Q2 2019 Earnings Call

Ladies and gentlemen, this is the operator todays conference is scheduled to begin momentarily until that time your lines will again be placed on me as a cold. Thank you for your patience.

You for standing by for Lakes, Inc. second quarter, 2019 second quarter earnings Conference call.

At this time all participants are in a listen only mode. After managements prepared remarks, there will be a question and answer session.

Today's conference call is being recorded I will now turn the call over to your host Miss to Han Wang Investor Relations for the company. Please go ahead your line.

Hello, everyone and welcome to the 20 nitrogen second quarter earnings conference call for like see also known as the only show. The company's results was 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 <unk> Dot <unk> Dot com.

Dr Wong, our CEO and founder and Mr. <unk>, our CFO will begin with some prepared remarks following their prepared remarks, Mr. jorgensen, who our CTO and co founder and Mr. Wheeling, Archie scientists and co founder will also join us for the <unk> 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 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 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 todays earnings press release at this discussion.

A general discussion of the risk factors that could affect like business and financial results is included in certain filings 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.

Our 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. Yang. Please go ahead.

Thank you for joining our 29 <unk> second quarter earnings Conference call.

During the second quarter, our topline was impacted by heightened reach out moments sharing policy.

Mostly applicable to all of our newly meeting product and to some extent.

Pretty good both probably the only product as well.

Which affected our word of mouth user growth.

In addition increased competition for traffic acquisition led by K 12 players during the summer month from late May until the end of July .

Joe Bob the customer acquisition cost.

Which further affected our user and revenue growth.

With these headwinds we have been taking swift actions to offset the revenue impact.

Hi, 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.

For more than 900000 unique paying users who purchased our courses and services just in the second quarter of 29, <unk> demonstrating our monetization potential.

Aside from I believe many reading and the only product we have various initiatives in the pipeline that we've launched in adults and kids markets.

As well as cynical, but 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 use new users and enhancing detriment.

Therefore, despite the additional expenses for these initiatives in recent months.

We believe our from investments will better position the company for further solidified.

Our competitive edge in China's AI powered language learning market in the home.

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 to Ting optics Valley will be province.

Known for being China 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 conditions for cutting edge companies such as ours.

We aim to hire 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've 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 algorithms is king.

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 censuses and 2.667 billion minutes of conversations.

Covering numerous proficiency levels, a wide geographic range and demographics kids to adults.

With our for foresight into industry trends and our years of focus on cutting edge technologies will 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 are committed to the long term vision that AI powered learning products 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 Miss being.

Who will discuss our chief financial results.

Thank you he and Hello, everyone. The unexpected headwinds our marketing channel resulted in decelerated topline growth in the second quarter sales tend to be 19.

While the revenue growth was lower than our previous expectation, we were able to realize significant operating leverage improvement as our business you know that.

This was evidenced by the improvement of sales and marketing expenses as a percentage of net revenue on a year over year basis, and gross margin remaining stable at approximately 77%.

That has now been paid to our key financial metrics in the second quarter of Tempe 19.

Net revenues were 276.4, meaning that maybe or 40.3 million U.S. dollars.

The language and a 4% increase from 135.5 million and maybe for the same quarter last year.

As of June Thirtyth S&P 19.

Company had 564.7, maybe Andy or 82.3 million U.S. dollars you've heard of revenue.

The increase was primarily attributable to the overall business growth and the platform wide extension of our paying user base.

As well as to the increased adoption of our proprietary I teacher among users in China as an effective learning approach and a better alternative to the traditional ways of English learning.

Cost of revenues was 64.9 million and maybe on 9.4 million U.S. dollars.

You have 196.6% increase from 31.4 million I mean de for the same quarter last year.

This change was primarily due to increases in salaries and benefits for certain full time employees, an IP service cost is all such costs, resulting from the general business growth and user base expansion.

Gross profit was 211.6 million and then B or 30.8 million U.S. dollars, you why having a 3.2% increase from 104.1 million R&D 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 325 million and be a 43.8 million U.S. dollars, a 64.5% increase from 182.7 million I mean do you for the same quarter last year, primarily resulting from business growth activities and development and introduction of new products and the cost associated with the expansion of the company's user base.

Sales and marketing expenses were 219.7 million and maybe also he too many U.S. dollars.

A 65.3% increase from 172.9 million people in the same quarter last year.

The increase was primarily due to the increases in R&D and marketing expenses and the salaries and benefits for the sales and marketing personnel, including our lives have your advisors.

Importantly, sales and marketing expenses as a percentage of net revenue declined and notably to 79.5% for the second quarter can be 19, compared with 98.1% for the same quarter last year.

Research and development expenses were 52.9 million I mean be or 7.7 million U.S. dollars, you, 46.5% increase from 36.1 million and maybe 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 revenue for the second quarter of Tempe mountain compared with 26.6% for the same quarter last year.

General and administrative expenses were 7.9, meaning a movie or 4.1, meaning less dollars.

Wow Thats, 3.4% increase from 13.7 million or maybe for the same quarter last year, primarily due to increases in salary and benefits for general and administrative personnel and professional service fees.

General and administrative expenses as a percentage of net revenues remained flat at 10.1% for checking Cordell Tempe 19, compared with the same quarter last year.

Loss from operations was 88.9 million movie or certainly in the U.S. dollars.

Compared with 78.6 million a movie for the same quarter last year, you talked about I mentioned, the reasons, including general business growth and user base expansion.

Adjusted EBITDA was a loss of 77.2, meaning a movie or 11 point Threemillion U.S. daughters, compared with an adjusted EBITDA loss of 71.1 million I mean do you for the same quarter last year.

Foreign exchange loss was 1.7 million I mean de or 0.2 million U.S. dollars compared with a foreign exchange loss of 5.1 million I mean do you for the same quarter last year.

Income tax expenses was 0.0 3 million or maybe all 4000, the U.S. dollars in 99.6% decrease from 6.4, meaning that maybe for the same quarter last year, primarily due to the Companys estimated taxable loss publishing telling yes.

Net loss was 87.8 million and maybe I'll tell 0.8 media U.S. dollars compared with 89.9 million I mean do you for the same quarter last year.

Adjusted net loss was 81.6 million Mb or 11.9 million U.S. dollars compared with 78.5, meaning I mean do you for the same quarter last year.

Basic and diluted net loss per ordinary share attributable to ordinary shareholders was 1.7, the ATM, Andy or 10 P 61 cents compared with 500, I mean be for the same quarter last year.

In terms of our balance sheet.

As of June Thirtyth can be 19, the company's cash cash equivalents and short term investments totaled 729.5, meaning a maybe a 106.3 million U.S. dollars compared with 747.8, meaning a Monday as of December 30, 117 18.

Turning to our outlook for the third quarter of 219. The company currently expects net revenues to be between maybe 230 million to get me to 150 million, which would represent an increase of approximately 27.4% to 38.5% from RMB 180.5 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.

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 the adults and kids markets and explore alternatives 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. Gilligan will our CTO and co founder and Mr. Lynn, we are chief scientist and co founder joining us for the Q and a session.

Operator, Please go ahead.

Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad for the benefit of all participants on today's call. If you wish to ask your question to management in Chinese. Please immediately repeat your question in English, we'll pause for just a moment to compile a Q and a roster.

And our first question comes from the line of LC from Morgan Stanley . Your line is open.

Hello Management I had two questions first one is about.

The child policy.

I just like to know on what percentage of.

Now comes from it.

Channel.

And can you give us more details about how you plan to like increase the salt users from other channels and.

When do we expect these to begin to see the.

Speaking of growth momentum and southern countries out of marketing spend under management as percentage of Anthony as you just mentioned it dropped.

Yes.

But as you plan to increase in marketing like other marketing channels and does that mean, the marketing expense will increase in the second half of this year.

Have any guidance on the sales and marketing expense full year guidance. Thank you.

Right.

Thank you for the question I'll take the second question first.

Currently as you know with the Titan, we chat Mama sharing policy or we do experience a decrease in our world.

Revenue growth.

A billing and that revenue, especially if are you reading product, which up and we'll talk in detail later, but on the CAC again as in the past, we'll continue to invest in our cost of customer acquisition cost that going forward.

In addition to the monitoring of the efficiency of our paid traffic. We are also focused on improving our product experience because we still believe within reach the accountant and the product mix will.

And the 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.

Okay.

Okay. This is Ben.

I will answer the first question about the Richard.

As we mentioned in our earning release.

We chose impact mostly to our leading product, which contributed to about 15% of the pipeline for the past quarter and.

For the for the rest of the products meaning.

The revenue many from Boenning you related products.

The.

Abstract we chart.

Is.

But it does appear we track those are pegged to the growth of the product.

But it's definitely not a serious as well.

Impact on you'll be reading and also it's mainly a packed our motto mouse organic growth, especially when allows our users like our products. They would love to share our they are we chart.

We had a policy changing may actually from our.

User studies that actually have impact on our user psychology of Sherry.

So not particularly related to the product itself.

So at this moment our data shows it has an impact but its under control.

Okay. Thank you.

Again, if youd like to ask a question that's star one on your telephone keypad.

And again star one on your telephone keypad.

As there are no further questions now I'd like to turn the call back over to the company for closing remarks.

Thank you once again for joining us if you have further questions. Please feel free to contact likes Investor relations through the contact information provided on our website with TPG Investor Relations.

This concludes this conference call you May now disconnect. Your line. Thank you.