Here Group Limited

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Here's Earnings conference call. At this time, all participants are in a listen-only mode. We will be hosting a question-and-answer session after management's prepared remarks. Please know that today's event is being recorded. I would now like to turn the conference over to Ms. Leah Guo, Investor Relations Associate Director of the company. Please go ahead, ma'am.

Thank you. Hello, everyone, and welcome to Here's Earnings Call for the first quarter of fiscal year 2026. With us today are Mr. Peng Li, our founder, chairman, and CEO, and Mr. Jin Xie, our CFO. Mr. Li will provide a business overview for the quarter, then Jin will discuss the financials in more detail. Following their prepared remarks, Mr. Li and Jin will be available for the Q&A session. I will translate for Mr. Li. You can refer to our quarterly financial results on our IR website at ir.qgrease.com. You can also access a replay of this call on our IR website when it becomes available a few hours after its conclusion. Before we continue, I would like to refer you to our Safe Harbor Statement in our earnings practice, which also applies to this call, as we will be making forward-looking statements Please note that all members stated in the following management prepared remarks are in IMB terms, and we will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported in our earnings release and followings with the SEC. I will now turn the call over to the CEO and founder of HERE, Mr. Li. Okay.

Good morning, everyone.

Thank you for joining us today for our first quarter of fiscal year 2016. This is a historic moment. Our first earnings for a year following our business restructuring, which positioned us as a pure play player in the global employee market. Today, I'm proud to report that our first quarter as a fully-focused organization. We have completed this puzzle of our non-portfolio businesses by November 30, 2025, allowing us to concentrate all our talent and resources on the immense global portfolio opportunity ahead. In Q1, we delivered a total revenue of RMB 100 at the 27.1 million.

With our software business growing. Wait a moment. Hello, I can't live without this background interview, okay?

We know the cocktail business is growing 93.3% quarter-hour quarter from RMB 65.8 million. Exceeding the higher end of our previous schedule, RMB 110 million. Let me highlight our most impressive operational metric, which demonstrates the power of our focused strategy. Our total GOV of direct-to-customer online stores reached around 44.6 million customers. In the fiscal year 2016, we validated our capability to develop D2C operations And our future C2C development strategy may align with our sales planning, new product launch schedules, and other operational activities. This operational momentum, along with contributions from our diversified sales channels, translates directly to strong initial performance. Our shipment focus is also driving improved profit profitability, with growth margins expanding to 41.2%, up from 34.7% in the previous quarter. We ended the quarter with a solid balance sheet and strong asset space, reflecting our financial stability and operational strength. Now let me walk you through how we are executing our two-pillar growth strategy and the tangible results we are seeing across our business. Our first pillar focuses on strengthening our IT ecosystem with a balance of audio. This strategy is delivering results across regional prosperity, IP creation, strategic partnerships of electricity IP, and across industry co-funding. A key element of this approach is concentrating resources on our flagship IP properties. to maximize their market impact and the cultural resonance of our cuckoo. We launched our cuckoo on the road series on November 29th. This new series brings collectibles into real-life scenarios, building emotional connections with young customers who will This repeats as daily companions and personal samples rather than just toys. By integrating lucky numbers into lifestyle sentences and operating versatile phrases, we transform used interactions with collectibles into Sponsor knows social sharing moments. Every design element from changing colors to social risks like interchangeable silky cut hats makes a tangible daily experience. The launch was sponsored by original songs and music videos, creating a multimedia experience that extends the IP's cultural reach beyond physical products. Our operational excellence demonstrates this strategy in action. Waikoku's streets become one of Shanghai's most popular photography destinations. in November, attracting young people and social media creators who generate diverse content through street photography and collection showcases. This capability, turning IP launches into cultural phenomena that draw new organic community engagement, grows our ability to create compelling that actually is embedded into young people's lives become authentic expressions of personality and happiness or cultural moments that extend beyond traditional product boundaries. continues to be a powerful growth engine, with recent launches achieving record-breaking performance, particularly in international markets. These launches show our systematic IP development capabilities and our ability to create emotionally resonant characters with compelling narratives. Looking ahead, We remain committed to adding value to our flagship activities and newly launched activities. Let me share our strategic partnerships that are extending our cultural influence. We will formally establish a strategic partnership with Beijing Radio and Television Station. The partnership covers contents as a cultural project cooperation mechanism, including program co-creation, IP integration, and the co-brand production. This deep integration with mainstream media enhances our brand credibility as the latest foundation of our national media partnerships. Our PopToy IP participated in the official Golden Booster Awards activities, including the Starry Sea gift set, light-colored visual elements, and outside integrative creativity, becoming one of the examples of youth culture at this year's field event. This collaboration achieved deep connections with China's industry and entertainment industry. Our product industry co-branding strategy is elevating our branding to new customer segments through diverse partnerships across the entertainment, media, sports, and corporate developments. In the sports sector, we achieved a long-term milestone and the first official pop-tart in China open history, creating value across three key areas. From a media perspective, we generated over 200 million exposures and become a core topic. In terms of facilitating engagement, we secure essays, I also take integrations as organic endorsements from global top players, including the most number-one event athletes, who have strong celebrity sales sales demands. On the commercial side, our summit program saw generational immediacy sales revenue with multiple limited-edition titles selling out immediately after release. This success demonstrates the effectiveness of our Hot Toys Plus premium sports events model, creating a seamless connection from product awareness to mature sales conversions. In the Thailand sector, we have secured high-profile, collaborative sessions that expand our reach into mainstream technology. We have also collaborated with various social media platforms, such as Google, by integrating our broad-based Thailand infrastructure into Thailand's landscape. This partnership demonstrates our ability to seamlessly blend pop culture with the live stream television program reaching diverse demographic segments. We also partnered with local tourism government office to create street featuring installation. Integrative scenarios and immersive social opportunities in the call-facing landmarks also did fit. This project increased support, traffic, and helped. We were very talented as the area for younger audiences This collaboration showcased our variety of society meetings in cross-industry partnerships, from premium sports tournaments to domestic reality shows and urban commercial districts each designed to introduce IP to new audiences while strengthening broad recognition across different consumer platforms This IP set creates the foundation of our second pillar Our only channel, of course, which analyzes science, provides this compelling, broad, and logical standpoint to try to achieve efficient growth both domestically and internationally. In China, our social media industry is delivering exceptional results. Our combined followers are based across key platforms of our region. 26.5% we have generated things 535 million miles on the wind and 131 million miles on the road. That is a direct bridge. This is working directly to the south. With our inspection, they are already raising 97.2% of our plan. We are continuing to trust our people-based stock. which show our product as a strength in T matrix. Our storehouse stores have generated over every three minutes in cumulative sales, and we have secured green locations which are all-side traffic locations in top tier shopping districts including Shanghai, Beijing, and Shenzhen. For more direct-to-customer channels, our first Beijing T2C store and our first Chongqing T2C store will open in December 2025. Two additional T2C stores in Beijing are set to open in early 2036. In addition, We have also launched the Christmas and New Year's pop-up stores after the holiday shopping in Shanghai and Shenzhen. We participated in high-profile events, including the 2021 China International Fair of Treats in Surrey, significantly boosting ground visibility. and generating quarter qualified leads for our wholesale channels. Internationally, our momentum is flourishing across key markets. Our performance on TikTok shop in North America has positioned us as a popular in collectibles category. A standout success with our Google vendor series. Well, our overseas distribution network now covers around 20 countries including North America, Europe, Southeast Asia, and the Middle East. With the established infrastructure in place, we are now beginning to focus on enhancing sales performance in this market as our supply chain. capabilities continue to improve and our partnerships with overseas distributors. This foundation allows us to rapidly scale our geographic point while minimizing fixed infrastructure infrastructure infrastructure investments that leverage our established retail relationships and local markets expertise to achieve efficient markets for all countries. Underpinning our creative and commercial success is our integrated operational system.

which represents a true competitive advantage.

Well, we are no longer in transition. We are in a celebration mode with a pure play of strategy, followed by a two-pillar execution plan. Agile provides chain capabilities. As a sense of balance sheet, we are now positioned to capture the massive global portfolio authenticity and deliver sustainable, long-term value to our shareholders. This result, this quarter, will validate our strategic choices. Our brands are resonating with consumers. Our channels are enabling communications And our operations are executing flawlessly. We have the momentum, the capabilities, and the results to become a defending global player in the popcorn industry. I will now turn it over to Tim for a detailed review of our financial results.

Thank you, everyone. That's all.

Hello, thank you. Before I go into the details of our financial results, please know that all amounts are in RMB terms, that the reporting period is the first quarter of our fiscal year 2026, ending on September 30, 2025, and that in addition to gap measures, we will also be discussing non-gap measures to provide greater clarity on the trends in our actual operations. We are pleased to report on solid financial performance this quarter, which demonstrates the successful execution of our strategic transformation into a product-driven pop toy company. Total revenue reached 127.1 million with a gross margin of 41.2%, compared with total revenue of 65.8 million with a gross margin of 34.7% in the previous quarter. Adjusting net loss from continuing operations narrowed to $17.1 million, down from $19.3 million in the previous quarter. These results reflect the success of our strategic business restructuring and the disposal of our non-pop-toy businesses, allowing us to focus entirely on our high-growth pop-toy segment. Revenues for the quarter were $127.1 million, entirely generated from the sales of pop toys and related activities, compared to $65.8 million in the previous quarter. Gross profit for the quarter was $52.4 million, compared to $22.8 million in the previous quarter. Our gross margin increased to 41.2% this quarter from 34.7% in the previous quarter. reflecting the strengths of our pop toy business model. On the operational front, total operating expenses were $81.6 million for this quarter. To break this down, sales and marketing expenses were $27.6 million. These expenses mainly included advertising and promotion costs aimed at enhancing product and brand visibility to accelerate growth and expand market share. As a percentage of total revenue, non-GAAP sales and marketing expenses, which exclude share-based compensation, decreased to 21.7% this quarter from 29% in the previous quarter. Research and development expenses were $15.8 million. These expenses were mainly focused on advancing our portfolio through new product design innovation and establishing our integrated sales platform and data center infrastructure. These investments create a solid operational foundation to support future business expansion. As a percentage of total revenue, non-GAAP research and development expenses, which exclude share-based compensation, decreased to 12.5% this quarter, from 13.5% in the previous quarter. General and administrative expenses were $38.1 million. These costs reflected our operational functions, including employee compensation, professional service fees, and other operational expenditures. As a percentage of total revenue, non-GAAP general and administrative expenses, which exclude share-based compensation, decreased to 23.2% this quarter from 26.3% in the previous quarter. Our net loss from continuing operations was 25.8 million compared with 21.8 million in the previous quarter. Our adjusted net loss from continuing operations was 17.1 million compared with 19.3 million in this previous quarter. Basic and diluted net loss from continuing operations per share was 0.16 during this quarter. Basic and diluted adjusted net loss from continuing operations per share was 0.11 during this quarter. Regarding our balance sheet position as of September 30, 2025, we held $789.4 million in cash and cash equivalents, restricted cash, and short-term investments. Looking ahead, we're excited about the growth prospects for our pop-up business. Based on currently available information, We expect revenues from our pop toy business to be in the range of RMB $150 million to RMB $160 million for the second quarter of fiscal year 2026, and in the range of RMB $750 million to RMB $800 million for the full fiscal year 2026. These forecasts reflect our confidence in the pop toy market opportunity and our ability to scale our IP portfolio and expand internationally. That concludes my prepared remarks. Operator, let's open up the call for questions. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. And when asking your question, when asking a question in Chinese, please translate your question in English for the convenience of everyone on the call. Please ask one question at a time. And our first question today will come from Alice Kai with Citi. Please go ahead.

Good evening, management team, and thanks for taking my question. I have two questions. And the first one, based on the second quarter guidance, imply that the first half revenue is around RMB 280 million, right? So to hit the full year target of 800 million, second half revenue needs to reach at least 500 million, which is nearly double first half. What is the specific breakdown of this confidence? And is this cost driven by capacity, secure orders from retailers, Or is it based on projected sales through of new launches? New IP launches, I mean. And do we expect to turn profitable in second half given the strong revenue guidance? And my second question is about the implication on the labor momentum. Is there any impact on our local revenue momentum? Thanks.

Okay, thank you for the question, Alice. For the first one, regarding the guidance, the revenue forecast is primarily based on the following points. the timeline and pace of the product launches for different IPs and corresponding production capacity arrangements as well as the current production capacity and the inventory situation. It also takes into account the order from our customers allocation and arrangements for the channel partners and self-operated online platform and DTC channels. Currently, our production capacity is expected to reach approximately 400,000 sets per month, equivalent to 2.4 million units in the near future, I think maybe by end of this year, which will help avoid severe supply chain shortages such as first half year from recurring. At the same time, based on the order situation for new products in the latest months, the subsequent product launch plans, and the order placement from various channel partners, our projections can generally support the overall revenue guidance range for the fiscal year ending June 2026. I think the core of our business lies in balancing IP operations and sales scale. with a focus and priority on continuously extending and enriching the emotional value that the IP products bring to our users while achieving sales growth. We are striving to continuously realize and optimize this objective. Regarding the bottom line, I think the losses, especially the adjusted losses, excluding the share-based payment expenses, is narrowing, and also the losses incurred in the fourth quarter were primarily due to the short-term business adjustment for the business restructuring. Because the existing fixed cost and expenses structure, including the fixed cost, remained relatively high compared to our current revenue scale. of which many items are appropriate with the legacy business, such as fixed expenses related to maintaining the listing company status, the ODCs, and the list of office spaces based on the previous business model, all of which are currently being optimized. We are actively refining our cost and expense structure in accordance with the needs of the new business development. In the upcoming quarters, the proportion of similar fixed costs and expenses are expected to continue decreasing. Regarding sales expenses, I think one of the major expenses, we anticipate that the adjusted ratio will fluctuate around 20% of the revenue. The specific amount and proportion will depend on market conditions and the schedule of new product launches. During this rapid growth phase, we plan to allocate slightly more resources to branding and marketing to enhance the IP operation activities. However, consistent with our longstanding business strategy, will not pursue growth through excessive spending. In the early stages, they aim to strike a balance between profitability and growth. And we are confident that this profitable growth will be achieved in the coming quarters. I think the other question related to the product, especially for the IP, I think our peers, for example, the Labubo IP operations have achieved outstanding business performance and rapid growth. And we believe the market is closely following the latest developments of the Pioneer companies and other IPs. But as a portfolio company, we believe there is plenty of room for the growth in our industry. And according to a recent research report, the data from a research firm, the market of these IP pop toys is still growing very fast at a PEGA of over 18% in the next five years. So moving forward, we will continue to prioritize our IP operations, new product launches, and brand building. The market has validated Wacuku's unique appeal to the users. Let me share some sales numbers. The first generation of Wacuku was launched at end of last year. And the second generation was launched in the fourth half of this year, in this May. All of the previous version Wacoku products, the cumulative sales up to now have now exceeded 6 million individual units. And we launched our new generation mini version just now on November 29. The offline debut received very positive feedback, and the online launch is scheduled for December the 4th. So the portfolio market has moved beyond its niche origins and now reaches a much broader audience. Going forward, we will continue to build our IP portfolio, creating distinctive and resonant IPs for different consumer segments. In product development, we will continue exploring the unique characteristics of each IP to develop new products that align with market demand. For marketing and promotions, we integrate our operations with strategic marketing campaigns to continuously strengthen our IPs and maintain their long-term vitality.

Thank you. Very helpful.

The next question will come from Lai-Ping Zhao with CICC. Please go ahead.

Good evening, Lizon team. Congrats on your strong quarters. And thanks for taking my questions. As Lizon just said that you guys are going to launch the DTC stores offline. Could you please share the latest updates on these stores and your future opening pipeline in 2026? And how should we expect the sales value of these DTC stores? Thank you.

Thank you. I will answer it. Our key progress with offline DTT stores centers on building strategic of brand experience centers. The first batch of the stores are expected to open between late December this year and early 2026, in very early of January. Current preparations focus on decoration and operational systems and I think we are getting ready. Our goal is to transform our DTC stores into immersive and interactive offline narrative spaces. They will serve as physical hubs for our brand culture and core basis for offline community engagement. In terms of channel synergy, our DTC stores represent a strategic investment in brand building and deepening user relationships. The goal is not only direct sales competition. Instead, we enhance overall brand momentum by providing unique immersive experiences. The approach reinforces and empowers the online DTC and CA channels. We are creating a positive cycle of offline experience, online engagement, and omnichannel conversion. This ultimately strengthens our brand's omnichannel competitiveness. I think future expansion will strictly follow a prudent, safe strategy. We begin by validating the profitability of a single store and brand impact model using operational data from our initial stores. Once we successfully validate the business model, we will consider to speed the process of replication. This way ensures every new store becomes a valuable brand asset that keeps generating value over time. That's my answer. Thank you.

The next question will come from Yukeng Zhang with CITIC. Please go ahead.

Good evening, Benjamin. Thank you for taking my question. And my question is regarding our OECD markets. Because we know that PopMart's overseas business almost contributes half of its revenue. But for now, our current overseas revenue proportion is relatively low. So will the overseas market be our focus for the next year? And what is our strategy on the overseas market? Thank you.

Thank you for your question. Regarding the overseas market, I think That definitely is one of our focuses, especially starting from recently in this quarter. I think because of the supply chain shortage in the first half year, our major resources are put into the domestic market because we are still at the early stage and also we should supply all of the demand, all the demand from the existing clients in the domestic markets, especially the KAs first. But at the same time, we are increasing our capacity, the production capacity, especially recently, as I just mentioned, we have increased the monthly capacity almost 40 times recently. compared to that early this year. So we started to make our efforts in terms of the overseas channel and sales. So starting from this quarter, we will adopt such a strategy that first we will cooperate closely with our KAs, with our distribution partners especially with that who has very solid overseas chain stores and distribution network. And then at the same time we are building our overseas online platforms such as TikTok in North America and Southeast Asia at the same time. So I think combining both of these efforts we will make progress in terms of the overseas sales in the coming quarters. But I think as we, even though we definitely think that the overseas market is growing very fast compared in terms of the speed, the growth rate with the domestic market, but as we, overly, we are still at an early stage and our absolute sales volume is still growing very fast. I think to The majority of our sales will still come from the domestic market in the short term. Definitely, we will replicate the strengths and experiences built in the domestic market to the overseas market. So everything is at the beginning and on a trajectory trend so that we can make big progress in the coming quarters.

Thank you.

The next question will come from Dai Xi with Hightower Securities. Please go ahead.

Thank you, management, for this opportunity to raise my question. I'm Dishu from Hightower Securities. And my question is about our IP structure. So I wonder what is the revenue structure breakdown by IP this year and how do we foresee the drivers from new IPs in the next year? Thank you.

Thank you. Based on this quarter data, our pop-top business shows a healthy and well-structured IP portfolio. We ranked our IPs according to the popularity and also the IP strength. First, in this quarter, the total revenue for the quarter was RMB 127 million. Our super hit product and IP, Wacoku alone, accounted for 71% of our total revenue. And this makes it the key driver for our growth. Our classic IP, Yuli, as a stable pillar, contributed 16% of the total revenue, approximately. And the new IP, which we launched in July, and it is a third-party license, exclusively licensed IP, made a solid debut, accounting for approximately 10% of our revenue this quarter, demonstrating a remarkable performance. The remaining came from other IPs because we currently have 70 IPs. For this result, I will give you some basic principles. First is that we will focus our efforts, all of our efforts, the majority of our efforts and resources on our S-class IPs, that is, Wacoku, Zuly, and Synono. Currently, I think in the short term, maybe in the coming quarter and maybe three, around three years, we will focus on the top IPs because we think we should put efforts to make the top IP to last their popularity. Looking ahead to the next year, our new IP strategy will be driven by a dual approach, deep in the core and systematic incubation. So our core engine, Wacoku, will transition from that explosive launch momentum to deeper operations and extending its product lifecycle. We will consolidate our market leading positions through strategic product line expansion and enhanced user experience. And also, we will systematically replicate Synono's proven incubation model to cultivate one to two additional flagship IPs creating a more balanced and diversified growth portfolio. So overall, our company will drive future growth through an IP matrix operating model. This breaks down into two main areas. And first, we will refresh our established IPs to keep them fresh and engaging for our audiences. Second, we will set up a flexible incubation mechanism That allows us to continually test new concepts and strategically allocate resources to the most promising emerging IPs. Over time, this approach will help us create a healthy IP ecosystem, one that appeals to diverse audiences, protect us from single product risk, and also deliver long-term growth potential. But quarter by quarter, I think the IP revenue fluctuation will be based on the product launches and the pace of the product, each IP. So I think in a sum, we will focus on three to five key IPs, such as Vakuku, Sinono, Zuly, and other IPs maybe in the future. And also, we will incubate some new IPs so that we can not only diversify the revenue concentration risks, but also to grow the whole IP portfolio. Thank you.

As there are no further questions, I'd like to hand the conference back over to management for closing remarks. Please go ahead.

Thank you again for joining our call today. If you have any further questions, please feel free to contact us or submit a request through our IR website. We look forward to speaking with everyone in our next call. Have a good day.

The conference is now concluded. Thank you for your participation. You may now have a good day.