Lizhi Inc. (NASDAQ:LIZI) Q4 2022 Earnings Call Transcript

Lizhi Inc. (NASDAQ:LIZI) Q4 2022 Earnings Call Transcript March 16, 2023

Operator: Hello, ladies and gentlemen. Thank you for standing by for LIZHI Inc.’s Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s remarks, there will be a question-and-answer session. Today’s conference call is being recorded. I’ll now like to turn the call over to your host, Effy Kang, Head of Capital Markets for the company. Please go ahead.

Effy Kang: Thank you very much. Hello, everyone, and welcome to LIZHI Inc.’s fourth quarter and fiscal year 2022 earnings conference call. We did share our financial and operating results via newswire services earlier today, and they are available online. Participants on today’s call will include our Founder and CEO, Mr. Marco Lai; our COO, Mr. Zelong Li; and our Acting CFO, Mr. Chengfang Lu. Mr. Li and Mr. Lu will begin with prepared remarks, and the call will conclude with a Q&A session. As a reminder, this conference is being recorded. In addition, our earnings highlights presentation and a webcast replay of this conference call will be available on the IR section of our Web site at ir.lizhi.fm. Before we continue, please note that today’s discussion will contain forward-looking statements made under the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995.

These statements tactically contain words such as may, will, expect, target, estimate, intend, believe, potential, continue, or other similar expressions. Forward-looking statements involve inherent risks and uncertainties. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, many of which factors are beyond our control. The company, its affiliates, advisors, representatives, and underwriters do not undertake any obligation to update this forward-looking information, except as required under the applicable law. Please also note that LIZHI’s earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures.

Please refer to LIZHI’s earnings press release for a reconciliation of unaudited non-GAAP measures to unaudited GAAP measures. I will now turn the call over to our COO, Mr. Zelong Li. Please go ahead.

Zelong Li: Hello, everyone. Thank you for joining our fourth quarter and full year 2022 earnings conference call. First of all, on behalf of the LIZHI’s team, I would like to express our deep gratitude to all our shareholders and investors for your continued support. In the past year, despite the challenges posed by having seen the global macro environment, we remain committed to steadily promoting our global business development and expanding our diversified program matrix at home and abroad. We also strove to harness the power of technology innovation and integrate the latest advancements of cutting edge technology into our business. At present, we have applied with AI technology in various existing products and launched the area of innovative AI features, including chatbot.

Going forward, we will continue to upgrade our technologies and product features and advance the application of AI chatbot in our products. We aim to provide users with innovative online social companionship experiences by building on our AI chatbot platform and creating more engaging fun and interactive AI chatbot usage scenarios that foster emotional connection, ultimately promoting our global business development. In 2022, we proactively implemented and refined operational strategies and consistently enhanced our operating efficiency through our divestment of core proprietary technologies and optimization of our organizational structure. Notably, while maintaining stable full year revenue growth, we also achieved a significant increase in profitability.

In the fourth quarter, our total average mobile MAUs amounted to 50.8 million, average monthly paying users totaled 491.8 thousand and revenue reached a new high of RMB588 million. As a result of our operational efficiency optimization, both the amount of our operating expenses and their proportion of the total revenues decreased quarter-over-quarter and year-over-year. More excitingly, our net income surged to 58% sequentially and more than 250% year-over-year to RMB31.4 million. In 2022, our full year revenue increased to RMB2.185 billion while our full year gross margin improved by 400 basis points to 33%. We are delighted by our robust profit growth in 2022 with full year net income reaching RMB86.5 million further demonstrating the sustainability of our business model and laying a solid foundation for our long-term growth.

In terms of our audio entertainment business, we incubated and launched the area of audio entertainment products in 2022 covering users from broader verticals and bringing them a larger variety of interactive entertainment experiences. To that end, we integrated, invented social features such as advertise to reach product functions and enhance our products interactivity and their entertainment value. We also found being on top trending topics and cooperating with content creators to launch a variety of specialized audio programs throughout the year. Leveraging various audio formats, including audio live streaming and forecast, we provide the users with unique and compelling interactive audio experiences. Meanwhile, we held a series of IP-based annual competitions and various different online content to further enhance our user interaction and community and with you.

During this period, the LIZHI App was spotlighted numerous times as a featured app in Apple’s App Store. In terms of business innovation, we have been researching and exploring both AI and related technologies for years. We have made breakthroughs in automatic speech recognition, ASR, text to speech, TTS, AI voice changer and AIGC, among others, laying the technical groundwork for commercial application of these technologies across our business. We are pleased to share that thanks to our advanced technology innovation capabilities as well as our comprehensive business strength, LIZHI has been named among China’s top 100 Internet companies for the fourth consecutive year at the end of 2022. At present, we have combined our existing AI technology capabilities with natural language processing, NLP, and other cutting edge technologies to launch innovative entertainment features, including AI chatbot.

For example, we recently utilized API of a large language model developed by OpenAI to launch the TIYA Bot module in our GIF , providing users with online AI conversational function. In addition to the application of open-source models, in February we developed an online audio chatbot demo, integrating NLP technology with voice AI technology, including ASR and TTS. In just the last week, we launched the audio chatbot structure in our audio products, providing users with the novel intelligent audio channel experience. Going forward, we will continue to leverage pioneering technologies such as AIGC, NLP and voice AI and the integration of our in-house self developed technology and open-source models. Utilizing the rich resources and operating experience LIZHI has accumulated in the online audio field, we will continuously fine tune and optimize our AI models through supervised learning and reinforcement learning, enabling us to design interactive chatbot with more engaging and fun features.

We will also further extend their usage scenarios providing users with a brand new social interactive experience. Meanwhile, we will continue to upgrade our social products with more diverse features and functions, build a comprehensive interactive AI chatbot platform and promote the development of our global business. Overall, our shipments and the experience we accumulated in 2022 have laid a solid foundation for the company’s long-term sustainable development. Stepping into 2023, we will execute our globalization strategy, establishing efficient global management system, empower business innovation through the advancement of frontier technologies, and promote the application of technologies such as AIGC, voice AI and AI chatbot in our business, and accelerate global business expansion.

We are confident that in the coming years grow fast and look forward to creating greater value for our shareholders and society at large. Thank you all. With that, I will now turn the call over to our Acting CFO, Chengfang Lu, who will discuss our financial results in more detail.

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Chengfang Lu: Okay. Thank you, Zelong. Hello, everyone. We’re delighted to report a set of solid financial results for the fourth quarter and full year 2022. Thanks to our ongoing cost structure optimizations and operational efficiency enhancements, our net income in the fourth quarter surged 252% year-over-year and 58% sequentially to an all-time high of RMB31.4 million. More excitingly, for full year 2022, our gross margin was 33%, up 400 basis points year-over-year, and net income increased to RMB86.5 million, compared with a net loss of RMB127.3 million in the previous year. We’re encouraged by the robust growth in the profitability driven by our efficient operations and strong execution. Entering 2023, we are committed to unleashing greater commercialization potential and delivering sustainable growth.

Now, I’d like to provide a brief overview of our financial results for the fourth quarter of 2022. In the fourth quarter, our total net revenues were RMB587.6 million, representing an increase of 5% year-over-year, primarily due to the growth in the average user spending on our audio entertainment products. Cost of revenues was RMB404.1 million in the fourth quarter of 2022, representing an increase of 7% year-over-year, primarily due to an increase in revenue sharing fees to our content creators as the company’s revenues grew, and partially offset by decreases in salary and welfare benefits related to decreases in our operation’s headcount, as well as a decline in other miscellaneous costs and share-based compensation expenses. Gross profit was RMB183.6 million in the fourth quarter of 2022 compared to RMB181.9 million in the fourth quarter of 2021.

Non-GAAP gross profit was RMB185.1 million in the fourth quarter of 2020 compared to RMB184.4 million in the fourth quarter of 2021. Gross margin for the fourth quarter of 2022 was 31% compared to 32% in the fourth quarter of 2021. Non-GAAP gross margin for the fourth quarter of 2022 was 31% compared to 33% in the fourth quarter of last year. Operating expenses were RMB158.1 million in the fourth quarter of 2022 compared to RMB176.6 million in the fourth quarter of 2021. Research and development expenses were RMB63.7 million in the fourth quarter of 2022 compared to RMB73.5 million in the fourth quarter of 2021, primarily due to the decrease of expenses related to research and development services provided by third parties and share-based compensation expenses, as well as decreased salary and welfare benefits related to a decrease in the number of our research and development staff.

Selling and marketing expenses were RMB67.7 million in the fourth quarter of 2022 compared to RMB70.9 million in the fourth quarter of 2021, primarily attributable to a decrease in branding and marketing expenses, as well as decreased salary and welfare benefits expenses related to a decrease in the number of our marketing staff. The company will evaluate and adjust its marketing strategy and budget based on the company’s performance, operational needs and market conditions. General and administrative expenses were RMB26.7 million in the fourth quarter of 2022 compared to RMB32.2 million in the fourth quarter of 2021, mainly driven by decreases in professional service fees, share-based compensation expenses and other miscellaneous expenses, partially offset by the increased salary and welfare benefits related to an increase in the average salary.

Operating income was RMB25.5 million in the fourth quarter of 2022 compared to RMB5.4 million in the fourth quarter of 2021. Non-GAAP operating income was RMB31.1 million in the fourth quarter of 2022 compared to RMB14.7 million in the fourth quarter of last year. Net income was RMB31.4 million in the fourth quarter of 2022 compared to RMB8.9 million in the fourth quarter of 2021. And non-GAAP net income was RMB37.1 million compared to RMB18.3 million in the fourth quarter of 2021. Basic and diluted net income per ADS were RMB0.60 in the fourth quarter of 2022 compared to RMB0.17 in the fourth quarter of 2021. Non-GAAP basic and diluted net income per ADS were RMB0.71 in the fourth quarter of 2022 compared to RMB0.36 in the fourth quarter of 2021.

As of December 31, 2022, we had cash and cash equivalents, short-term investments and restricted cash of RMB689.9 million. Okay. This concludes all of our prepared remarks today. I will now open the call to questions. Operator, please go ahead.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. . Our first question comes from the line of Vicky Wei from Citi. Please ask your question, Vicky.

Vicky Wei: Thanks management for taking my question. My question is, what is company’s strategy in the post pandemic era in 2023? Does management notice any changes in user behavior in the past three months post COVID? And any step up investment to drive business growth in this year? Thank you.

Marco Lai: This question is answered by Marco and I will translate for Marco. Thank you, Vicky. In terms of our overall strategic plan, we will further propel our global expansion strategy for 2023, promote the applications of AI chatbot in our global business, and target more user groups through our diverse product matrix to ultimately achieve a steady growth of our global business. In the past few years, we’ve been forming and developing fundamental core technologies, pretending to voice AI and other assets. And recently leveraging the cutting edge technologies, we have utilized the voice AI and NLP among other technologies in our products. And for instance, we’ve launched the innovative functions in our products, including the TIYA Bot and voice chatbot Xiao Zhi providing users with new online social interaction experiences.

And we are also leveraging the technology to empower our business development and using AIGC and voice AI technology, we plan to launch and customize the social chatbot products that convey emotions and connect with users, as well as innovate more product features to enrich our product matrix while continuing to expand our commercialization model. For the changes in user behaviors, and in my opinion the pandemic has made more people accustomed to live entertainment and communication, and it also increased the users’ hand for online companionship and emotional connections. Additionally, we can see the technology is continuously developing. And recently, the 4.0 model was published. The new development of technology also brings more possibilities for product innovation.

And the recent reaction of the whole market also shows that users are very receptive and then you . Next, we will further develop our AI chatbot and upgrade product features for companionship, fostering emotional connections to bring innovative online companionship experiences to more users. And our product positioning is in line with the needs of users in the post pandemic era, and I believe it will also bring greater growth potential for our business. In terms of investment, our business strategy in 2023 is to promote a global business expansion through our diverse product matrix with a focus on AI chatbot. We have been exploring and investing in AI chatbot technology for years and making investments every single year. In addition, we expect to increase the revenue scale by launching monetization models in this space and we expect new revenue streams in 2023, as we expand the overall investment is under our management and control.

In addition, we are improving our operational efficiency and reducing the cost of scale expansion through the enhancement of our versatile technology platform and operational system infrastructure, as well as the application of self developed technologies. And we can see from our performance in 2022. On the marketing front, we aim to reduce the overall user acquisition costs by enhancing the network effects of our products and promoting the organic growth. In general, we expect that the investment in 2023 to increase in line with our business growth, but the overall proportion will remain at a reasonable level. Thank you. Next question, please.

Operator: Thank you. Our next question comes from the line of Serena Lee from China Securities . Please ask your question, Serena.

Unidentified Analyst: Thanks for taking my question. And recently we have seen that company has some progress in chatbot and AI area, like publishing Xiao Zhi and TIYA Bot, et cetera. So could management share more specific plans and strategy regarding to the chatbot area? Thank you.

Marco Lai: Okay. This question is answered by Marco. In terms of the chatbot development, we actually started working on voice chatbot technology as early as 2018. And during the years, we have accumulated valuable experience in these technologies and have utilized this technical expertise in our products. And recently we have made breakthroughs in voice AI technologies, such as ASR and TTS. In addition, our years of experience in social audio and audio entertainment also give us a great advantage in training and launching innovative chatbot that can convey emotions. So we will further leverage our years of experience and technology core strategy to promote the application of chatbot in our business and build AI chatbot platform providing users with the new online and more personal companionship experience, and ultimately enhancing our differentiating and competitive strength.

Moving forward, we will also launch chatbot functions and features in various products based on our product positioning and the unique demand from local users in various markets globally. In the meantime, we plan to develop more innovative features to adapt it to different usage scenarios. For example, we may expand on the product functions by combining the avatars, voice chat and the functional bot while also introducing corresponding monetization models. In addition, we may launch a wider array of independent product lines focused on the AI chatbot which would upgrade products and enrich our product matrix and bring greater business growth potential. Thank you. Next question, please.

Operator: Thank you. Our next question comes from the line of . Please ask your question.