iHuman Inc. (IH) Earnings Call Transcript & Summary

Hello, and welcome to Deutsche Bank Depositary Receipts Virtual Investor Conference, dbVIC. My name is Zafar Aziz in the DB team. I'm pleased to announce that our first presentation will be conducted by iHuman from China. Before I introduce our speaker, key points to note. [Operator Instructions]. Once the Q&A session has ended, don't log out. You'll automatically be transferred to the iHuman booth where you can continue to ask questions via chat and access shareholder materials. On a final note, all of today's presentations will be recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Justin Zhang, Investor Relations Director from iHuman, which trades on the NYC under the symbol IH. Welcome, Justin.

Thank you. Thank you, moderator. Good evening or good morning, everyone. First of all, I would like to say thank you. Thank you to Deutsche Bank for inviting us for this Virtual Investor Conference. My name is Justin, I am the Investor Relations Director of iHuman. Today, I will briefly go through our presentation, and will take questions afterwards. First, I will provide an overview of the company, followed by investment highlights and the financial highlights and then talk about our growth strategies. iHuman is a leading provider of tech-powered, intellectual development products in China. The key to our success is our premium content and advanced technological capabilities. As you can see from this slide, in the second quarter of 2023, the average total MAU, which is monthly active users, of our online products were 20.33 million. This was an increase of 11.7% year-over-year. Our revenues were RMB 241 million. And our net income nearly doubled and our revenues continued to grow year-over-year. This marking our sixth consecutive quarter of profitability. Our non-GAAP operating income was RMB 43.3 million. In the last 2 years, we have received multiple major industry awards domestically and internationally, which you can see from the purple box on the right side of this slide. We believe this acknowledgment represents a strong testament to the excellence of our products and boost the market awareness of our brands. Our products are very popular. According to Qimai, a tracking company in China, from the most recent last 7 days ranking between October 31 to November 6, 2023, our flagship app, iHuman Chinese, was ranked the #1 among apps in the children's category in Apple's App Store in China. Very often 2 or 3 out of the top 5 apps in the children's category are our products. And according to Appfigures, the American data tracking company, iHuman Chinese has occupied the #1 app under the top grossing ranking in the kids category of the Apple App Store in China among iPad users from October 2, 2019, to November 1, 2023. Next, let me introduce our business model. Our products cover different perspectives that match the needs of children on and the parents, including Chinese, Logical Thinking (sic) [ Magic Thinking ] Stories, Pinyin, ABC, Coding, [ Arts ] and more. As shown in yellow, they are our online self-directed apps under the brand of iHuman. We monetize our online products by charging for time-based subscriptions, including monthly, quarterly and annual plans as well as for content-based subscriptions. Parents could choose from various options based on their needs. As shown in purple, we offer high-quality materials and smart devices, including Smart Reading Pen, Smart Writing Pen, Logic Pal, Interactive Storyteller and others that can be used in different material -- in different scenarios. For our off-line business, we're monetized by selling materials and smart devices. Moreover, we officially established our international facing brands, bekids and AHA World. And we have already launched several apps under the new brands in the past year. We monetize the same way -- we monetize them the same way we charge for iHuman online apps. Bekids series and Aha World 6 aim to promote the well-rounded development of children through [ theme ] focused products. Next, let me go through our journey. As you may know, we were founded in early 2016 and started development over smart digital online apps. Our first online interactive app iHuman Chinese was released at the end of the same year. In the fourth quarter of 2017, we launched iHuman Books. In 2018, we began full commercialization of iHuman Chinese with time-based and content-based subscriptions. We also launched iHuman Magic Thinking and iHuman Stories in the same year. In the fourth quarter of 2019, we merged our online operations with the majority off-line business of Hongen Education, which was also controlled by our Chairman, Michael. Through this, we are now able to offer an integrated portfolio of online and offline smart products. Meanwhile, we have also successfully launched iHuman Pinyin at the same year. In 2020, we launched the new product, iHuman ABC in March. We also completed our IPO on the New York Stock Exchange in October, which was a significant milestone. In 2021, we launched another 2 products iHumanpedia in August and iHuman Kids Workout in December. In the first half year of 2022, we launched a few products of iHuman, including iHuman Coding, iHuman Reading, iHuman Fun Idioms, iHuman Little Artists, iHuman Readers, iHuman Writing and iHuman Fantastic Friends. Meanwhile, in 2022, we have officially launched our bekids series apps like bekids Coding, bekids Coloring, bekids Science, bekids Reading, bekids Puzzle and bekids Academy. At end of the year 2022, we launched a brand-new app named, Aha World. And at the beginning of the year 2023, we released another app, Gogo Mini World, which was previously known as Gogo Town, when it is first launched. Going forward, we will continue to refine our product content and introduce innovative apps. Now let's talk about our competitive landscape. As shown in the first row, our products cover different perspectives that match the needs of parents and children. When compared with our competitors in the market, we are the only company to deploy 3D graphics, and we are also far ahead in terms of AI/AR functions, fun content and interactive features. Next, I will go through our 5 investment highlights. Let us talk about how we differentiate from our peers. First, let me talk about our branding, iHuman. We are the leading provider of tech-powered intellectual development products in China, and we have a very, very strong brand recognition. For tech-powered intellectual development products in China, the key of success is to provide a highly interactive and immersive experiences for children. Our Chairman and founder, Dr. Michael Chi founded both Hongen Education and Perfect World games over 20 years ago and achieved great success with both companies. When Michael founded Hongen Education in 1996, its first product was Genesis, which was a truly phenomenal product. It taught Chinese households how to use computers. Many primary schools even voluntarily included in their instructing materials. Hongen's products have hugely influence in the 70s, 80s and 90s generation who are now becoming parents. Their loyalty to the Hongen brand, which is iHuman will further drive them to purchase our products for their children. One thing I would love to mention here, when Tim Cook, the CEO of Apple, visited China in March 2019, we were the only company he visited. He also experienced our products and learned how to write the first character of Apple in Chinese, which is [ ping ]. Our second investment highlight is that we have proven product and content innovation capabilities. On the content side, we have reached industry and operational know-how based on more than 20 years of experiences in the industry. Our R&D team include experienced experts in the children's intellectual development industry and they have accumulated deep knowledge of children's psychology and practical experiences who served over 10,000 kindergartens across the country. They received wide acclaims from our partners. On the technology side, we have world's leading 3D technologies and a secret and a proven recipe for developing original content. Our AI-driven voice recognition system, which is tailor-made for children can accurately recognize and correct children's pronunciation. Moreover, we utilize key point recognition and image segmentation technique based on deep learning to bring kids their artworks to life by turning it into an animation with a single snapshot. This allowed kids to interact with their artworks on the screen by dragging and dropping them into different scenarios and creating unique stories. We also utilized our big data analysis to continuously upgrade our products. We collect over 200 million data points of anonymous user behavior every day and conduct a [ go ] through analysis of the massive data on each of our products. Based on this, we continue to upgrade our products on a weekly or biweekly basis and use the insights to guide our new product development and enhance our user experiences. The third investment highlight is that we are one of the very few in the industry that has integrated online and offline capabilities. Our business features our online apps, while we also have an offline business that has been operating successfully for more than 20 years. In this way, our online and offline business helped us achieve significant synergies and they complement each other in all areas, including R&D, sales and marketing and so on. We also offer a full lineup of offline Smart Reading Pen, Smart Writing Pen, Interactive Storyteller and other products that match perfectly with our online app in terms of artistic style, content, IP and so on. This has effectively formed a close loop and elevating user stickiness. The fourth investment highlight is that we have a scalable business model with a highly popular product offerings. We are a product-centric company. In fact, before the end of 2019, we hardly ever advertised our business or our products. We mainly rely on our reputation and word-of-mouth referrals to outperform our peers in the market and maintain our top rankings in the Apple Store. In the second quarter of 2023, our monthly active users were 20.33 million. This has given us a huge exclusive user pool. The solid foundation created by our user base is a strong driver for our long-term growth. In the future, we will continue to enrich the content of our existing products and launch new apps to gain more market share, optimize monetization efficiency and achieve scalable growth. In addition to sales to external parties, we have also realized significant scalability in our in-house product development. At the bottom, we have a very strong centralized R&D platform, including 3D Engine, AI/AR technology, art design resources and the proprietary methodology for innovation. Such a strong centralized platform supports each and every studio in the development of our products at a more efficient and a much higher success rate. Last, but not least, I would like to talk about our visionary and experienced management team. First, our founder and Chairman, Michael Chi, as the founder of both iHuman and Perfect World. Michael has more than 25 years of experiences in both the tech-powered intellectual development products and entertainment industries. He is an extremely talented entrepreneur and has succeeded with each business he founded. Michael is also well known for implementing his global vision to every business he founded. For example, in recent years for a lot of movies produced by Universal Studios, you can see Perfect World's logo up there. Our CEO, Dr. Peng Dai, who has more than 15 years of experiences at the international consulting firms and the large type companies such as Boston Consulting Group and Lenovo. And he has both strategic vision and solid execution capabilities. Our CFO, Vivien. Vivien has over 20 years of experience in finance, investments and capital markets. And our CTO, Mr. Wenbin Lu, who has over a decade of experience in all aspects of R&D, including both front-end and back-end technology development and architecture design. Moving on, I would love to talk about our recent developments. We have done lots of updates on the current products. For the domestic apps, our flagship product by iHuman Chinese, we added a new module named Chinese Characters In Daily Life with aim to further strengthening kids proficiency with Chinese characters while having fun. For iHuman Little Artists, we launched Interactive Art Gallery, an innovative module designed to introduce children to art and nurture their creativity through an integrated online and offline experiences. For our International Apps within a Aha World, we updated 2 new modules, My World and City designed to further unleash children's creativities. These modules offer children a wider array of elements to custom design virtual daily life scenes according to their imagination and their preference. For Gogo Mini World, we continue to add more engaging and highly interactive games to enrich our product contents. Moving forward, we will continue to refine and introduce more innovative apps and contents. Now let's talk about our financial highlights in this quarter. Total revenue in the second quarter increased to CNY 241 million, an increase of 4.5% in the same period last year, primarily driven by user expansion and enhanced user engagement. Our gross profit and gross margin remained solid. Gross profit was CNY 170.8 million and the gross margin is 70.9%. Average total monthly active users were 20.33 million in the second quarter, an increase of 11.7% from the same quarter last year. Our non-GAAP operating income was RMB 43.3 million. Now talk about our operating expenses. As an R&D-driven company, we have always focused on research and development to maintain our core competitive advantage. In the second quarter of 2023, the R&D expenses was RMB 63.4 million. Excluding SBC, it accounts for around 25.8% of our total revenue. On the marketing front, excluding SBC, our sales and marketing expenses stayed at a relatively low level, accounting for around 16% of our total revenue in this quarter. We will plan to maintain our sales and marketing expenses within a reasonable range going forward. As for GA, general and administrative expenses, excluding SBC, GA expenses remain at a relatively stable level of around 10%. In addition to this, we maintained a strong balance sheet and a very healthy operating cash flow. With cash and cash equivalents exceeding [ RMB 1 billion ]. This provides us means and flexibility to invest in technological and product innovation and pursue attractive opportunities. Now I would like to talk about our growth strategies. First, we will continue to solidify our product-leading position and provide a one-stop solution to meet the different needs of parents. At the same time, further expand and diversify our portfolio, improve cross-selling opportunities and form the closed-loop between online and offline products to elevate user stickiness. Second, replicate our domestic success in China to the global market. We will continue to launch a series of localized childhood apps to fulfill the increasing demand from our overseas users. Third, bring more diversified experiences and value to users through new smart devices and integrate digital and physical experiences. Fourth, we will continue to focus on our 3 Cs, which is customer, community and commercialization with the aim to enhance user communication and management and build private traffic tools to expand our user base. In addition to organic growth, we will also selectively pursue strategic investments, acquisitions and partnership opportunities to complement our existing offerings and accelerate our long-term growth. From our last slide, I would like to talk about our vision, which is to make the child upbringing experience easier for parents and to transform intellectual development into a fun journey for children. With that, I would like to conclude our presentations. Thank you very much.

Thank you, everybody. I do see there are a few questions in the Q&A box. Well, I guess, due to the time constraints, I will just answer 1 or 2 questions. If there are any more questions you have, please feel free to send an e-mail to [email protected]. Again, please send an e-mail to [email protected], and I will be very, very happy to answer all of your questions. So the first question I see is what is your plan for the next 3 to 5 years? First of all, I would like to talk about our international markets. We will continue to ramp up our efforts on the international expansion. Our company itself is quite international already, and we do have competitive edge in overseas markets. We hope to fulfill and meet the growing demand from our overseas users. And on the product side, we will continue to implement our product diversification strategy by launching new products, while at the same time, optimizing current offerings. Particularly, we will develop more products that are tailored to children's needs and interests and with different contents and different themes. So on the user front, we will expand our user base by extending our current offerings horizontally and vertically to serve different user groups. As you may know, apparently lower-tier cities also place great emphasis on the quality of the childhood products but often find it difficult to access high-quality resources and products. Our products, on the other hand provide easy access with affordable pricing, which give us a big edge and a chance to expand our reach in lower-tier cities. And we will continue to leverage our refined operations to enhance product synergies and direct user traffic to different products. This will enable us to cross-sell more products on different user groups and build a closed loop, and therefore, to boost our user stickiness. I guess, have another several minutes. I will take another question. So the second question is, what are your competitive advantage for international expansion? So, I guess, our key advantage are our technologies and our design. And I think those translated into a creative interaction for our products and provides strong support as we go international. Our products are very interesting and very interactive. So we already set up our international operations team to better understand the global market. For example, we conduct one-on-one interviews with some users from overseas. Such in-depth communication helped us understand how they perceive or view our products, and we have accumulated a lot of successful experiences in our domestic market and the those can be copied to overseas as well. In just a little over a year of international expansion, we have already received many international awards. For example, our bekids Reading or bekids Coding, bekids Science, bekids Puzzle have received NAPPA awards and our bekids Reading and bekids Coloring have received the Mom's Choice award. And it's also worth mentioning that this year, our bekids Reading also received the W3 Gold award in the mobile apps and sites, family and kids categories. In that case, we are very, very confident in our international expansion. With that, I will probably end today's Q&A. However, like I said, if you have any questions, please feel free to contact [email protected], and I very much look forward to speaking with all of you in the future. Again, thank you so much for listening. Thank you.