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 aidless and 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 Hear's Earnings Call for the third quarter of fiscal year 2026. With us today are Mr. Peng Li, our founder, chairman, and CEO, and Mr. Tim Xie, our CFO. Mr. Li will provide a business overview for the quarter, then Tim will discuss the financials in more detail. Following their prepared remarks, Mr. Li and Tim will be available for the Q&A session. I will translate for Mr. Li. You can refer to our quarterly financials results on our IA website at ia.healgroup.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 filing with the SEC. I will now turn the call over to the CEO and founder of HEAR, Mr. Li.

Okay, thank you. Good morning, everyone. Thank you for joining us today. I'm very pleased to announce that we achieved about RMB 165 million in revenue this quarter. This exceeded the high end of our guidance. More importantly, we keep improving our IP and POPTOY business. We are consistently optimizing our operations and cost structure to build a stronger foundation for long-term growth. As we all know, the first half of the year, especially the first three months, is typically a slow season for the pop toy industry. Beyond working with our channel planners and selling through our own direct channels, we stayed focused on our core strategy, that means building internal capabilities, developing IP-related products and content, and optimizing our channels. The marketing environment remains challenging, but consumers' demand for emotional and experience-based spending persists. We build our IP products and services around what consumers actually need. Let me start with our IP performance. Wacoku remains our flagship IP. It contributed RMB 102 million in revenue in Q3, all around 62.2% of total revenue. Sedona's revenue grew 73.1% quarter over quarter. accounting for 20.2% of total revenue. Synorno launched in the second half of 2025. In less than a year, it has reached a meaningful scale. This is an early validation of our ability to incubate new IPs. More importantly, we are seeing a growing cross-IP engagement. While Google users are connecting with Zenono and other IPs, while new users are always discovering our increasingly rich IP portfolio. As we move forward, we keep coming back to one key insight. Short-term sales are not the real measure of success. The real question is whether an IP can win users and earn a lasting place in their hearts and lives. IP development and ongoing operations take time. They require long-term interaction between the IP and its users. Often in physical spaces, offline D2C stores are a key part of making that happen. Based on our deeper knowledge of the IP industry, we have refined our strategy. In 2025, our growth was mainly driven by our strong productive capabilities and the strength of our IP portfolio. At the same time, we benefited from favorable market circles, channel pair wins, and celebrity partnerships. These collaborations give us additional momentum and valuable experience. We will continue to benefit from our partnerships at the same time. We know that building lasting IPs requires strong building and solid operational capabilities. That means building our own systems to reach users directly. and engage with them deeply. Therefore, long-term IT momentum will always be our top priority. Revenue should follow from strong ITs, not the target. To achieve this, we have set the following key priorities. First, keep building ITs and brand operations create ongoing interaction between IPs and users through different formats deliver great emotional experiences We will stick to our strategy focusing on our core IPs while creating and growing new ones Around our core IPs we are speeding up the development of innovative products. This will take about three to six months. We expect to launch new products from our core IPs very soon. Second, keep expanding our offline D2C stores and the robot shops. This extends our brand reach and the user touchpoints. We treat our offline D2C stores as an extension of our IP products. The store itself is a product. It unifies the IP expression within our self-operated brand system. As of today, we have opened seven B2C brand stores. Each store serves as a space for brand user interaction. Our membership system has also been upgraded. We now have a full-chain membership management system in place. This lays the foundation for constant user engagement. Our RoboShop rollout has also recently begun. To date, we have developed around 15 RoboShops in three cities. Third, keep building Strong online operations. We want to note that online sales are not our goal. Online activities will serve as one of the tools for IP and product operations. This helps us deliver a great consumer experience. First, keep a measured and steady pace on global expansion in the near term. We plan to open a pop-up store in South Korea and participate in a trade show in the U.S. at the initial market test. Fifth, keep optimizing our business cooperation with China partners. We pursue mutual benefits and winning outcomes. work with them to promote our IPs and products, and to deliver great experiences to users. Building IP value and enhancing user experience is a long journey. But with efficient execution, we can move more steadily, better and faster. Our progress comes down to two things. First, IP ecosystem. we are moving from one of these to a repeat engine. As of March 31, 2026, our IP portfolio includes 20 total IPs. That includes 12 proprietary IPs and eight exclusive licensed IPs. This quarter, we focused on Diversifying our IP metrics, we introduced new IPs with unique styles and different target audiences. We also accelerated our new product launch pace for both flagship and emerging IPs. This quarter, we launched a new co-branded IP, Xiao. Its core spirit is defined by four words. cool, stubborn, brave, and free. This message resonates well with young consumers. To drive the launch, we run an integrated campaign across celebrity, social, and fun channels, leveraging our strengths in IT design, supply chain, and omni-channel sales. We completed pre-launch prep, including character development and mass production. We all gained strong market attention and a pre-launch buzz. The strong market response has validated and strengthened our portfolio. It proves that our IP incubation model is scalable and competitive. Beyond that, we have a strong product pipeline in preparation. We will launch them steadily according to our planned cadence. For Wacoku, we launched a new series. The handicraft world of Wacoku series vinyl flash store on March 28. As of March 31, the initial launch period, the series achieved strong results. Total omni-channel sales exceeded RMB 20 million. Peak concurrent online viewers reached 28,000. And the total new product, Explorer, topped 100 million. The series focused on handcrafted feel, friendship and warmth, healing vibes. This depends on our emotional connection with users. In May, we also released the 520 gift box, Wakuku Heartbeat Devil, as a hunting card set. Recently, we have also launched new products for other IPs. This includes new plush toys, vinyl figures, handing cards, and sandwich collections for IPs like Ziuli, Zenono, Kido, Kili Kili, and Awei. Each of these IPs speaks to a different audience with unique styles and labels. That's how we build a richer IP matrix. For Synanon, the new generation product moved on. Serious, vinyl plus dough, had its offline launch on May 30 and online launch on June 2. Second, omni-channel reach. We are boosting IP user interaction with a cleaner, with a clear focus. Offline first, online empowering. Offline, we operate through three channels, our D2C stores, RoboShop network, and partner channels. First, our self-operated brand stores and RoboShop. As of today, we have opened seven D2C stores in four cities. We recently opened two new D2C stores. One at Shenzhen, Uniwalk Qianhai on April 25, and another at Xi'an Saige on May 1. Both stores are in prime high traffic business areas and rank among the biggest in their respective cities. We are closely tracking store performance scouting locations for new stores. We are also expanding into automatic retail. As of June 4, we have rolled out about 15 robot shops across key cities nationwide. These unmanned vending machines are placed in high-traffic locations. They extend our offline reach without the higher cost of full-scale DOS. They serve as both sales channels and brand touchpoints. They make our IPs more accessible with collecting available data on product performance and purchasing habits. Second, partner channels. We continue to work with our channel customers This partnership helps us reach more consumers through established retail networks. They expand our IPs and brand elements at more offline touchpoints and help us interact with users. On the online side, our social media presence continues to grow as a green force Our community of followers across major platforms is approaching 800,000. We use online channels to build content and community. Doing so empowers our IP and brand operations. We have also run several brand marketing events to build brand awareness and drive user engagement. We partnered with ApolloGo, Baidu's autonomous driving platform, to integrate our APIs with AI technology and smart mobility. This partnership spans co-grounding in vehicle exposure and the use-focused content campaigns in May. We participated in the first China New Culture and Creative Market and Trendy Toy Carnival in Beijing. This is a nationwide-level event co-hosted by three central ministries. Hero Group was the only non-state-owned enterprise featured in media coverage, including BRTV. Our flagship IP, Mwakuku, was showcased alongside traditional culture as a new oriental aesthetics section. Going forward, we will accelerate the creation of more offline scenarios to give IPs and user and uses small spaces to interact. In Beijing, at Beijing airport, we plan to set up a store to enhance brand visibility. And we are actively exploring more similar scenarios. In Hong Kong, we plan to create a dedicated ride experience on the boat at a central pier using our keys, building a unique brand operational discipline is reflected in our capital allocation. We continue to align resource support and cost structure with our strategic adjustments. Whether investing in a new IP, opening a store, or launching a content initiative, we evaluate each potential investments against a clear ROI framework. We don't make guesses. We allocate capital based on the information and the data from IP momentum, our offline network, membership system, and the sales channels. Thank you for your continuing support. 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 note that all amounts are in RMB terms. That reporting period is the third quarter of fiscal year 2026, ending on March 31, 2026, and that 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 our third quarter results, which exceeded expectations on both revenue and gross margin despite navigating a softened demand environment in the broader industry. Total revenue was $164.7 million with gross profit of $56.9 million, representing a gross margin of 34.5%. While revenue decreased from the previous quarter's 177.3 million, growth margin improved by 350 basis points from 31%. These results reflect our ability to maintain operational resilience and financial discipline in a challenging market environment. While positioning the company for sustainable long-term growth, through strategic cost management, and continued focus on our core IP portfolio. Revenues for the quarter were $164.7 million, primarily generated from sales of our three flagship IPs, Bakuku, Sinodo, and Thule, compared to $177.3 million in the previous quarter. This change was driven by the of our new product launches and the impact of the Chinese New Year holidays during the quarter, which materially reduced effective working days and temporarily constrained our supply chain and delivery capabilities. Gross profit for the quarter was $66.9 million compared to $55 million in the previous quarter. Our growth margin increased to 34.5% this quarter from 31% in the previous quarter. This margin improvement reflects the early benefits of our strategic cost structure refinements implemented during this quarter, positioning us for enhanced margin performance going forward. On the operational front, total operating expenses were $100.8 million for this quarter, To break this down, sales and marketing expenses were $57.7 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 exclude share-based compensation, changed to 35% this quarter from 29.6% in the previous quarter. Research and development expenses were $9.5 million. These expenses mainly consisted 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 5.7% this quarter. compared to 5.1% in the previous quarter. General and administrative expenses were 33.6 million. These expenses reflected our core 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, changed to 13.8%. 80% this quarter from 12.7% in the previous quarter. Our net loss was $34.1 million compared to $25.4 million in the previous quarter. Our adjusted net loss was $22.9 million compared to $16.1 million in the previous quarter. Basic and diluted net loss per share were $0.21 during this quarter. Basic and diluted adjusted net loss per share was 0.14 during this quarter. Looking ahead, we remain excited about the growth prospects for our PopToy business. Based on current available information, including our pipeline for upcoming IP releases and seasonal demand, We expect revenues from our pop toy business to be in the range of RMB $130 million to RMB $140 million for the fourth quarter of fiscal year 2026. We are revising our fiscal year 2026 revenue guidance to a range of RMB $600 million to RMB $610 million. This revision reflects near-term market realities and demonstrates our commitment to providing transparent guidance aligned with current industry conditions. 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 telephone. If you wish 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. And today's first question comes from Jing Yuan at CICC. Please go ahead.

管理层晚上好,感谢接受我的提问。 我想请教一下,在过去一年中, 公司观察到潮玩消费者的需求出现了哪些变化, 以及竞争格局上我们观察到哪些变化? Good evening, management. Thanks for taking that question. Could management elaborate what change in the consumer demand within the popcorn market, how we've seen in the past year? And how has the computation shift changed?

OK, thank you. I'll take this question. First, we see that emotional consumption is really all about companionship. Consumer motivation is driven by a mix of emotional value and collectible value. And their expectations for IP products keep rising. So only products with real character and solid operations can truly connect with consumers. For young buyers, they are buying for immediate emotional satisfaction. Our handicraft world of Wacoku series focuses on handcrafted feel, companion shape, and warm heating. This responds directly to what consumers are looking for. This is a recent example for our new product launch for the IP Wakuku. At the same time, good IP products have real artistic value. Some collectors still want to collect complete sets or even buy on the secondary market because they love the IP. Companionship and portability have become very important product dimensions. The plush and bag charms saw strong growth in 2025 and became the farthest growing category in the pop toy industry. However, starting in the first half of this year, we've seen the market cool down. The main reason is that supply chain grew too quickly, which reduced the early scarcity. This is actually a normal market correction. The industry is moving back to the core of emotional consumption, from chasing scarcity to buying what you like, or both. And for us, The underlying logic of this category has not changed. Consumers still want IP products that fit into their daily lives. We stick to our strategy, creating excellent IPs and products. For example, our recently launched Synono Mode on Series, the new product, has been very popular based on recent consumer response. And for the competitive condition, The competitive landscape is shifting from grabbing territory to competing on ecosystem capabilities. Firstly, more players have entered the market, but only a few can operate IPs, especially the self-owned IPs, consistently over time. It is still a large market with many small players. Secondly, the core of competition is moving from product capability to full-chain IP operation. Long-term IP value must be built from within. Pop toys are not fast-moving consumer goods. You cannot drive growth simply by adding more SKUs. You should need IP design, supply chain, brand, and sales all working together as one system. And honestly, very few companies can actually pull it all together. Thirdly, the industry is taking a fresh look at owned IPs. For most pop toy companies, licensed IPs account for the majority of their revenue, and these licenses typically last only one to three years and have a high cost. So if a license doesn't get renewed, you're looking at a major hit to your revenue. We've taken a different approach. We have built a systematic capability to create and fund our own IPs. Our IP portfolio is much more balanced. More than half of our IPs are self-owned. And even with our licensed IPs, we focus on long-term. Proportionality. For co-branded IPs like Xiao, which is just recently launched, we use a deep cooperation, co-creation model, rather than relying on a simple licensing deal. That's all. Thank you.

Thanks. That's very helpful.

Thank you. Our next question today comes from Yikun Zheng with Citix. Please go ahead.

Good evening, Benjamin. Thank you for taking my question. And my question is about the momentum of IPs. So far, we have several very successful IPs, such as , , . So my question is, in the future, how to keep both strength and momentum of these popular IPs? Thank you.

Okay, thank you very much for your question. I will answer in Chinese and my colleague will translate for me. Yes, this is a very good question. First of all, it's the IT's own characteristics. In other words, do they have a star image? Another one is the continuous and effective operation of IT to maintain the IT's market power. IP momentum depends on two factors, the IP's characteristics and ongoing successful operations.

To maintain this momentum, the key is to consistently deliver events contacts, products, and experiences that align with the IP's characteristics and connect with our target audience.

To be more specific, we are continuing to do a few things. The first one is to keep the resources focused on our core IP, and then use it as a basis to help our IP solidify. And then, Specifically, here is what we are doing and will continue to refine in our IP operation strategy.

First, we remain focused on our core IPs. We concentrate resources on our core IPs and build our IP portfolio around them. We need steady resources to keep our core IPs running smoothly. At the same time, we closely monitor performance across the multiple dimensions to improve resource efficiency.

The second point is that through good products and experiences, to deepen the user's understanding of our IP, so that we can maintain and improve the IP's performance, and have a rhythm to do our product planning well, and then continue to deal with innovation around the IP. This year, we rely on the core IP, and then continue to set up and replace new products. At the same time, we have also developed a variety of materials and playing methods, and then chose the right time to open up our product range. Secondly, we strengthen the user's wellness and engagement through the high-quality products and experiences.

This helps maintain and build IP momentum. We arrange product plans at a steady pace and keep innovating around IP. This year, we are planning next-generation products for our core IPs, along with offerings of new materials and new play styles. We will expand into new categories at the right time. And beyond physical products, we are developing IP-driven experiences through a live asset model. For example, We recently signed a ferry at Hong Kong Centre Pier, and we turned it into an IP theme park on the water.

The third point is that we continuously carry out the operation of IP brands. By having a suitable variety of shows, celebrity collaborations, and brand activities, we can create the influence of IP. Third, we actively manage our IP brands through partnerships.

This includes the placement in variety shows, celebrity partnerships, and brand collaborations to grow our IP influence over time. Fourth, with gently offline touchpoints through our DTC stores, rubber shops, and dedicated branded sections in pilot retail locations.

So overall, we believe strong fundamentals help us manage and extend an IP select circle. But this does not come from a single heat product. It comes from consistent, stable, and systematic operations. Okay, that's all. Thank you.

Thank you, Mr. Li. It's very clear. Thank you. And our next question comes from D.C. with Huai Tai Securities. Please go ahead. Good evening, Mr. Li.

Thank you for this question. My question is mainly about the quality. Because in the past, We also benefited from the high-quality product of the whole box and Tangjia Maorong, and also realized the rapid layout on these products. In the future, do we have any new product layout planning expectations? Management, good evening. My question is about our company's plan for the category expansion in the future. Thank you.

Yes, we have always been particularly concerned about the opportunity of product extension. Yes, we do.

We are continuously exploring the category expansion opportunities. Our principle is to extend from our IPs, not to launch the new categories for their own sake. At this stage, we mainly consider where each IP is in its lifecycle. Then we carefully expand into merchandise around our core IPs. Our strategy focuses on three key areas.

第一点就是周边衍生品。 First, merchandise is a key focus for us. We gradually expanding into IP-related merchandise.

Particularly lifestyle products, the idea is to transform our IPs from collectibles on the shelf into everyday companions in people's lives.

第二点是我们会保持审慎的一个节奏来拓展品类。 潮玩行业目前的一个普遍现象是多SKU广散网,但是我们不打算这么干了。 Second, we're expanding a discipline pace.

There is a common trend in industry right now, many SKUs, very broad coverage. but that is not our approach. We believe category expansion must align with IP's context and user needs, not to just add more SKUs. We prefer to go deep with our core IPs, not broad.

The third point is that we are also paying attention to the development of intelligent companionship and technology-based IPs. The combination of AI technology and ChaoLan will definitely become a new direction in the future. Third, we are watching for opportunities like smart companionship and the tech-class IPs development.

The combination of AI and pop toys is becoming a new direction. We're actively researching it, but we're still exploring and don't have any specific plans yet.

So to sum up, stay focused on IP. We go deep in our core categories,

then gradually expand into merchandise. We are not trying to cover everything instead. Our goal is to make sure every new category truly supports the emotional connection between our IPs and our users. Thank you.

Yeah, that's all.

Thank you. Thank you. That's helpful. Thank you.

Thank you.

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

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 nice day.

Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.