NetDragon Websoft Holdings Limited (777) Earnings Call Transcript & Summary

Dear friends and investors, good morning. Thank you for joining us for NetDragon Websoft Holdings Limited 2022 Annual Results Presentation. [Foreign Language] Our presentation PPT will be broadcast on the live streaming platform, and the PPT is also available for download on our company website at www.nd.com.cn, under the Investor Relations tab in IR Webcast section. [Foreign Language] Before the start of our presentation, please allow me to introduce the management who are hosting today. [Foreign Language] We have Dr. Simon Leung, Group Vice Chairman and Executive Director [Foreign Language]. We have Mr. Ben Yam, Group CFO [Foreign Language]. We have Mr. Lin Chen, Group Senior VP [Foreign Language]. We have Mr. Vin Riera, CEO of Promethean [Foreign Language]. Now let's pass our time to Dr. Simon Leung to host our presentation today. [Foreign Language]

Well, thank you. Well, first of all, welcome. Thank you for calling in. I have to apologize. I'm not dressed for the occasion just like my other colleagues, and they're joining us from different parts of the world. Vin is from Seattle, Lin Chen is in Fuzhou. Ben is actually being isolated at his home because he got COVID. He doesn't look like it, but he's recovering. So Ben, thank you for joining even though you are not well. But anyway, why don't we go straight to the chart out? Today is actually is kind of interesting. We'll go through 2002 (sic) [ 2022 ]. We'll look at the outlook. Let's flip to the next page. Yes. It's the end of March, we'll talk about 2022. So it's actually -- I think at times, I will refer to development in '23 as more like an outlook. If I can look back at 2022, if I may quote the Tale of Two Cities. It was the best of time, and sometimes it's not so much the worst of times, but it's not so good at the time because there's actually a lot of things happened in 2022. The good news is the upshot is that we're seeing good growth in our education segment. But frankly, that's not without some challenges. But the fact that we have a very good team under Vin Riera, we were able to pull off a very solid growth and respectable results, which is actually very good feedback on 2022. I mean in Europe, so there's a war between Ukraine and Russia. Essentially, that's caused some issues. Economy got hit in, in Europe, and all that. And followed by, we have some currency issues because of the devaluation of lot of the European currency compared to a very strong U.S. currency. And then we still -- we're dealing with some of the aftermath of COVID. But we gathered all those challenges. It's actually a very good result. If you look at our revenue growth, it's 12% year-over-year. That is with very, very good growth in education, offset by a small decline in our gaming sector. We are not the only one. It's actually we are becoming, I think, slower, better than our competitors, which is actually exciting news from that sense. But at the end of the day, we don't like declining results. So we're going to work very hard this year. Lin Chen is going to take you through what we plan to do in 2023. If you look at our profit, we chose to show the non-GAAP because it's actually -- we got -- we took some hit on some of our investments, which Ben will go through it. But from an operational standpoint, even with some of the decline on the gaming sector, we maintain the same kind of profit more or less year-over-year. And then we have a small growth in operating cash flow. That shows you we have a very solid business in terms of both education and gaming and also operationally, we performed very, very well. So with that, I'll go through the highlights a little bit. I did talk about education, very solid growth. Good news also is actually we maintain the #1 global position in the panel outside of China. We also -- one of the things we're very happy that we started to do even before the big AI kind of wave is actually embrace the AI technology, which Vin will talk at a high level what we are doing. We may set up some other time later in the year to take you through the detail on what we plan to do, both from a strategic standpoint and also from a product standpoint. On the gaming side, even though we declined, but we declined slower than the market, which is not bad. We also significantly invest in our people so we can position ourselves for our future growth. Again, Lin Chen is going to take you through some of the details. So with that, I'm going to turn it over to Ben, who is recovering from COVID, but he's going to do his best to take you through some of the highlights. Ben?

Well, thank you, Simon. Okay. First, I'm going to quickly go through the overall P&L and then I'll talk about our potential growth. Okay. So our overall revenue growth for the year was 11.8% despite a year of macro challenges, especially in the gaming business. Gaming is down 5.8%, while education was up 34%, and I'll let Lin Chen [indiscernible]. On the expense side, we continue to benefit from the operating leverage as all 3 of the SG&A line items went down as a percentage of revenue. And then in terms of bottom line, on a non-GAAP basis, our EBITDA went down by 10.8%, and operating profit went down by 12.7%. Non-GAAP profit attributable to owners of the company was down by like 2.2%. But I wanted to point out that our operating cash flow actually saw a moderate growth of 4.2% for the year as we continue to manage our cash flow with a disciplined approach. And also, we had RMB 3.7 billion of cash and cash equivalents on our balance sheet as of the end of 2022. On to the next slide. Okay. On this slide, I'm going to talk about the segmental financials for education and gaming. First, on the education business, while we saw strong top line growth, our gross margin actually dropped by 7.6%. And that is mainly due to a couple of factors that is actually outside of our control. One is tariff, tariff accounting, and then the other one is currency impact given the strong U.S. dollar against the GBP and the euro. And if we look at the adjusted gross margin, which is -- which takes our tariffs and assumes foreign exchange on a neutral basis, the adjusted gross margin was 29.2% for the year compared to 30.7%, which is a very slight decrease, and that is actually because of a slight increase in the material cost per unit as we launched our new ActivPanel 9 in June 2022. And this is the product that are acting faster, more powerful, right, in terms of industry-leading new features, which Vin is going to talk about. And I think the other reason for the drop is that while we launched ActivPanel 9 too, we had to sell down ActivPanel 7, which is our existing model. And so we had to sell down that inventory with the low ASP -- with a lower ASP than in 2021. And in addition, there's also a one-off accounting write-off of a warranty inventory in 2022, which also impacted our gross margin. Overall, in terms of the segmental bottom line, our core segmental loss for education narrowed by 27% to RMB 299 million as a result of our continued effort in cost management. On the gaming side, what I want to highlight is that we continue to invest in R&D in 2022 as we saw our R&D expense increase by 16.7% during the year. We believe that our increased investment in R&D enable us to continue to grow our pipeline, both in terms of quality and also in terms of quantity. And then on the SG&A side, we also continue to look for cost-saving opportunities in sales and marketing and also our administrative expenses. And as a result, you can see that both of these expenses also decreased during the year. Okay. With that, I'm going to pass time to Lin Chen, who is going to take us through the Gaming business.

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Great. Thank you. Good morning, good afternoon, good evening, everybody. My name is Vin Riera. I'm the CEO of Promethean. I'm going to be talking about 2 things today. I'm going to talk about 2022 performance and review the highlights of last year. And I'm also going to be talking about what we're focused on, on a go-forward basis in 2023 and beyond. Next slide, please. We saw nice growth across our 3 main categories that we track. Revenue was up 31% year-over-year. We finished the year at $585 million in revenue. We shipped over 253 interactive flat panels last year. That was a 38% increase year-over-year. And we're also able to increase our market share from 23% to 23.7%. So across all 3 categories, we saw nice levels of growth. Next slide. I talked a lot about our global footprint in these calls and looking at where we're #1. Simon already mentioned that we're the #1 provider of interactive displays globally, excluding China, and I'm pleased to share that we're #1 in 9 of our top 10 markets by revenue contribution. This is a really important metric for us in a couple of regions -- for a couple of reasons. The first is, we want to be #1 in the market. We want to be the thought leader. We want to be the market leader, but also equally as important, as we build out a new pipeline of products, we want a strong installed base to go sell these products to sell our new products to. And what this shows is we have deep relationships globally with customers in our largest markets. Next slide, please. We also launched our ActivPanel 9 in June, and we were able to launch it with a higher ASP. We're super proud of the new ActivPanel 9 product. It comes with upgraded hardware, it comes with ActiveSync, security features and recording features. This is a very strong product line in the market today. And the fact that we're able to sell this product at a higher ASP really shows that. When we launched this product, we had multiple areas of feedback from existing customers as well as net new customers. What our existing customers really liked about the product as it was a seamless transition from a previous version of a Promethean product into a new version of a Promethean product, except it has much better features and functionality than prior versions, but it was a seamless transition. What new customers like about this product is that it was super easy to set up. It was super easy to install and very intuitive to use. So when we take a look at how this product resonated in the market as we look back over the last 6 months, we're super pleased with the progress that we made. Next slide. We also acquired a company in 2022. We acquired Explain Everything. It's an existing SaaS product, and it's a whiteboard product. Whiteboards are incredibly important to our customers. Over 90% -- 95% of our customers utilize the whiteboard application at least monthly. And the whiteboard function that exists with Promethean is a great user experience, but it's a very basic user experience. As technology has increased and use -- and ease of use of that technology, we saw a lot of requests from our customer base to expand our offering and specifically our whiteboard offering. We're thrilled that we're able to acquire a market leader in the whiteboard space. Product is very differentiated. It's got collaboration features. It allows you to present, record and collaborate. And it's a product that sells today in the Apple Store. We sell it directly today to end customers, and we're super excited about our ability to integrate this product into other software offerings to increase the size of the software stack that we have going to our customers that takes a great Promethean experience that allows our customers to be able to enhance that to whatever level they see fit. We're going to build on the monetization that started with this product in 2015, and we're excited to incorporate it into our existing offerings and our future offerings. Next slide. One of the things that we also look at is we like to look at the customer feedback, but we also want to see where our awards are coming from. I'm thrilled to say that we've got awards across the 3 most important categories: teaching and learning awards for use in the classroom, edtech award for innovation within the edtech environment, and then also IP awards for ease of use and security by the IT administrators that will set up and connect these devices. So as we take a look back at 2022, and as Simon said, it seems like it was so long ago, we accomplished a tremendous amount of things aside from a number of awards. We grew our market share, which is incredibly important. We had strong revenue growth. We launched our new AP9 product, which is just setting the stage for future growth, and we acquired Explain Everything, which is SaaS revenue stream and a product that we feel really good about. So if we go to the next slide, I want to talk to you about what we're looking at and what's to come and what we're actually working on. So I'm going to talk about our path to integrate AI. So if we go to the next slide. We mentioned last year that we had a strategic partnership to take the 2 market leaders, Promethean as an interactive flat panel market leader in front of class with Merlyn Mind, which is the leader in AI assistant for education. And we signed an exclusive distribution agreement between the 2 of us. This agreement arrangement has been great. We've had the opportunity to get more Merlyn Mind devices in the market. We've also had the opportunity to hear the phenomenal feedback that we're getting from teachers that are using the product and the ease of use that it has. And what it's really enabling us to do is to see how AI is being used in the market today and where we can bring AI in the future across our offering. We're also seeing an opportunity in working with Merlyn to roll out an additional AI integrated panel, which I'll talk about briefly shortly. Next slide, please. So just as a quick reminder of what Merlyn Mind is. Merlyn Mind is the leader in AI-powered teaching voice assistant. And really what it allows is it allows a teacher to be able to operate anywhere in the classroom using voice AI. We can tell if a product is successful or if people like using it by the amount of times that they use it. And the way that Merlyn is able to engage -- or teachers are able to engage with the Merlyn product is nothing short of stellar. The average user uses this over 30 times a day in the classroom. The top 17% are using it greater than 50 times a day. And the top 6% of users are using it 100 times a day. When you compare that to a large offering like Amazon Alexa that is not specific to a specific environment, usage is significantly higher. So we're thrilled to see that this product designed for the classroom is being used in the classroom as intended. Next slide, please. So a quick recap. When you take a look at today's classroom and where we're going, there's all sorts of technology that exists in the marketplace today, but the devices are so low -- are siloed. And there's not any integration or AI in the classroom setting on a broad basis. Merlyn's the first to really step into that. Teachers are tethered to the blackboard or panel. They have to teach from the front of the classroom. They have to teach from their laptop, which is not always ideal. And there's just too many applications that are not connected together, which really leads to teacher fatigue and burnout. Our vision of the future AI-enabled classroom is devices and applications are connected with AI. Micro automations between the products and applications that are most frequently used really enable a teacher to do what they're there to do, which is to teach. We're untethering teachers and engaging students. We're allowing teachers to roam around the classroom and teach in a natural way and use their voice to share lesson plans or do searches or show additional content. And it's just a natural interaction of tech for teachers and students. This is something that they do today, but it's bringing it together in a package that makes it much easier for them in the future. Next slide, please. So our road map on how we're going to become a category dominant leader in AI-enabled classroom solutions are we're going to focus on delivering AI with our panel, and we're going to leverage our existing channels and installed base. So we are working to deliver an AI-enabled panel in the next panel release. We're going to introduce our installed base, which is greater than 1.9 million classrooms to AI-powered technology. And we're going to leverage the 275 sales professionals and 2,000 -- and over 2,000 channel partners to accelerate penetration of our new AI solution in the market. It's important to understand that this is a new technology and a new solution. We think that we can take a bigger share of wallet when we're competing for a new front-of-class business. But I also think it's a compelling technology that makes teachers' lives easier. And in essence, it expands our total addressable market because I think instead of a natural replacement rate, people will replace their products sooner to get to the latest and greatest technology because it will really make a difference. We then can take that base that we're building of AI-powered panels and expand our offerings with generative AI solutions and education. This allows us to bring new solutions to the classroom, and then we can also focus on what we can do, not only for teachers, but also for students and administrators. So we're taking this really healthy market that is growing, and we're addressing -- we're increasing the total addressable market with people coming toward new technology. And then finally, there's a lot of excitement and enthusiasm around AI, but the ability to control what teachers are using or what schools want to see the educators using is something that people can control. And we're going to make sure that we incorporate controls into the AI so people can set up the settings that they want to use, the content that they want to use and overall functionality that's customized to the school. So we're putting a lot of thought into the products that we're going to be bringing to market. Next slide, please. Excellent. Thank you. I'll turn it over to Simon.

Yes.

Now I'll turn it to Simon. Thank you.

Actually, let me kind of take you back on what the enthusiasm you can see in Vin's presentation about us embracing the new technology, whether it's actually Explain Everything, which is a technology that we hire in some of the future that we're working on, which is actually all-around AI. I think this basically has been across both businesses. However, I still believe it will make much quicker in that in education. I just want to reiterate a Vin's point about expanding the market share. What we have done by embracing AI, we basically create a new category of market for us. So instead of looking at the traditional panel market, we're looking at somebody who's looking for AI to help, whether the teacher, the student or whether they are at home or they are in the classroom. So we were able to address all that. So number one is actually we create our TAM in both ways. One is actually -- I mean, we will take share. The other one is actually, I do believe that we will also speed up the replacement cycle because it's the overwhelming kind of the benefit of using our AI payments which got me very, very excited. The other thing is actually we're going to join -- an addition we're going to add to our revenue stream, which is actually we monetize AI by creating SaaS opportunity for us, which is in alongside with Explain Everything. We do believe education, for us, in 2023, is a transformative year. So -- and going back to gaming. We are equally excited about the fact that gaming, we're also embracing AI technology, the whole concept of Metaverse because it's actually that's what we do well for the last many years, MMORPG games, but with a lot of new technology. In case you don't know, we have made quite a bit of investment in the Metaverse area. I think Lin Chen talked about live streaming. We invest in a company like that. We're also looking at investing into other companies that will enable us to embrace the whole concept of Metaverse. Of course, that's going to be a multiyear effort to get us to Metaverse, but we are starting by last year, and we're going to continue to make progress. With that, we are cautiously optimistic about 2023. There's going to be some challenges along the way because it's actually the economy around the world, some of the geopolitical issue, but we're very confident we have a good team to support us, and we will find ways to navigate through all these challenges and continue to grow our business. So with that, I'm going to stop, and then I think we're going to open up for Q&A.

Thank you, Dr. Leung and management. Now it's time for our Q&A section. [Operator Instructions] [Foreign Language] We welcome questions in both English and Chinese. [Foreign Language].

No questions so far?

There is quite coming from. We are checking. Okay. So investors are very excited about our AI, our AI path. The first question investors would like to know about our Merlyn Mind AI technology. Is it a self-developed technology? Or is it based on any existing platform? Is there any other future application in pipeline?

Vin, do you want to take that one?

Sure, yes. That is Merlyn's technology that they've developed. They've been developing over the course of the past 5 years. We have an exclusive distribution agreement with the Symphony Hub for that product. And it is completely focused on the classroom, which is what makes it so differentiated. It's not generalized AI, it's specific to a teaching-and-learning environment. It's also specific to regional applications. So whether it's U.S. or U.K., it can be customized.

The other thing I want to say is actually, it is based on Merlyn's, our own technology. But that said, it doesn't stop us from working with other people like ChatGPT, right? So we are very open in working with other people because we want to integrate all the capability and offer the best solution and adjusting the best use cases that we have in education.

Thank you, Simon. Thank you, Vin. Our next question is also for our education business. As Vin said our education business revenue growth in the second half of the year actually decreased. What's the reason? And what is the revenue outlook for 2023?

Well, first of all, we don't give a guidance, but Vin, maybe you can address the second half issue. And don't forget, I said it at the very beginning, I mean it's actually the economy in Europe and all these different challenges. So anyway, Vin, go ahead.

Sure. I would attribute the biggest reason for the decline in the second half of the year is what we saw was buying behavior based upon COVID funding that existed, and schools could make decisions outside of typical times that they make decisions. So one thing, if you take a look back historically at the education performance with Promethean, it's been much more seasonal and much more cyclical. It doesn't mean that the volume changes, per se, it just means that the time of the year that the volume that customers place orders change. What we saw was, as things became essentially more back to normal and more normalized in the second half of the year, it started to feel like a more normal buying behavior where people go out to bid at this time of the year in Q1 and place orders in Q2, and that's what we saw in the back half of last year.

Yes. It's actually -- one of the thing is, actually, if you look at our tradition in the last many years, it's actually -- I think Q2 and Q3 are the buying seasons and then the market shift a little bit. I think we -- the market is actually kind of going back to the Q2 and Q3. So I think we can cap in terms of the shift. And if you look at the first half of last year, our growth is tremendous. I mean so that's -- I think we should kind of look at the year-over-year growth rather than like half-year-over-half-year or quarter-over-quarter because of the shifting.

Thank you, Simon. Thank you, Vin. Our next question is also for the education business. We would like to know more about our SaaS business at the moment. So what would be the contribution in 2023? And what is our expectation?

Vin, do you want to take a crack first or?

Yes. Sorry, I missed the first part. What's the first part of the question.

I will start it again. Can you give us a brief on our current development on the SaaS business? Our SaaS model...

I'm hearing the word SARS.

Yes, SaaS. That's right.

SaaS model.

SaaS model.

SaaS model.

I guess SaaS model.

Sorry. We should speak in American. Yes.

I apologize. Yes, we have been focused on building on our SaaS business. And we're super excited about to Explain Everything acquisition because the whiteboard is the cornerstone of the use case with the panel. And what it allows us to do is take an existing product that did not have a very large distribution channel, incorporate it into our distribution channel as the first step, put additional focus on using distribution methods like the Apple Store. But more importantly, building that product out and starting a tiered software stack that customers can buy what they want to buy from us for an enhanced experience. And we're going to continue to bring high-value, high-quality software solutions that solve challenges in the classroom.

Yes, if I may add to it. So when the integrated AI panel coming out, so there's a lot of opportunity for us to add and address the use cases. So that's also a great opportunity to continue to build our sales revenue stream. Like I said at the very beginning, we, the management team, intend to separately set up a session so we can talk about all this going forward in a little bit more detail. So stay tuned. We probably -- we won't be able to address all the details at this point in time.

Thank you, Simon. Thank you, Vin. Our next question is for our gaming business. [Foreign Language].

Good question. Lin Chen?

Okay. [Foreign Language].

[Foreign Language] We would like to welcome a question from our teleconferencing center. Operator, please bridge through. Thank you.

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[Foreign Language] Our next question comes from CGS-CIMB, Ernest. The question is, dear management, thanks for the informative presentation. The first question is for our gaming business. I understand that your plan is to significantly expand our pipeline of new games. Can investors look forward to new games to be launched in the next 3 months? [Foreign Language].

Do we need to answer in English or in Mandarin?

I think in Mandarin.

Okay. Lin Chen.

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[Foreign Language] The next question from Ernest is that given the exciting development in our Education segment, do you think it's likely to continue the trend of narrowing the segment to loss of the business such that it may hopefully breakeven in 2023?

We are asking for guidance again. So we're going to pass on that one.

Okay. Thank you. [Foreign Language] [Operator Instructions] So our next question would be -- our next question is also for our gaming business. It's from Waite Research [indiscernible]. We would like -- he would like to ask by expanding new demand into so many versions with this diluted player experiences or rather expressing players trusting. [Foreign Language].

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Thank you, Simon. Thank you, Lin Chen. Our next question is also from Lee Han. What is our current plan or schedule on the spin-off our education business?

What do you want me to say? So the only thing I would say is actually either no comment or stay tuned. That -- yes.

Thank you, Simon. Our next question is from [indiscernible]. [Foreign Language].

Okay. Either Ben or -- maybe, Ben, you can take it. So, yes.

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Thank you, Simon. Thank you, Ben. [Foreign Language].

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[Foreign Language] Let's welcome our last 2 questions. [Foreign Language].

Over to you, Ben. Ben? Hello, Ben?

Yes, I'm here. Sorry, my line was cut. I just lost -- the last...

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[Foreign Language] Our last question is for Vin. Actually, because our Promethean has maintained a leading position in the market for a very long time, what is the expectation for the demand in 2023 and 2024 given the macro backdrop is quite weak this year -- these few years?

So I'll answer it without giving any guidance. The interactive flat panel technology, we are at the stage of market adoption today where customers that were early users of the technology are now replacing the technology with new interactive devices. Customers that used to buy whiteboard technology, there is now products in the market and the interactive flat panel world that are in line with that. So the addressable market, from a replacement cycle, is bigger. And then there's still large portions around the globe that have not even adopted this technology yet. So overall, there's a significant amount of classrooms that don't have any type of front-of-class technology in which is all green space for us.

Yes. If I may add, it's actually basically summarized what Vin has said earlier. One is actually, we continue to gain share. That's part of the growth strategy. The other one is actually she managed to expand our addressable market by introducing a value panel. I think we did talk about it maybe within that, I forgot. So because we have been selling the high end, but we're going to introduce a value panel. So our TAM actually has increased. This is really looking at Promethean. Last, but not least, is actually what Vin have spent a lot of time talking about, creating a new category, which is actually AI-enabled, which is actually the first one to the market. So our TAM is actually -- can expand even on the down market. That's -- yes, I think that's the brand.

Thank you, Simon. Thank you, Ben. Thank you, Vin, sorry. Okay. Thank you very much. Thanks, Dr. Leung, Ben, Lin Chen and Vin. This usefully concludes our presentation today. Once again, I would like to thank you all for joining us. If you would like to communicate with the management further, please contact us for one-on-one meeting arrangements. Thank you, and we wish you all have a great day. [Foreign Language].

Okay. Thank you. [Foreign Language] Okay. Have a good day.