Here Group Limited (HERE) Earnings Call Transcript & Summary

Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Here's Earnings Conference Call. Please note that today's event is being recorded. I would now like to turn the conference over to Ms. Tina Tang, the company's Manager of Investor Relations. Please go ahead, ma'am.

Thank you. Hello, everyone, and welcome to Here's earnings call for the fourth quarter and the full fiscal year 2026. With us today are Mr. Peng Li, our Founder, Chairman and CEO; and Mr. Tim Xie, our CFO. Mr. Li will provide a business overview for the quarter, then Tim will discuss the financials in more detail. Following their prepared remarks, Mr. Li and Tim will be available for the Q&A session. I will translate for Mr. Li. You can refer to our quarterly financial results on our IR website at ir.heregroup.com. You can also access a replay of this call on our IR website when it becomes available a few hours after its conclusion. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. Please note that all numbers stated in the following management's prepared remarks are in RMB terms, and we will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported in our earnings release and filings with the SEC. I will now turn the call over to the CEO and Founder of HR, Mr. Li.

Yes. Okay. Good morning, everyone, and thank you for joining us today. We closed out our fiscal year 2026 with fourth quarter revenues of RMB 127.7 million, representing a robust year-over-year increase of 94.1% and bring out our full year revenue to RMB 596.8 million. Fiscal year 2026 marks our first full fiscal year dedicated to the Pop Toy business. Most importantly, this year has provided us with a complete clarity about our cooperation identity. Our long-term strategic positioning and the path we must take to build lasting shareholder value. Before going into our operational updates, I want to share the core strategic insights that receiving here. We firmly believe that enduring a high premium IP company must anchor itself on distinctive products and constant creativity. Non-third-party distribution channels alone, distribution expense market reach cannot answer the fundamental question of our user loyalty. Why will customers remember you and consistently choose your brands? [indiscernible], our product pipeline under release cadence were tightly opposed with wholesale channel demand to protect our brand from external wall volatility. We are shifting our business model into a drastic close. This model integrator as adaptive product design and direct-to-customer channels. As this closed loop grounds us autonomy over our go-to-market cadence, product presentation and the customer experience, our self-operated D2C channel term as the premier theater to showcase this high-value portfolio extensions. Industry-leading IP house cannot [indiscernible] Trim out with the mass market passively accept today. This is why our D2C retail network is far more from that point of sale. It is an IP incubator and hard to test new ideas. As a result, our capital allocation and operational priority is focused on perfecting this D2C closed loop and optimizing our structural unit economics rather than maximizing short-term volume at the expense of brand health. This philosophy brings us to our board assets on brand momentum. True brand momentum does not stem from chasing fleeting market streams, mindlessly coping customer performance. Real long-term brand momentum is forged through design conviction and artistic leadership. Furthermore, the long-term asset value of IP is intrinsically linked to its perceived scarcity. Once market supply outpaces consumer interest, that scarcity, dissolves and the triggers structural devaluation of the IP. While we remain pragmatic about macro conditions, we maintain absolute control over our own operational tenants. We have made deliberate strategic choice to prioritize long-term IP assets value, our short-term wholesale sales volume. This choice is heavily driven by who we are within the global Pop Toy landscape, true independent pure-play IP companies exceedingly [indiscernible] . Here Group stands as one of the very few enterprises that we go really adheres to the path of priority incubation and self-operated execution. Over the past fiscal year, we have proven the scalability of this model, navigating the current [indiscernible] Requires resilience, disciplined efforts and refusal to compromise our core strategy for short-term committees. We will strictly adhere to the IP principle. Our mission is not to generate plating retail transactions but to deliver long-term emotional companionship and lasting narrative value to our users. To fully realize this vision, we focused our execution across four strategic pillars during the fourth quarter. First, IP portfolio, diversification and ecosystem monetization. We continue to curate our IP metrics across the entire asset life cycle, boosting product innovation and brand collaborations. Our ecosystem is structurally engineered to mitigate a single IP patency. As of June 30, 2026, our total portfolio expanded to 22 IPs, compromising compromising 13 proprietary [indiscernible] Under exclusively licensed states. Our flagship IP, WAKUKU, generated RMB 47.7 million in the fourth quarter and RMB 359.3 million for the full year. This accounted for 51.9% of our annual revenue. [indiscernible] Next-generation powerhouse, SIINONO has delivered phenomenal trajectory, which is only in the second half of 2025, generated RMB 27.3 million in Q4 fiscal year '26, rapidly growing to represent 21.4% of our total quarterly revenue. For its first full fiscal year, SIINONO generated RMB 92.7 million, contributing 15.5% to our annual top line. The meteoric rise of SIINONO from 0 to near RMB 100 million annualized scale in under 12 months confirms that we can systematically build and scale new proprietary apps. We have also built out diversified long tail flywheel. Revenue from our other IP category, which grew emerging proprietary starts like a [indiscernible] and more, served by extraordinary 651% year-over-year to RMB 39.8 million in the fourth quarter. This is up from just RMB 5.2 million in the same period last year. Combined with lease solid contribution of RMB 12.8 billion in the fourth quarter, this portfolio of IP is now collectively amount from over 41% of our quarterly revenue. Our product expansion and the lifestyle integration front, we recently accelerated several high-impact initiatives. Recently, we aggressively expanded our IPs into premium daily consumer scenarios. SIINONO launched limited addition co-brand sparkling water with [indiscernible] Forest and partnered with the French fashion house [indiscernible] , on exclusive [indiscernible] Collection. Meanwhile, we evaluated our cultural positioning well, exclusive partnership with the Museum of Fine Arts, Boston, co-developing [indiscernible] Premium artistic works from the -- across 3 core IPs. Furthermore, we have formalized our partnership with 2026 China Open, is [indiscernible] SIINONO as a headline IP for this year's [indiscernible]. New IP pipelines were another part of our strategy. We officially introduced unit Noble IP, alongside with seasonal collection for in politics and [indiscernible], notably [indiscernible] captured strong use engagements during the [indiscernible] Festival where collaboration with [indiscernible] And served as an official event partner for the prestigious 2038 Husband Flowers Awards. Finally, in Hong Kong, our landmark [indiscernible] Project as a central peer is undergoing final declaration. We have transformed the ship into a multi-layered vertical expiring show space, Victoria Harbor. Ticket sales officially launched on Ctrip September 21, ahead of the Madden voyage on October 1. This will allow us to capture the peak tourist flows of the upcoming National Day Golden Link. Second, discipline to see network expansion and scenario optimization. Our off-line direct-to-customer foot point remains a primary avenue for depending user intimacy and validating product market fit. At this stage, our network strategy priority priorities, high RI unit economics and qualitative location premium over share store count. We continue to manage our permanent foot points with strict capital discipline to optimize our asset portfolio. As of today, we operated 7 D2C stores across 4 core metropolitan areas. During the quarter, we successfully inaugurated our new store at Beijing Daxing International Airport. This marks our strategic entry into high-traffic premium transit hub retail stores. We leveraged [indiscernible] Pop-up store fronts as [indiscernible] Purpose-specific vehicle. Beyond the derisking permanent site selection. This pop-ups suction as IP centers for activation and immersive user integration interaction. Prime example is our successful activations in September at Prisma [indiscernible] Center in Shanghai and Hondo Tower. In addition, our automated retail network expanded to 25 robot shops about 6 cities having complete compensated our initial structural layout. We shifted our operational mandates from aggressive deployment to maximizing same machine efficiency and data extraction. Sir, operational refinements and data integration. On the supply chain, we are optimizing our pro procurement, warehousing and logistics framework by strengthening our budging leverage with many factors and the suppliers. We have shortened our supply chain response times. This enables faster, higher quality, replenishment and boost our supply chain resilience. We are also consolidating data strength across our physical stores, robo shops and online commerce to build omnichannel data infrastructure. Our upgraded membership ecosystem tracks customer behavior, allowing predictive insights which help us optimize our inventory on partner channels, our operational metrics is evolving towards deeper integration. We are transitioning. We are transitioning channel partner relationships with traditional transaction lead distribution into high-value, customized strategic alliance and working closely with partners to ensure our premium IP products are placed in environments that respect our brand integrity and pricing. On the digital front, our cumulative social foot points continues to scale in positive level, and we shifted our KPIs from vanity followers metrics to deep engagement quality. Our online platform function as a strategic bridge converting digital community engagement into physical D2C, food traffic and reinforcing offline experience with online thousand finally, talent accusation and organizational capability building to execute our close-the-loop strategy, we continue to build our team onboarding top-tier industrial experts across premium store operations, productive design and the core brand operations. Before I had the call over to our CFO for granular granular financial review. I want to address our bottom line results directly. Our financial loss this quarter was heavily impacted by a onetime nonoperating income statement in self item driven entirely by market valuation adjustments. This historical accounting revaluation is noncash in nature, separated from our ongoing core operations. Operationally, our performance reflects our net upfront upfront investments in design capability, next-generation product innovation and targeted brick-and-motor store front and pop-up expansions. On currently, as we proactively optimized our business model and navigated challenging retail sales environment. Our revenue scale was affected by lower sales through traditional channels, cost and expense optimization is on the way across all operational segments. While revenue and cost trends are not yet fully aligned. We expect we expect that gap to close over time as our revenues bidding stability and our cost structures are optimized. Looking forward, we are committed to balancing capital stability with traditional momentum with a near-term mandates to drive towards sustainable profitability at early days. At the same time, we will maintain a steady on compromising cadence in operating and incubating the [indiscernible] our users allow. I will now turn the call over to Tim for the detailed financials. Thank you.

Thank you. Before I go into the details of our financial results, please note that all amounts are in RMB terms, unless otherwise stated, the reporting period in the fourth quarter of fiscal year 2026, ended on June 30, 2026. And in addition to GAAP matters, we will also be discussing non-GAAP measures to provide greater clarity on the trend in our actual operations. In the fourth quarter, our total revenue was [ RMB 927.7 million ], up 94.1% year-over-year, but down sequentially. The year-over-year growth was primarily driven by higher sales of both existing and newly launched IT product lines in our Pop Toy business. On a sequential basis, the decrease was mainly due to a challenging market environment and the lower channel sales. Cost of revenue was RMB 94.7 million compared to RMB 43 million a year ago and [ RMB 907.9 million ] in the third quarter. The year-over-year change was mainly due to higher IP product costs in line with revenue growth as well as increase in logistics, level and IP licensing expenses Sequentially, the change was primarily due to lower channel sales. Our gross margin was 25.8% this quarter compared to 34.7% a year ago and 34.5% in the third quarter. Total operating expenses were RMB 215.1 million for the quarter. To break this down, sales and marketing expenses were RMB 56.2 million this quarter, broadly in line with RMB 57.7 million in the third quarter compared to RMB 19.1 million a year ago. The year-over-year trend mainly reflected higher advertising and promotional expenditures and increased employee compensation. This investment supported targeted marketing for our brands and IP products. They also supported the continued expansion of our multichannel sales capabilities. As a percentage of total revenue, non-GAAP sales and marketing expenses, which exclude share-based competition were 43.9% this quarter compared to 29% a year ago and 35% in third quarter. Moving to research and development R&D expenses were RMB 9.9 million this quarter, compared to RMB 9 million a year ago and RMB 9.5 million in the third quarter. The year-over-year change was mainly due to high product design related expenses as we continue to invest in our design team. Meanwhile, employee competition and other service fees remained broadly stable during the quarter. As a percentage of total revenue, non-GAAP research and development expenses, which exclude share-based compensation, was 7.7% this quarter compared to 13.5% a year ago and 5.7% in the third quarter. General and administrative expenses were RMB 25.8 million, compared to RMB 19.7 million a year ago and RMB 33.6 million in the third quarter. The year-over-year change was mainly due to higher share-based compensation expense. Sequentially, the decrease was driven by lower salary expenses and lower share-based compensation expense. As a percentage of total revenue, non-GAAP general and administrative expenses, which exclude share-based compensation, were 14.4% this quarter compared to 26.3% a year ago and 13.8% in the third quarter. As a result, our net loss from continuing operations was RMB 169.6 million compared to RMB 21.8 million a year ago and RMB 34.1 million in the third quarter. Our adjusted net loss from continuing operations was RMB 37.7 million compared to RMB 19.3 million a year ago and RMB 22.9 million in [indiscernible] And diluted net loss from continuing operations per ordinary share were both 1.07 during the quarter compared to a year ago and [indiscernible] in the third quarter. Basic and diluted adjusted net loss from continuing operations per ordinary share or both [ RMB 0.24 ] during the quarter compared to [ RMB 0.10 ] a year ago and [ RMB 0.13 ] in the third quarter. Separately, we recorded a goodwill impairment charge of RMB 524.1 million related to our acquisition of [indiscernible]. This was mainly due to lower-than-expected financial performance amid macro headwinds. The regional good value from this acquisition was RMB 187.6 million. And after the impairment of our remaining goodwill balance was RMB 53.5 million as of June 30, 2026. Now moving to capital allocation. Our Board approved a USD 20 million ADS repurchase program in June. As of September 16, 2026, we had repurchased approximately 0.4 million ADS for approximately USD 0.7 million under the program. We will continue to assess share repurchases and other capital return opportunities alongside our investment needs with the goal of maximizing long-term shareholder value. Looking ahead, as we continued investing in our self-operated system. We will remain disciplined in allocating capital across our different formats. Closely evaluating the unit economies of each one and prioritizing investment towards those with the strongest long-term potential. We remain committed to strengthening our IP and product capabilities while improving operating efficiency over time. That concludes my prepared remarks. Operator, let's open up the call for questions. Thank you.

[Operator Instructions] And today's first question comes from Liping Zhao with CICC.

[Interpreted] Mr. Lee and team, my question is about the new IP. What plans do you have for the exploration, incubation and commercialization of new IPs.

[Interpreted] In terms of new IP discovery, incubation and commercialization, we have developed a systematic approach that takes our IPs from 0 to 1 with, as we mentioned, 22 properties. We build our capabilities around the full life cycle of IPs from discovery to incubation to commercialization. Every stage has its own approach and a dedicated team. At the same time, we selectively bring in international IP collaboration. This partnership allowed us to gain valuable experience in product development and marquee operations, which we then feed back into our own original IPs, creating a positive cycle that strengthens our core over time.

[Interpreted] Let me make you more details. On the discovery side, we maintain both original in-house creation and collaborations with artists. Our IP portfolio has now expanded to 22 properties, spanning a wide range of tiles from [indiscernible] To durable, to fashion forward. We continue to bring in talented emerging designers and artists to keep our creative pipeline fresh and diverse.

[Interpreted] On the incubation side, we use both data and emotional connection to guide our work. We look at the real-time sales and user feedback from our DTC stores and robo shops to shape our IP design. At the same time, we give each IP its own personality and emotional appeal. SIINONO is about interface by the door bell. WAKUKU is a free and with [indiscernible] child. SIINONO launched in the second half of last year and cross-IP user overlap is still growing. This tells us our o to 1 incubation model works. We will bring the center approach to import [indiscernible] Building a rebatable assets as we go.

[Interpreted] On the commercialization side, we are advancing both our core IPs and our newer ones. For our flagship we keep rolling out new products to strengthen our base. For our new IPs, we are driving cross-industry collaborations and expanding into more scenarios. For example, SIINONO has been very active on the partnership this year. We teamed up with [indiscernible] On a limited edition white pitch sparkling water, collaborated with the Museum of Fine Arts Boston on the co-branded products and partnered with the French fashion brand, IRO Paris, on an exclusive [indiscernible] Series. SIINONO will also take apart as the official corner IP at 2026, China Open. On the new IP front, [indiscernible] Rolled out our same campaign during [indiscernible] And also teamed up with a phone case brand Case Band. [indiscernible] Also serves as an official event partner for the 380 flowers awards. New large-scale figures are also being released on a regular basis. Across all these initiatives from the beverages to fashion, from art and culture to sports events and from seasonal campaigns to lifestyle merchandise, our IPs are steadily making their way into a broader range of consumer and everyday life scenarios. So we believe the pop toy industry is shifting. It is no longer about single product hit. It is about who can consistently incubate IPs with real characters and stories and operate them well. That takes time and discipline. This is a concrete reflection of what we mean by putting long-term health first. Thank you.