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 note that today's event is being recorded. I will now turn the conference over to Ms. Tina Tang, the company's manager of investor relations. Please go ahead, ma'am.

Thank you. Hello, everyone, and welcome to HERE's earnings call for the second quarter of fiscal year 2026. With us today are Mr. Peng Li, our founder, chairman, and CEO, and Mr. Ting Xie, our CFO. Mr. Li will provide a business overview for the quarter, then Ting will discuss the financials in more detail. Following their prepared remarks, Mr. Li and Ting will be available for the Q&A session. I will translate for Mr. Li. You can refer to our quarterly financial results on our IA website at ia.healgood.com. You can also access a replay of this call on our IA 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 press release, which also applies to this call. as we will be making forward-looking statements. Please note that all numbers stated in the following management prepared remarks are in RMB 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 the following with the SEC. I will now turn the call over to the CEO and the founder of HERE, Mr. Li.

Okay, good morning everyone, and thank you for joining us today. Just over three months ago, we held our first earnings call as a pure play portfolio company. We shared our vision of focused acceleration. Today, I'm pleased to report that we have not only maintained that momentum, but also began translating it into the durable, long-term value we promised. This quarter marks a significant milestone. It's our first full quarter operating as a dedicated FP-trained company. We have a clear and firm strategy, and we are continuously optimizing in execution in rapidly changing market environments. Building on our Q1 outperformance, Q2 delivered strong results. Total revenue reached 177.3 million, representing 39.4% quarter-over-quarter growth. This performance exceeded the high end of our guidance and reflects sustained and steady momentum following our strategy. We continue to focus our flagship IPs to create ultimate product appeal. Our flagship IP, Makuku, contributed RMB 129.4 million, accounting for 73% of Q2 revenue. Zenono is another potential black-shaped IP. It has been gaining momentum since its initial launch in July 2025. It's generated over 19.2 million in revenue this quarter. This is not just about productive success. It demonstrates that our IP-first strategy is successfully converting more payroll consumers into a growing base of our users. This quarter, based on our observation on changing market conditions and our evolving operational insights, we improved our strategy implementation in a timely manner. we have gained a deep understanding. Product sales for a period of time are not the only metric to mirror an IP's success. The ultimate goal of our operations is to build IPs that users love and that possess lasting vitality. We expanded the sales contribution from offline distributor channels. This allows users to experience IP products more intuitively. We have opened five offline D2C stores, positioning as a dedicated venue for brand user interaction. We are continuously optimizing the operational experience. Our online operations team has also improved our user membership system. This quarter, we refined our core operational systems. This covers IP portfolio health, product appeal, supply chain efficiency, channel effectiveness, and user engagement. These efforts aim at building enduring value, not just focusing on quarterly revenue. Building on the framework we discussed last quarter, let me walk you through the performance of our two-pillar growth strategy this quarter. Pillar one, IT ecosystem. Moving from a creative heist to a systematic pipeline. In Q1, we demonstrated our ability to turn IP launches into cultural phenomena. The Wakuku Dam, the street in Shanghai, was a great example. This quarter, we refined our operational approach we identified what works and applied those licenses systematically. Our IP and product development now rely on continuously improving mechanisms, a data-driven, systematic engine. Let me share a snapshot of our IP portfolio. As of December 31, 2025, we had a total of 18 IPs. That includes 11 proprietary file-exclusive licensed and two non-exclusive licensed IPs. This diversified portfolio forms our IP ecosystem foundation. We have established a comprehensive end-to-end mechanism covering everything from IP planning to production and promotion. The Wacoku on the Go series launched in late November 2025. It spewed Wacoku's proven success. It took our daily campaign concept to new heights. We introduced many authorized from factors for full scenario integration, placing Makuku in the entirely new category of collectibles as everyday components. The market response was immediate. We achieved total omni-channel sales surpassing 18 million within one week, along with over 84,000 pre-sale registered patients, over 56,000 peak concurrent online users, and over 100 million in total new product exposure. For Zenono, the success of its latest release is clear. The Whisper of Ta series value slash store hit over 11 million in omni-channel sales within a week, with more than 60 peak concurrent online users and a total exposure reaching 170 million. IP's journey begins at launch, but extends far beyond. This quarter, LaCouCou was invited by the Tianjin Culture and Tourism Bureau to serve as a promotion ambassador. This demonstrates our success in integrating IP with culture and tourism development. Recently, Wacoku also launched a co-branding collaboration with Lux Folk Jewelry, 六福珠宝. This continuously enhances IP influence. We are planning to enrich our IP narrative walls through our light content strategy. That's short form Storytelling that depends on emotional connections. It extends IP influence from physical spaces into narrative spaces. It extends emotional engagement between IPs and fans. Pillar 2. Omni-channel reach. Our approach ranges from online brand visibility to offline user experiences. We are continuously depending on the connection between IP products and users. Our diverse channels are not just sales points. They are portals for IP user interaction and experience. continuously empowering the IP ecosystem. Building on last quarter's massive organic reach, our members are strong. As of February 26, 2026, our total cumulative followers across major social platforms in China reached approximately 700,000. And our cumulative social media exposure exceeded 1.8 billion. This growing digital footprint forms one of the of our brand and the IP-driven model. For offline channels, we position our D2C stores as brand users' interaction and experience hubs. Since December 2025, we have opened five D2C stores in Beijing, Shenzhen, and Chongqing. To date, additional two stores are in the preparation stage. A notable example is the grand opening of our Shenzhen Upper Hills flagship store on February 1 this year. We invited a celebrity to serve as store manager for a day. This drew a massive crowd and it generated a strong same-day sales of approximately RMB 250,000. This validates the power of our offline experience or approach. Our Shanghai K11 pop-up generated strong social media buzz and even become a trending topic and this event has more become one of the key drivers of food traffic and sales. On 2026, New Year's Eve, we held here at Qimengdao some exhibition and the light show in core commercial districts such as Wangfujing in Beijing, Gulou in Tianjin, and P11 in Shanghai. Through this landmark, public spaces, we achieved high traffic reach and dependent interaction between the brand and the consumer. At the same time, we are deeply leveraging the powerful and creative tools of the AI era and innovating vigorously in the area of smart sales terminals. We expect to deploy our intelligence sales robots to more offline locations for user integration and interaction in the near future. The change in growth margin this quarter reflects our strategic expansion of partnerships with more offline distributor channels. We are committed to providing more interactive and tactile experience through diversified offline channels to our consumers. This deepens IP connections and strengthens user loyalty through physical engagement. We firmly believe that the strategic investment will lay a solid foundation for the company's long-term healthy development. our international strategy continues to gain momentum. On one hand, as our supply chain capability improves, we are working with domestic distribution partners to promote overseas export sales. On the other hand, we are actively seeking local overseas partners for IP and product sales As we continue to refine our approach, the appeal of various international markets is steadily increasing. This quarter, we continued to optimize our organizational structure and core operating platform. We refined our cost structure. We now have a leaner and more focused team and cost structure compared to the first fiscal quarter. We are building an integrated operational system that will be a crucial competitive advantage. On the supply chain for France, Our production capacity is now approximately 50 times what it was at the beginning of 2025. This progress further steps from last quarter. This is a solid foundation for creating these products this year. Operational excellence provides a solid foundation for our capital allocation. We will continue to invest in high-potential IP development, strategic metric expansion, and our light content initiatives. We will continue to systematically build cultural assets based on IP. As a dedicated IP-trained company, we are committed to continuously improving our operational efficiency and financial health. The journey of building an enduring company requires patience and discipline, and we are fully committed to both. I will now turn it over to Tim for a detailed review of our financial results. Thank you, everyone.

Thank you. Before I go into the details of our financial results, please know that all amounts are in RMB terms. That reporting period is the second quarter of fiscal year 2026, ending on December 31, 2025. And then in addition to gap measures, we'll also be discussing non-gap measures to provide greater clarity on the trends in our actual operations. We are pleased to report on another quarter of solid financial performance, marked by continued revenue growth and further improvement in our profitability metrics. This demonstrates the sustained successful execution of our strategy as an IP-based product-driven pop-toy company. Total revenue reached $177.3 million, representing a 39.4% increase from the previous quarter. Gross profit reached $55 million with a gross margin of 31%, compared with total revenue of $127.1 million and a gross margin of 41% in the previous quarter. Adjusted net loss from continuing operations continued to narrow to $16.1 million, down from $17.1 million in the previous quarter. These results reflect the growing traction of our PopToy products and the operating leverage we are beginning to realize in our focused business model. Revenues for the quarter were $113. and 77.3 million entirely generated from the sales of pop toys and related activities, compared to 127.1 million in the previous quarter. This sequential growth is primarily driven by our offline channel sales. Cross-profit for the quarter was 55 million, compared to 52.4 million in the previous quarter. Our gross margin decreased to 31% this quarter from 41% in the previous quarter. The margin decline reflects our strategic expansion of offline channels, which generated lower per unit margins than direct online sales. This channel diversification strategy is designed to enhance IP engagement and strengthen customer loyalty through physical retail experiences. allying with the company's long-term vision as a leading IP chain company. On the operational front, total operating expenses were $93.2 million for this quarter. To break this down, sales and marketing expenses were $52.8 million. These expenses mainly included advertising and promotion expenses and staff compensation to support brand building and customer acquisition efforts. across multiple platforms. As a percentage of total revenue, non-GAAP sales and marketing expenses, which include share-based compensation, changed to 29.6% this quarter from 21.7% in the previous quarter. Research and development expenses were 9.1 million. These expenses were mainly consisting of IP design and product development expenses. As a percentage of total revenue, non-GAAP research and development expenses, which exclude share-based compensation, changed to 5.1% this quarter, compared to 12.5% in the previous quarter. General and administrative expenses were $31.3 million. These expenses reflected our operational functions, including employee benefits. composition, professional service fees, and other operational expenditures. As a percentage of total revenue, non-GAAP general and administrative expenses, which exclude share-based composition, changed to 12.7% this quarter from 23.2% in the previous quarter. Our net loss from continued operations was 25.4 million compared to 25.8 million in the previous quarter. Our adjusting net loss from continued operations was 16.1 million compared with 17.1 million in the previous quarter. Basic and diluted net loss from continued operations per share were 0.16 during this quarter. Basic and diluted adjusting net loss from continued operations per share was 0.1 during this quarter. Regarding our balance sheet position, Our accounts receivable amounted to $32.6 million as of December 31, 2025, primarily attributable to revenue from our offline channel sales. It's worth noting that despite significant revenue growth from offline channels during this quarter, our accounts receivable balance actually decreased markedly compared to September 30, 2025. This improvement reflects our intensified efforts to enhance customer engagement management capabilities and strengthen collections discipline. Our entries were 111.8 million as of December 31st, 2025, representing a significant increase from the prior quarter. This was primarily driven by enhanced supply chain capacity and efficiency, as well as inventory built proactively in anticipation of the Chinese New Year factory closures and new product launches in the upcoming quarter. We view this as a strategic move to ensure we are well positioned to meet upcoming demand. Looking ahead, we remain excited about the growth prospects for our pop toy business. Based on currently available information, including our pipeline for the upcoming IP releases and seasonal demand, We expect revenues from our pop toy business to be in the range of $540 million to $150 million for the third quarter of fiscal year 2026, and in the range of $750 million to $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, please press star, then 1. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. 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. The first question today comes from Alice Cai with Citibank. Please go ahead.

Good evening. Thanks, management, for taking my question. Just one quick question. The revenue guidance for third quarter suggests a quarter-over-quarter decline of about 15% to 20%. Is it primarily due to seasonality, or are there any specific adjustments due to your IP launch schedule for the upcoming quarter? Thanks.

Thank you, Alice, for your question. Indeed, both factors have contributed, but the core message is that we are actively building momentum for subsequent growth. Firstly, regarding seasonality, Given that our current business primarily operates through a distributor model, distributors naturally slow down their operations and inventory and stocking during the Spring Festival holiday. This is within our expectations and represents a common seasonal fluctuation in this industry. And secondly, regarding the reason and pace of our product launches, this is not an adjustment but rather a proactive arrangement based on our annual planning. Our products are typically planned three to six months in advance, with dynamic optimizations made based on market feedback. Currently, we are fully prepared for our product pipeline in the coming quarter and beyond, with major new products expected to launch successfully. successively starting from this end of March. Therefore, what we are seeing in the short term is a normal seasonal dip from a medium to long-term perspective. This is proactive management on our part to welcome a new product cycle and optimize inventory and channel pace. Thank you for your continued attention.

Thanks. It's been helpful. The next question comes from Li Ping Zhao with CICC. Please go ahead.

Hello, Mr. Liu, Mr. Kim, thank you for accepting my question. First of all, congratulations to the company for obtaining a very good quarter. I have a question about the future of this company cooperation. We noticed that the company below that Shenzhen一起, Also, Light Media has recently established a partnership. I would like to ask if this partnership indicates that the company will work with Light Media in the field of content creation and IT development in the future. I'll translate myself. So my question is about the cooperation of other companies in the future. We noticed that the Shenzhen IT has recently established a joint venture with Enlight India. Does this partnership mean you will be working closely with Enlight Media in areas such as content creation and IT development? Thanks.

Hi, I think Mr. Li will answer this question. Mr. Li, this question is for you.

Okay, let me answer it. I will answer the question in Chinese and Tina will translate for me. Okay. Thank you very much for your question. I think this cooperation actually shows that Thank you for your interest.

Regarding our cooperation with Enlighten Media, it is a key part of our efforts to deepen our IP strategy.

First, over the past year, we have successfully tested and confirmed commercial paths from IP images to pop toys.

By focusing on our core IPs to create heat products, we have built a solid foundation centered on the product gen.

其次呢,我们一直都强调 IP的一个生命力 其实在于要有持续的一个内容的赋能 那这个就好像是一把刀的这个刀刃和刀背一样 所以我们不光是关注就是毛盒,毛绒这些我们的实际产品 We also want to focus on the long-term development of this IP. So, while we are introducing excellent content talent, we also need to work with top partners in the industry, such as Guangxian, and use appropriate content to enhance the IP, and then add cultural connotations to the IP to deepen the emotional interaction between users and the IP.

Second, we have always stressed that vitality of IP comes from continuous contact support. And both is very important to this. We focus not only to selling the physical products like the blend boxes and the plush toys, but also in the long term, develop our IPs. So we are now enhancing our IPs through the suitable contact forms. We're doing this by bringing in excellent contact talents like the Enlight Media and cooperating with the top industry partners. Our goal is to add a cultural meaning to our IPs and strengthen the emotional connection between users and IPs.

OK.

Finally, the joint venture with EnlightMedia you mentioned is exactly one of the specific projects to carry out our product and contact dual job strategy. We hope to explore more possibilities for our IPs in areas like the film and television contact and derivative development through such cooperation. As for specific future plans, we will disclose them to the market when there is substantial progress. Thank you.

Okay, that's all. Thank you.

The next question comes from Yi Kunzhang with CITIC Securities. Please go ahead.

Good evening, management. Thank you for taking my question. And my question is about our operations strategy. The company was very successful in IP operation last year. So are there any new strategies for IP operation and marketing in this year? Thank you.

Okay, thank you for the question. I'll take this. This year, the core keyword for our IP operations and marketing strategies is a comprehensive upgrade from Maybe we can call that opportunistic creativity to a systematic IP factory. This is reflected in three key areas. The first one is on the product front. We have built a replicable assembly line for IPs. Extreme product excellence is the foundation of everything. Through our product committee mechanism, we rigorously select IPs based on three dimensions, the visual distinctiveness, story potential, storytelling potential, and audience resonance, ensuring that every character we launch has a generic makeup to become a classic. Concurrently, we have established a complete process from discovery and incubation to development and launch, and then to fulfill the full lifecycle management, making it possible to replicate and sustain HIT products. A great product in itself is the best nourishment for IP. We continuously strengthen our in-house teams and integrate outstanding external resources, injecting vitality into our IPs with product excellence. And secondly, on the operations front, we have developed an iterable omni-channel marketing methodology. Over the past year, we have continuously summarized and optimized our operational experience, forming a replicable pre-book that we constantly refine and iterate. This year, we will flexibly deploy differentiated marketing strategies based on the unique characteristics of different IPs and products Whether it's celebrity collaborations, branding, crossovers with major sports events, or integrated online to offline user engagement activities, our goal is to leverage pre-set operational support to ensure great products are seen and loved by more people. And third, on the content front, as just discussed by Mr. Li and the City Analyst, we are opening a new chapter of light content empowerment for IPs. And this is a crucial step in our journey from purely physical space to narrative space and from product moments to sustained storytelling. Through appropriate content, we infuse our IPs with cultural substance and emotional depth, transforming them from mere trendy toys into cultural symbols. with stories and vitality. This multi-dimensional empowerment across products, content, operations, and branding has one ultimate goal to build truly enduring evergreen IPs. So that's our changing strategy so far. Thank you.

Thank you. The next question comes from D.C. with Hoi Thai Securities. Please go ahead.

OK, thank you, for this opportunity. And my question is about our channel expansion. I wonder how is the performance of our region's offline stores as we may reach our expectation and what's the channel expansion plan in year 2026? Thank you.

OK, I've answered your question. Thank you for your interest in our store operations. Regarding our offline stores, I will address this from three dimensions, the short-term performance, strategic positioning, and future plans. Firstly, regarding short-term performance, our newly opened stores have generally met or even slightly exceeded our internal expectations. Since late last December in last year, 2025, They have opened five D2C stores in Beijing, Shenzhen, and Chongqing. Although they have been operating for just over one month, their overall performance has been solid, and they have broadly achieved nearly break-even, a commendable result for newly opened stores in their initial phase. Of course, due to differences in customer profiles across various shopping districts, we are continuously fine-tuning the operational strategies for individual stores. And second, regarding strategic positioning, we value these stores not only for their sales contribution, but also, and more importantly, for their role as brand landmarks and user touchpoints. Our offline direct sales stores are core scenarios for fostering deep interaction between our IPs and users. To this end, we recently established a user operations center, the organization in our company, aiming at integrating online and offline data and user and planning more cohesive interactive activities with our IP platform and the product launch pace. As a crucial component of this strategy, the value of our stores for brand showcasing and user connection far exceeds mere sales figures. Thank you.

Thank you very much.

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

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 II website. We look forward to speaking with everyone in our next call. Have a nice day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.