Lucas GC Limited (LGCL) Earnings Call Transcript & Summary

Good day, and welcome to the Lucas GC Limited Reports Fiscal Year 2023 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Robert Blum with Lytham Partners. Please go ahead, sir.

All right. Thank you very much, Chuck, and good afternoon, everyone. As the operator indicated, thank you for joining us for Lucas GC's Fiscal Year 2023 Financial Results Conference Call. Joining us on today's call is Howard Lee, Founder, Chairman and CEO of Lucas GC. At the conclusion of today's prepared remarks, we'll open the call to questions. [Operator Instructions] Today's event is being recorded and will be available for replay through the webcast information provided in the press release. Finally, I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information. The conference call today will contain certain forward-looking statements, including statements regarding the goals, strategies, beliefs, expectations and future potential operating results of Lucas GC. Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties and other factors, including, but not limited to, the factors set forth in the company's filings with the SEC. Lucas GC undertakes no obligation to update or revise any of these forward-looking statements. With that said, I'd like to turn the event over to Howard Lee, Chief Executive Officer of Lucas GC. Howard, please proceed.

Thank you, Robert, and welcome, everyone. I'm pleased to be conducting our first -- very first financial results conference call. As many of you know, we completed our IPO and began trading on the NASDAQ on March 5, and I look forward to holding these calls going forward to update you on our progress. So during today's call, I will highlight our recent accomplishments that demonstrate our continued execution to utilizing technology, including AI to disrupt the large and growing human resources market throughout Asia initially and to enter new market verticals such as insurance going forward. We will also discuss our plans to further grow our top and bottom lines while managing our capital efficiently. Finally, I will discuss the financial results for the fiscal year 2023. Now before -- but before that, with this being our first call, I thought it's best to provide a broad overview of Lucas and the opportunities that we believe will drive growth for the company going forward. At Lucas, we are an artificial intelligence-driven PaaS, Platform-as-a-Service, short for PaaS, company. The current industry vertical applications is to provide human resources services by developing a platform to support networks of professionals. Our 2 platforms called Columbus and Star Career provide recruitment and outsourcing services. Our users are primarily professionals who work in the human resources-related functions. Our corporate customers are corporations with recruitment, training, sales lead generation and outsourcing demands. At Lucas, we do not employ in-house recruiters or consultants as is the case with most traditional recruitment firms on the market today. Rather, we use the power of our roughly 638,000 active users as part-time headhunters or consultants to reach out to the contacts who are qualified candidates. By integrating AIGC and GPT technologies into the PaaS platform, Lucas seamlessly combines scenarios such as resume screening, job matching, video interviews and candidate consultations with AI, thereby enabling more efficient data processing and candidate matching, reducing operating costs, improving efficiency and ultimately increasing user stickiness and satisfaction. The differentiator versus traditional HR or recruitment firms is that with our platform, the headhunters, consultants or friends or acquaintances versus a cold call from strangers. On average, each of the 630,000 active members have roughly 300 contacts in their network, of which about 100 are active, giving Lucas access to roughly 60 million people. Now let me give you an example of how this might work in your life. A corporation will have a position to fill, let's say, this is for a project manager position. The hiring company will provide the job description or JD and the hiring requirements to our platform. The first value add we provide is that our AI will help the hiring company optimize and refine the JD based on our LLM, the large language model that has been trained by hundreds of millions of our proprietary industry data for over 4 years. Increasingly, the chances that the JD will attract more qualified candidates based on the current hiring trends of the most competitive industry peers. The next value add that we provide is to then push the position to only to those users who have the most qualified candidate resources. Notice that here, we use the next-generation push or recommendation algorithms similar to those used by TikTok instead of old technology such as browsing, that most e-commerce sites are using today. Those users will then go out and make calls to their qualified candidates within their own social private networks. This is more efficient than reaching out candidates by cold calling from a stranger. Once the candidate gets the job, passes the probation, the hiring company pays us a fixed percentage of the annual salary of the hired candidates as a fee to us and we share a portion of the fees with the headhunters or consultants who referred the job to the eventual hire. Our platforms users and the acquaintances are high-income earners with strong spending power. Approximately 78% of our active users are in the age range of 25 and 40 and approximately 89% of the users have received some college education. Due to its advanced technology, Lucas normally leads less than half the time required to find qualified candidates when compared to those traditional recruitment firms who rely on their own in-house headhunters and consultants. And we have a strong growth pathway ahead of us. We have posted revenue growth of CAGR, compound annual growth rate of roughly 86% from 2020 to 2023. Strong organic growth is expected to continue in the near to medium term as we look to disrupt the growing human capital and outsourcing markets in China, which are still growing at a decent pace. According to market research firm, Frost & Sullivan, the growth in the Chinese human capital market and IT outsourcing market are growing at a CAGR of mid to high teens for the next several years. The human capital management market is expected to roughly reach about USD 50 billion by 2026, driven by the growing number of private enterprises in China, the advantages in improving enterprise efficiency and saving costs and productivity as well as China's large discrepancy between the supply and demand for talented professionals. The IT outsourcing market is expected to reach roughly USD 160 billion by 2026, driven by increasing number of companies choosing to outsource IT services to facilitate their development -- the technology development process and the large base of software engineers and related professionals in China, which ensures the sufficient supply of IT talent for the IT outsourcing service industry as well as the promotion of industrial digitalization, including the promotion of digital transformation of small- and medium-sized enterprises and upgrading of enterprises' intranets. Therefore, we are confident to continue to gain market share, thanks to our technology, which we believe is one of the most advanced on the market and today is well recognized by our peers as we were awarded as one of the technologically advanced small- and medium-sized enterprises by the MIIT, which is the Ministry of Industry and Information Technology in China. In addition to our organic growth in China, we also expect to target inorganic growth through M&A outside of China. Our near-term focus will be on the Asian countries such as Vietnam, Thailand, Indonesia and Malaysia, which are some of the fastest-growing regions in the world. In the future, we are targeting revenue from China will be less than 50%, so less than half by the end of 2025. With this approach, I will look to leverage my proven track record, having executed over 30 M&A transactions in the U.S. and Asia with overall value exceeding USD 80 billion when I worked for 3 Fortune 500 companies, including Sun Microsystems, Alcatel-Lucent and most recently as Vice President of Corporate Development at Western Digital. With that review behind us, I want to -- I would like to review our 2023 achievements. So the first is 2023 highlights. So 2023 was a strong year for Lucas as our revenue grew 92.3% versus 2022. Our growth was driven by the growth in our corporate customers and active users as well as the post-COVID recovery in China. Since 2022, we have achieved an impressive revenue growth of roughly 86% CAGR and the active user size importantly, we have, we grew our active users from roughly 431,000 by the end of 2022 to 638,000 at the end of 2023, reflecting a roughly 48% year-over-year growth. Active users are the lifeblood of our business model as they serve as our agents, recruiters, consultants and salespeople. Our active users may engage in such activities as recommending job opportunities to their friends, providing us with information on which companies might have job openings that might potentially be our clients or commenting or forging videos or articles generated on our network to their friends. Over 80% of our users remain active in the 12-month period as of December 31, 2023, and they have strong incentive to stay active on our platform because, a, they can make money by acting as a part-time headhunter of providing information to us on potential clients; and b, maintain an active linkage with their friends and compatriots in a positive way; and c, for those users who are stay-home moms, they can acquire useful industry information and news so that they can keep abreast of their respective industries and prepare them to reenter the workforce in a productive way should they choose to do so. Our active users are not only the avenue by which we generate revenues, but they also serve as our competitive advantage and barrier to entry for those would-be competitors. Due to our early mover advantage, which allow us to gain many users and train the model with over hundreds of millions data sets will make it challenging for new competitors to enter the field. As you may be aware, the more data and longer the time to train a model and the more accurate it will become. Now that's why companies like TikTok are so successful because their algorithms can push very accurate recommendations to its users based on the users' historical behaviors, and we are doing the same on our platform. Now we expect to further grow our active users to about 1 million in a year or 2. On the customer side, during 2023, we grew our corporate customers to 582, a significant increase from 391 at the end of 2022. Corporations are seeing the value of our platform and how quickly their job openings are getting responses and filled with the most qualified candidates. Importantly, with our corporate customers count increased roughly 49% in 2023, our revenue growth was 92.3%, exhibiting that our older customers, those who know us best, are increasing their businesses with us. So during 2023, we brought on new corporate customers in the clean energy and high-end manufacturing sectors, which are growing rapidly in China. And we continue to increase our gross margin every year as we increased our gross margin by 32 basis points in 2023 compared to 2022. Our net profit margin is RMB 78.2 million in 2023 compared with RMB 36.4 million in 2022, representing 114% growth. Unlike most of our peers in the artificial intelligence space, we have achieved profitability in each of our last 4 years. With that, I will now review the financial results for the fiscal year 2023. The financial results for the year are provided in detail within our Form 20-F, which has been filed today as well as our -- within our press release, which was issued earlier. I will aim to provide some color on the key areas on the financial results as well as an outlook on certain areas where I can. First, on the revenue side, total revenue for the fiscal year ended December 31, 2023, was RMB 1.474 billion or USD 208 million compared that to RMB 767 million or USD 106 million reported in fiscal year 2022, representing 92.3% growth. Recruitment services, which are service fees fulfilling individual open positions, increased 59.6% to RMB 659 million or USD 92.8 million in U.S. dollar terms. Outsourcing services, which are service fee for providing overall IT project solutions, increased 136.5% to RMB 714 million or in U.S. dollar terms, USD 100.6 million. Other services, which include the selling of health care and training services, increased 95.5% to RMB 101 million or USD 14.2 million in U.S. dollar terms. Gross margin. Gross profit margin for the fiscal year 2023 was 28.4% compared to 28.1% in the fiscal year 2022. The increase in gross margins was due to productivity gains as well as a more favorable product mix. On the operating expenses side, total operating expenses for the fiscal year ended December 31, 2023, was RMB 351 million or USD 49.4 million in U.S. dollar terms, an increase of 91.1% compared to RMB 184 million reported in 2022. Selling and marketing expenses increased by 51.7% compared to 2022 due to continuous investments in brand promotion of our proprietary platforms, Star Career and Columbus for promoting activity that directly contribute to new user growth and acquisitions of customer leads. General and administration expenses increased by 127.1% compared to 2022 due to an increase in user support operating expenses as the user number increased and more experts from various industries were invited to maintain activity level of our users and the increase in professional service expenses related to IPO activities. Research and development expenses increased by 97.3% compared to 2022 due to continuously investments in AI-enabled technologies, including Generative Pre-trained Transformer, GPT, and related artificial intelligence generated content technologies, AIGC, as well as investments in our proprietary platforms, Star Career and Columbus, which gave us a cutting edge in business expansion and market competition. On the net income side, the U.S. GAAP net income for the fiscal year 2023 was RMB 78 million or USD 11 million in U.S. dollar terms, a 115% increase compared to the RMB 36.4 million or $5 million in U.S. terms reported in 2022. Earnings per share, EPS in fiscal year 2023 was USD 0.14, representing a 133.7% increase compared to that of 2022. Outlook. As we look into 2024 and beyond, we believe we will see continued strong organic growth in China as the overall human capital management and outsourcing -- IT outsourcing markets continue to grow. We are actively pursuing M&A opportunities in Asian countries such as Vietnam, Thailand, Indonesia and Malaysia, where they are the fastest-growing regions in the world. We believe outside China M&As not only accelerate growth, but also has the effect to mitigate the concentration of Chinese risk as we target our revenue from China will be less than 50% by end of 2025. We look for traditional companies in the recruitment, training or insurance agency companies in the Asian countries so that our technology and established SOP can vastly improve their efficiencies and create synergies. These are local brick-and-mortar type of companies that have solid client bases and stable revenue streams. They are profitable and immediately accretive to our top and bottom lines. Since they are traditional brick-and-mortar type companies that can be benefited enormously by our established AI and SOPs, they don't need to reinvent the will to spend the money on developing the technology themselves and instead just reapply our readily available technology and SOP that should double or triple the revenue based on our prior experience in China. In terms of efforts in R&D, we intend to establish a research center in Irvine, California, led by our Executive Director, Dr. Wang, to further solidify our technological lead in the generative AI and GPT, which we have obtained 2 patents granted in 2023 and additional 1 patent granted in 2024. So I'm going to wrap up. So let me just conclude with some of the key points about Lucas. We are continuing to grow and take market share because of our industry-disrupting and patented platform and technology, particularly in AI, data analytics and blockchain technologies. We have an early mover advantage, a large and growing active user base and thousands of hours and over hundreds of millions of data sets invested in refining our platform to become a very accurate and quick response with the highest recommendation accuracy on the market. Importantly, while currently our platform is exclusive for human resources, our platform is scalable to sell many nonstandard and high-value products and services that are most effectively sold by referrals or personal endorsement rather than cold call from a salesperson who is a stranger. Looking out a few years, as we have demonstrated the capability of our technology, we expect to further expand our business by selling our proven AI technology and PaaS systems, which has much higher gross margin of reaching around 80% give and take as a software, not a service, resulting in overall gross margin expansion for our company. With that, operator, we will be happy to take any questions.

Thank you so much for that, Howard. We're going to go ahead and begin the question-and-answer session. [Operator Instructions] I'm going to go ahead and start with some of the webcast questions here, Howard. The first one we have here is, can you speak about your competitive advantage against your competitors and how you are taking market share in the HR space?

Okay. Thank you, Robert. Now first, most of our peers are traditional recruitment firms that do not own the level of advanced technology that we have. Today, we have 17 granted patents with another 9 pending, all in the core technologies of AI, data analytics and blockchain. Our technologies is well recognized by our peers as we were awarded as technologically advanced small- and medium-sized enterprises by the MIIT of China. Our lead in AI, particularly in AIGC and GPT technologies is quite significant since we have been working on it for over 3 years, and we have already obtained 6 patents in this area. Now this achievement is not commonly seen in the industry. In addition, our model has been trained by over 100 million data sets, which, by the way, in China, only 4 companies have that amount of data volume. And our model has been trained and fine-tuning for over 4 years. The competitive entry barrier is high. So even if, let's say, some AI genius wants to compete with us today, they will face a significant challenge as it will be very difficult for them to obtain a large amount of proprietary industry data to train the model and to run it for 4 years. As you might know, that the more data and the longer the time to train a model, the more accurate it will become. And that's why, like I said, companies like TikTok are so successful because the algorithm can push very accurate recommendations to the users based on the users' behavior and profile, and we are doing the same on our platform. Now second, we are an asset-light company, which technologies and big data assets are our core data, our core assets. We do not directly employ consultants, headhunter trainers. Instead, we rely on our over 638,000 users today to deliver services, which makes our business model highly versatile and scalable without much fixed costs. Third, we enjoy a very strong brand recognition on the market with our CCRP certification program. CCRP stands for Certified Career Resources Planner. The program boosts sales recognition among our users and enhances their stickiness on our platform. Our financial results really reflect these competitive advantages as we almost doubled our revenue in 2023 year-over-year. Okay? Next question?

All right. Perfect. Thanks, Howard. Next question submitted here is, how do you view the Chinese human capital management and related markets in the near term?

Okay. Now the Chinese human capital market, IT outsourcing and training markets are huge and are still growing annually at teens for the next several years. Now according to the market research firm, Frost & Sullivan, the human capital market expect to reach about USD 50 billion by 2026 driven by the growing numbers of private enterprises in China, the advantages in improving enterprise efficiency and saving costs and productivity as well as China's large discrepancy between the supply and demand for talent professionals. Now the IT outsourcing market is expected to reach roughly USD 160 billion term by 2026, driven by increasing number of companies choosing to outsource their IT services as well as promotion of industrial digitization and transformation of small- and medium-sized enterprises and the upgrading of the enterprise intranets in China, which we are seeing increasing -- in an increasing pace. Now the training market is expected to reach about USD 82 billion in U.S. dollar terms by 2026, driven by the adaptation of new technologies such as AI and data analytics, as well as transformation and upgrade of China Industry Internet 2.0 project, which is a top priority of the government. Now given the huge TAMs, the total available market and our technological lead, we are confident to grow organically at a much faster pace than industry average in China for the next several years. There are tons of low-hanging fruits and the market is far from saturated from our perspective. And most importantly, we are able to leverage our industrial leading position in AIGC and GPT technology to further improve operations efficiency, which has shown we can double our revenue year-over-year. Okay? Next question?

All right. Great. Another question that was e-mailed in here. How do you see the long-term margin profile of the company? And what are the steps to get you there?

Okay. Now we are a believer of the proof-of-concept approach. So currently, we are providing recruitment services by leveraging our in-house developed AI technology and PaaS platform to prove to our potential customers that our technology works. And we are able to double our revenue year-over-year and to maintain profitability for 4 straight years. And I think with that fact that the results speaks for itself, it's much easier for us to sell our technology and system to the market going forward without having to spend a lot of money on sales and marketing. Now obviously, the gross margins of selling technology and systems will be much higher compared with those of services. So we expect to see an overall gross margin expansion for our company when we start selling systems. Now in other words, there is a strong upside in the future because today, Wall Street values us as a service company. But when we start selling our technology and system, we should see our gross margin expansion, hopefully leading to our valuation expansion. And we are confident that by then, we will be valued as a technology company, which obviously has a much higher valuation. So you can consider this as a free call option to PE expansion, price to earn expansion down the road. Okay? Next question?

All right. Great. Our next question here is, can you speak about the M&A landscape? And where do you see the opportunities?