LAIX Inc. (LAIX) CEO Yi Wang on Q3 2020 Results - Earnings Call Transcript
LAIX Inc. (NYSE:LAIX) Q3 2020 Results Earnings Conference Call November 26, 2020 8:00 PM ET
Company Participants
Harry He - Investor Relations Director
Yi Wang - Chief Executive Officer, Co-Founder
Bing Sun - Chief Financial Officer
Conference Call Participants
Elsie Sheng - Morgan Stanley
Operator
Hello, ladies and gentlemen. Thank you for standing by for LAIX Inc. third quarter 2020 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 turn the call over to your host, Mr. Harry He, Investor Relations Director of the company. Please go ahead, Harry.
Harry He
Thank you. Hello everyone and welcome to the third quarter 2020 earnings conference call for LAIX, also known as Liulishuo. The company's results were issued earlier today and you can download earnings press release and signup for the company's distribution list by visiting our IR website at ir.laix.com.
Dr. Yi Wang, our CEO and Founder and Mr. Bing Sun, our CFO, will begin with some prepared remarks. Following the prepared remarks, Mr. Zheren Ben Hu, our CTO and Co-Founder, 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 liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of the 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' 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 forward-looking information, except as required by law.
During today's call, management will also discuss certain non-GAAP financial measures for comparison purpose only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see earnings release issued earlier today.
I will now turn the call over to our CEO, Dr. Yi Wang. Dr. Yi Wang, please go ahead.
Yi Wang
Thanks Harry. Hello everyone and thank you for joining our third quarter 2020 earnings conference call.
During the third quarter, total net revenue were RMB239.4 million which, as anticipated, met our previously announced guidance. Gross profit margin further grew to 72.9% from 71.9% in the previous quarter. With the adjustments we made since the previous quarter, we have seen a constant flow of positive effects on our newly streamlined operations. That could be seen in our net loss, which was further narrowed to RMB70.6 million, a 23.6% improvement quarter-over-quarter.
During the quarter, we continued to maintain prudent cost control on advertising expenditures and our user acquisition costs. Our overall user growth was impacted by this approach and gross billing declined 16.1% sequentially. However, gross billings of our Kids business managed to improve by 56.5% compared with the previous quarter
With that quick financial overview, I would now like to provide an update on our product mix and the strategic growth plan then Bing, our CFO, will discuss our operations and financial further in a few minutes.
Let's start with our adult business. With our DongNi series, of courses, at the core of our adult product offerings, we are looking to take a step further and offer a comprehensive and all encompassing product portfolio. We believe that English learning could not be limited to simply improving General English capabilities but rather needs specific learning objectives under various scenarios in our daily lives. For example, for users who want to improve their English communication skills for business environment, they can achieve their goals through our Business English courses.
Now let's turn to our Kids business. As mentioned in our last quarter's earnings call, we have been actively developing relevant kids courses this year. Therefore it's not surprising that in the third quarter we saw significant increase in contribution from our Kids business to our overall revenue growth. We are differentiated from other kids products in the market as we have created an immersive learning experience for kids in different age groups by implementing our proprietary AI technologies.
Our current course plan for Kids main courses covers Level I to Level VII, targeting users from kindergarten to sixth grade in primary school. In addition to the main course plan, we have added higher priced SKUs to serve the needs of users with different learning objectives and purchasing power. Moreover, we have enriched our product mix by introducing more short duration courses such as science and art and to attract user with diverse learning needs.
We intend to utilize these shortened duration courses to convert users to higher priced products and to improve overall conversion efficiency. So far we have completed the course content development for the first five levels and we will launch Levels VI and VII courses in 2021.
In terms of long term revenue enhancement at the company level, we have adopted a more focused marketing strategy for different users and to further increase cross-selling opportunities between our Adult and Kids English business. Moreover, this onward sales capability, we established a distribution mechanism and distributed more traffic to the teams with stronger sales capabilities. When it comes to streamlining our operations, in the third quarter we continued to put forth strong efforts around enhancing operating efficiency, making solid progress both on organizational restructuring and cost control initiatives that is ultimately improving the bottomline.
With respect to marketing activities, we plan to reduce our advertising costs through diversifying our user acquisition channels. Enhancing our capability and converting existing users are our top priority as we intend to reduce dependency on acquisition of new users through third-party channels. Finally, technology advancements are at the core of our growth strategy, allowing us to remain at the forefront of learning technology.
Our products are highly differentiated and more dynamic than what exists in the market and what we used to offer which were designed to satisfy user's diverse learning needs, primarily helping user their pronunciation and learn new vocabulary. With our new AI teacher, Alex, which is a great leap forward in AI-powered language learning technology, users can speak and talk with Alex at anytime, anywhere, at an affordable price.
Selecting from a wide range of conversation topics, for example, weekend hangout or grocery shopping, users can have a very interactive mock conversation with Alex just as they would with a human teacher. Then they would receive differentiated and personalized responses from the conversation from Alex. Alex will then need to continue this conversation with user as if a real person teacher would, at the same time, providing explanations, pronunciation, grammar corrections and recommendations.
What makes Alex so highly useful and impactful is that users are more adept to really apply themselves into learning things they do not need to worry about making mistakes in front of a real person. What's more interesting is, Alex would actually pause and wait for the student to come up with their own language and give encouraging responses and encouragements, just like a real person teacher would. And then Alex, it is a crucial point that when it comes to English learning, especially among children, this kind of capability is really important and useful.
And the we then likes and develop this type of new technologies because we have one of the largest databases of English spoken by Chinese, which has been customized for deep learning processing along with a proprietary algorithm with profound understanding of English teaching concepts and theory.
This year marks LAIX' eight anniversary as a pioneer and leader in the AI-powered learning space and with a mission of empowering everyone to achieve their full potential. We continue to dive deeper into that technology and the English language education, dedicating ourselves to advancing proprietary AI technologies, aiming to provide the best online English learning product and making learning more personalized and effective.
Since our inception, we have been constantly exploring user needs and improving the user learning experience from a technology-based, content oriented user experience centered company culture. Looking ahead, we will continue executing on our growth initiatives, bringing our strong value proposition to market and maximize long term value to all of our shareholders.
This concludes my prepared remarks. I will now turn the call over to our CFO, Mr. Bing Sun, who will discuss our key financial results.
Bing Sun
Thank you Yi. And hello everybody. This is Bing. Let us now look at our key financial metrics in the third quarter of 2020. Net revenue were RMB239.4 million, a 11.1% decrease from RMB269.4 million for the previous quarter and an 8.26% decrease from RMB262.1 million for the same quarter last year. The quarter-over-quarter decrease was primarily attributable to a decrease in gross billings caused by the company's stringent cost control in user acquisition expenditures.
Cost of revenue was RMB65 million, a 14.1% decrease from RMB75.6 million for the previous quarter and a 9.6% decrease from RMB71.8 million for the same quarter last year. The quarter-over-quarter change was primarily attributable to due to efficiency optimization in personnel management and cost control in IT related services.
Gross profit was RMB174.5 million, a 10% decrease from RMB193.8 million for the previous quarter and an 8.3% decrease from RMB190.3 million for the same quarter last year. Gross margin for the third quarter of 2020 was 72.9%, compared with 71.9% for the previous quarter and 72.6% for the same quarter last year.
Total operating expenses were RMB252.1 million, a 13% decrease from RMB289.7 million for the previous quarter and a 37.7% decrease from RMB404.8 million for the same quarter last year. This change was primarily due to stringent cost control in user acquisition expenditures and optimization of our organizational structure.
Sales and marketing expenses were RMB185.5 million, a 7.6% decrease from RMB200.7 million for the previous quarter and a 35.9% decrease from RMB289.2 million for the same quarter last year. The changes were primarily due to the company's stringent cost control in user acquisition expenditures.
R&D expenses were RMB45.8 million, a 5.5% decrease from RMB48.5 million for the previous quarter and a 20.6% decrease from RMB57.7 million for the same quarter last year. The changes were primarily due to efficiency optimization in personnel management.
SG&A expenses were RMB20.8 million, a 48.7% decrease from RMB40.5 million for the previous quarter, primarily due to a one-off impairment loss on leasehold improvement in the previous quarter. G&A expenses decreased by 64.1% from RMB57.9 million for the same quarter last year, primarily due to the efficiency optimization in personnel management.
Loss from operations were RMB77.6 million, compared with RMB95.9 million for the previous quarter and RMB214.5 million for the same quarter last year. Adjusted EBITDA was a loss of RMB55.6 million, compared with adjusted EBITDA loss of RMB77.8 million for the previous quarter and RMB203.6 million for the same quarter last year.
Net loss was RMB70.6 million, compared with RMB92.5 million for the previous quarter and RMB214.1 million for the same quarter last year. Adjusted net loss was RMB61.4 million compared with RMB85.3 million for the previous quarter and RMB209.7 million for the same quarter last year.
Basic and diluted net loss per ordinary share attributable to ordinary shareholders was RMB1.43 compared with RMB1.87 for the previous quarter and RMB4.33 for the same quarter last year.
In terms of our balance sheet, as of September 30, 2020, the company's cash, cash equivalents, restricted cash and short term investments totaled RMB327.2 million, compared with RMB390.3 million as of June 30, 2020 and RMB552.6 million as of December 31, 2019. Net cash used in operating activities were RMB53.1 million and RMB119.5 million for the three-month period ended September 30, 2020 and 2019, respectively.
Our liquidity to meet our future working capital is based on our ability to attract new users and enhance user engagement and retention by offering higher quality and diversified courses while closely controlling the content costs and optimizing traffic acquisition strategy to effectively control and reduce these user related costs. We will continue to further preserve liquidity and manage cash flow by reducing discretionary expenditures including promotion expenses and SG&A expenses. Our liquidity is also based on our ability to obtain capital financing from equity or debt investors. We believe that we have sufficient cash to fund operations for at least the next 12 months.
The company had deferred revenue of RMB823.4 million as of September 30, 2020 compared with RMB828.8 million as of June 30, 2020 and RMB696 million as of December 31, 2019.
Now let's turn to look at our feature outlook. For the fourth quarter of 2020, the company currently expects net revenue to be between RMB210 million to RMB230 million, which would represent a decrease of approximately 9.2% to 0.6% from RMB231.4 million for the same quarter last year. This forecast reflects the company's current and preliminary view on the current business situation and market conditions, which is subject to change.
This concludes our prepared remarks. We will now open the call to questions. As a reminder, Mr. Hu Zheren Ben, our CTO and Co-Founder and Dr. Lin Hui, our Chief Scientist and Co-Founder, are joining us for the Q&A session. Operator, please go ahead?
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from the line of Elsie Sheng from Morgan Stanley. Your line is open.
Elsie Sheng
Thank you management. My question is about your Kids product. So can you give us more color on your strategy and positioning in the kids market, especially under the increasingly comparative landscape? Thank you.
Yi Wang
Thank you for the question. Right now, Kids product, the Kids, specially, is a very key growth driver for the company. In the third quarter, it contributed to more than 15% of our total gross billings. Our kids product portfolio covers the basic science course and also the main course, a core course that covers the beginner level in the kindergarten all the way to age nine right now. And we have plan to move it to cover to sixth grade which is age 12.
So basically, we have two components of the core course. The first component covers the demographic age group of three to six. And then they will start course for kids aged six to nine and continuing to age 12 in the next year.
Well, in terms of technology we adapted into our kids product, our proprietary adaptive learning technologies as our speech recognition. So it provides real-time feedback and overcoming the inefficiency of traditional teaching a one-size-fits-all approach. And what another key differentiator for us, compared to other products on market is that we are probably the only company offering a key differentiated learning experience in age group three to six and six to nine with the lower age group having a more game-like experience while the higher age group has more about a teacher-led learning experience.
We believe our continued investments into our product and user experience as well as curriculum design will pay off as we see very, very encouraging long term retention numbers in our user group. Thank you.
Operator
[Operator Instructions]. There are no further questions at this time. I will turn the call back to Harry for closing remarks.
Harry He
Thank you once again for joining us. If you have further questions, please feel free to contact Investor Relations through the contact information provided on our website. Thank you operator
Operator
That concludes today's conference call. You may now disconnect.
