness and health consequently increase lifetime value as more cross-sell and upset opportunities emerge

With a Sony series, of course position at the core of our One-Stop shop learning strategy. We provide a wide variety of scenarios that serve as excellent direct Channel existing users to try to end the purchase other courses such as the ones we just mentioned.

With an increasing number of users being guided into other courses internally. The dependents are acquiring new users externally for Revenue Office effectively reduced we're confident that continues enhancement enrichment of product mix can help us increase our user LT and mitigate the impacts from CAC increase of the broader Market at the same time.

With a strong and growing product mix and the clear path to profitability for our adults English business in 2020. We have also been actively developing our kids English business.

Based on comprehensive studies of children's learning motivations and characteristics in English learning as well as needs for Chinese parents.

Our kids courses in powered by a state-of-the-art technology are designed to create immersive learning experience where they can explore learn and apply their language skills and personalized fun meaningful ways the upgraded version of Kitsap which contains the newly launched the course ranked among the top ten on the iOS download chart for kids as within it just 1 month of its launch.

Every upgrade end times to improve the learning experience for our users and enhance interaction between parents and kids. For example, some recently added features include the one new word per day English songs weekly study reports wedding pictures book and AI foreign teachers Plus.

KidsPark mix is currently the only one in the market that offers different learning experiences with kids in the 326 age group and six to nine age group within next year off of courses will extend to the age group of 9 to 12 completing the product selection from age to 12.

Appreciate it from other kids products in the market. Our kids courses have shown strong users retention and growth and received very positive feedback from our kids users are both parents.

Mike's is not a traditional education company and it was never meant to be one. It was founded to leverage technology to make learning more personalized effective and successful starting from English pub. We are Pioneer and leader in learning Market our Innovative and attractive learning products Rich experience in integrating technology product curriculum design as long as large-scale efficient use operations, and the Deep bruising AI learning Technologies collectively make us unique and the leader in the increasingly crowded online intelligent public education Market.

To further strengthen our competitive advantages. We keep a strong focus on continuously continuously developing our proprietary sweet of a high-powered learning Technologies, including our speech recognition assessment engine riding scoring engine and advanced adaptive Learning System.

Which enables us to provide users with personalized effective learning as of June 30th, 2020 our massive database of English spoken by Chinese has recorded with approximately.

3.7 billion minutes of conversation and 29.8 billion sentences covering a broad range of geographic distribution and proficiency Levels by Thursday. We have some exciting news to share with you in June likes one the 20 20 China Garden finger finger tips best online education Apple award at a technology conference hosted by my immediate research the leading Data Mining and Analysis Institution for New Economic economy industry in addition likes was ranked as the home of the top twenty Chinese plus education Enterprises at the 2020 World artificial intelligence conference. One of the most highly recognized events in AI industry.

As a company dedicated to advancing proprietary Technologies to provide an Innovative and differentiated learning products. These were conditions are truly gratifying.

20/20 is no doubt very unique here for all of us.

For the education industry as a whole we have witnessed and an accelerated adoption of online learning and we believe likes is well positioned to benefit from it.

Empowered by our cutting-edge technology as effective and efficient learning products and services. We aim to exceed our used expectations. Not merely meeting them. We we aspire to offer products and services that our users truly love and will recommend to their friends and family this you will also be a pivotal year for Life as we have already started off two more aggressive Implement cost control measures and refine our operations.

As we continue to offer our growing user base as superiors through products and services. We are also making every effort to keep improving our operation operating efficiency and bottom line as long as we move forward capturing the enormous growth opportunities presenting for intelligent actually marketing China. We are also looking forward slash driving a development of the entire intelligent learning industry increasing its awareness and advancing adoption of a I power light.

This concludes my prepared remarks.

Now turn the call over to our CFO missed being some who will discuss our key financial results.

10 k e and hello everybody in terms of streamlining operations were not only focused on Top Line gross also focused on reducing costs through efficient operations in an effort to improve our bottom-line grows as well. I want to highlight the three strategies. We are currently pursuing month plus we're currently in the process of optimizing of our organizational structure to improve all aspects of work efficiency, which includes rationalizing the company's overall had tons and improving Performance Management of our which had the sales team in order to increase average total sales per group.

Second with the high penetration rate of internet and the quality and approved with the rapid absorption of remote working you to cover the nineteen. We close to some of our offices enabling us to lower some fixed cost without losing anything efficiency.

Should we are working on reducing our advertisement costs really finding the user acquisition channels enhancing free learning content and establishing more collaborative practicing ships with high traffic different forms and the content providers.

We believe all these efforts are aligning well to drive sustainable growth for our business and we are pleased to see that we have made the solid progress on this front page that has snow. Look at how do you Financial Matrix in the second quarter?

That's a revenue will I be 269.4 million and 18 percent increase from 200 to 28.3 million for the previous quarter home of record. The increase was primarily attributable to the upgrade of product mix introduction additional courses and the services with higher asps.

Cost of Revenue was the IMD 75.6 million a 4.0 a 4.0% decrease the 78.8 million for the previous quarter.

You put over quota change was a primarily due to decreases in salaries and benefit expenses.

Which prophet was I'm the one hundred ninety three point eight million a $29 26% increase from 149.5 million for the previous month.

Gross margin for the second quarter of 2020 was 71.9% compared with 65.5% for the previous quarter.

Go to operating expenses. I'm the two hundred eighty-nine point seven million a 16.3% decrease from 346.1 month for the previous quarter the changes to a primarily due to the increase the Improvement in operating efficiency and optimization of the organizational structure.

Sales and marketing expenses will be two hundred point seven million a 24.2% decrease from 264.7 million for the previous quarter the change of a primarily due to the company's cost the control in advertising and optimization of user acquisition costs.

Sales and marketing expenses as a percentage of net revenue decreased to 74.5% for the second quarter compared with 115.9% for the previous quarter.

Find the expenses. Well, I'm be 48.5 million and 18.1% decrease from I'm be 59.2 million for the previous quarter.

Find the expenses as a percentage of net revenue for the second quarter was 18% compared with 25.9% for the previous quarter off. The change will primarily due to the efficiency optimization in personnel management.

Jenny expenses William the 40.5 million and eighty 2.8% increase from 22.1 million for the previous quarter.

The increase was primarily due to the one-time charge on this code Improvement caused by early termination of these in hand and nineteen Q to change in this is strategy.

Jimmy expenses will 15% of net revenue for the second quarter of 2020 compared with 9.7% for the previous quarter.

Bus from operations will be 95.9 million compared with I'm be one hundred ninety six point five million for the previous quarter.

The Improvement in operating results was attributable to First upgrade of our product mix introducing additional courses and the services with higher wage second the Improvement in operating efficiency and the third our cost control in advertising and optimization of user acquisition costs suggested. It was a loss of 77.8 million compared with just with the loss of R&B 182 wage to five million for the previous quarter.

That's a loss was Nineteen Ninety two point five million compared with $197 million for the previous quarter.

The just did a naturalist was I'm twenty-three million compared with Envy 189.2 million for the previous quarter.

Basic and diluted the Netflix but all you know is attributable to ordinary shareholders was I'm the 1.87 again compared to resign be 3.99 came in for the previous quarter.

In terms of our balance sheet.

S of June 13th 2020 the company's Cash Cash equivalent restricted cash and short-term Investments the total 390.3 million month compared to resign be 459.4 million as of March 31st 2020.

Operating cash outflow was 66.4 Million compared with zombie 99.8 million for the previous quarter wage company has deferred revenue of R&B 828.8 million as of June 30th 2020 compared with R&B 820.5 million as of as of March 31st 2020.

No opinion to a Ultra.

For the other quarter of 323 the company currently expects.

That's a revenue to be between the two hundred thirty million to R&B 250 million which would represent and decrease of approximately 12.2% to 4.26% from 200 to 62.1 million for the same quarter last year this forecast the reflects the company's current and the preliminary review and the current wage in this situation and the market the conditions which is subject to change and this concludes our prepared remarks. We will now open the cost to questions about a reminder is the Hoosier our CTO and the doctor link of our chief scientist will join us for the Q&A session operator, please go ahead.

Thank you at this time. I would like to remind everyone in order to ask a question, please press star. Then the number one on your telephone keypad. That is star. Then the number one on your telephone keypad to ask you a question and for the benefit of participants on today's call. If you wish to ask your question to management page in Chinese, please immediately repeat your question an English. We will pause for just a few moments to compile the Q&A roster.

Your first question comes from the line of Christine Joe from Goldman Sachs your line is open.

Yes. Hello. It's thank you for the presentation. Can we just get a little bit more color around your third quarter guidance. And also when could we expect an inflection in terms of your life questioning gross as well as Revenue growth, please. Thank you. Thanks, Christina our Revenue guidance as just the mention the 43 years between 230 million to 250 million MB which would represent a decrease of 4% to 12% from the same quarter last year off. It may seem not to be so exciting on the surface. But the actual Dynamic of Revenue driver is very encouraging as we continue to enrich our pay the product offerings to me the fundamental needs and learning interest for our users such as business English courses. This product offerings supposed to have to increase our have increased

So what use this stick in this race use the lifetime value and in turn generate a higher Revenue as it's a specialized the cost is generally, with much higher prices are ever bought. This course is also usually lost the phone much longer do relations and the related to revenue cannot be fully recognized for accounting perspective within 1/4. That's why we may still have to face the trend of declining Revenue in the near-term while the quality of the revenue is actually improving underneath in terms of GB and they're looking at the page three, we believe our GB will continue to grow in the short-term and long-term

What only series of purposes are being repositioned?

That's the heart of a one-stop-shop English learning strategy.

They provide a variety of scenarios that is excellent to the channel and the addition of our only select and other relevant to Target of the closest bank account to the falls. Let me think about it. I can't do the four fifty 42% of total GB in Q2, which will represent a much higher wage of our normal only series.

And in addition to that our case the only saw a phoenix the cost is which launched a year ago, which we are also contributed to our gross peeling off in Q3 and going forward when we looked at when we looked at at q1 and Q2 accumulative Lee we can see is that the kids process accountable for months already accounted for 10% of our total gross Billings.

Yeah, more than 10% and we see the is a very very positive. Yes.

Also, we continue to evaluate opportunities to expand into different markets include the different demographic user groups Geographic areas, especially interest-based and the scoop is the learning and so on so we have different projects in the pipeline to enhance our own no affinity and we will update the market once we achieve our miles mile distance.

Your next question comes from the line of Leslie Shang from Morgan Stanley your line is open.

Thank you management. You you introduce a lot of the new product new features. So I'm just wondering what is found future strategy and rolling out these new products and future pipeline, especially on key and do management have any Target of this new product. Thank you.

Hello, this is let me talk about a doll first and move onto kids on the adult side as we mentioned earlier in the call that we intend to become the One Stop Shop choice for adult Learners in China. And we think we can achieve that goal, you know, and to certain degree by the end of this year by the end of this year. We may have a full product mix that with price range from the you know, the lower home to the higher thousand.

Okay, and covering a wide range of users demands including the the Cornerstone course only Bang Theories which serves as the systematic course for improve General English capabilities for adults as well as which, you know, the only series of expand across different, uh price points including the basic standard one, you know off-setting for $1,300 to the select setting between $4,000 and the VIP court that we recently launched sending forth and nine thousand and in between we also have you know, uh special purpose in courses such as business travel pass.

It'll Buy.

That the pronunciation so on so forth and we we are also increasing, uh, the the mix for lower-priced introductory asked to use as a as a way to attract user with different interests and sell them up-sell and cross-sell them to the main boss not to mention hourly Reading part, which has very good Market positioning the leader in the category and the keeping interaction then let me move on to get off on the kids side. We are very excited to see the launch of the core course in March and April, you know, I want to send March and April because we we were the only player in the in the market that offers separate learning experience for the age group between 6th and 69th.

And as we also mentioned we plan to continuously rolling out content for higher levels so that we can find something next year. We're going to cover the full range between Age 3 to 12. Not only that we are ugh, so working off exciting and you excuse such as picture books and so on and so forth. I think by some point next year. We will have a complete package offering of products that cover the full range of needs for kids in that age group. And then because our you know, you need strength in a I assist learning and also product design, we believe that differentiated learning experience as well as complete and Rich lineup of content and really put us in a month.

The positions compete, you know, I I can't, you know disclose specific numbers, but let me just say that for the user retention figures we've seen dead things the launch of the cold Crossing March April, we were very much encouraged. You know, we have seen very high user retention numbers both on weekly and monthly basis so that we think we think is as the foundation for our future growth, even though we are not actually in a sort of spending mode aggressively acquiring external traffic at this point of time that we were, you know, uh, spending a lot of time, you know, converting our internal adult customers who are you know, parents into the buyers of the kids product and we think that organic Life Energy is also one of the our unique strengths

There are no further questions at this time. I would now like to turn the call back over to the company for closing remarks.

Thank you both again for joining us. If you have further questions, please feel free to contact lacks investor relations to the contact information provided on our website. Thank you operator.

This concludes today's conference call you may now disconnect.

Thursday