Lucas GC Limited

Good day and welcome to the LucasGC Limited Reports Fiscal Year 2023 Financial Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Robert Bloom with Lithium Partners. Please go ahead, sir.

All right. Thank you very much, Chuck, and good afternoon, everyone. As the operator indicated, thank you for joining us for LucasGC's fiscal year 2023 financial results conference call. Joining us on today's call is Howard Lee, founder, chairman, and CEO of LucasGC. At the conclusion of today's prepared remarks, we'll open the call to questions. If you are listening through the webcast, you can send in a question through the portal utilizing the Ask a Question box, or you can simply email a question to me at bloom, that's B-L-U-M, at lithiumpartners.com. If you are dialed into the call live, as the operator indicated, you can ask a question by following the instructions provided of Star 1. Today's event is being recorded and will be available for replay through the webcast information provided online. in the press release. Finally, I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information. The conference call today will contain certain forward-looking statements, including statements regarding the goals, strategies, beliefs, expectations, and future potential operating results of LucasGC. Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties, and other factors, including but not limited to the factors set forth in the company's filings with the SEC. LucasGC undertakes no obligation to update or revise any of these forward-looking statements. With that said, I'd like to turn the event over to Howard Lee, Chief Executive Officer of LucasGC.

Howard, please proceed. Thank you, Robert, and welcome, everyone. I'm pleased to be conducting our very first Financial Results Conference call. As many of you know, we completed our IPO and began trading on an asset on March 5th, and I look forward to holding these calls going forward to update you on our progress. So during today's call, I will highlight our recent accomplishments that demonstrate our continued execution to utilizing technology, including AI, to disrupt the large and growing human resources market throughout Asia initially and to enter new market verticals such as insurance going forward. We will also discuss our plans to further growth our top and bottom lines while managing our capital efficiently. Finally, I will discuss the financial results for the fiscal year 2023. Now, before that, with this being our first call, I thought it's best to provide a broad overview of Lucas and the opportunities that we believe will drive growth for the company going forward. At Lucas, we are an artificial intelligence-driven platform as a service, short for PaaS company. The current industry vertical applications is to provide human resources services by developing a platform to support networks of professionals. Our two platforms, called Columbus and Star Korea, provide recruitment and outsourcing services. Our users are primarily professionals who work in the human resources related functions. Our corporate customers are corporations with recruitment, training, sales leads generation, and outsourcing demands. At Lucas, we do not employ in-house recruiters or consultants, as is the case with most traditional recruitment firms on the market today. Rather, we use the power of our roughly 638,000 active users as part-time headhunters or consultants to reach out to the contacts who are qualified candidates. By integrating AIGC and GPD technologies into the PaaS platform, Lucas seamlessly combines scenarios such as resume screening, job matching, video interviews, and candidate consultations with AI thereby enabling more efficient data processing and candidate matching, reducing operating costs, improving efficiency, and ultimately increasing user stickiness and satisfaction. The differentiator versus traditional HR or equipment firms is that with our platform, the headhunters, consultants are friends or acquaintances versus a cold call from strangers. On average, Each of the 630,000 active members have roughly 300 contents in their network, of which about 100 are active, giving Lucas access to roughly 60 million people. Now, let me give you an example of how this might work in your life. A corporation will have a position to fill. Let's say this is for a project manager position. The hiring company will provide the job description, or JD, and the hiring requirements to our platform. The first value add we provide is that our AI will help the hiring company optimize and refine the JED based on our LAM, the Large Level Model, that has been trained by hundreds of millions of our proprietary industry data for over four years. Increasingly, the chances that the JED will attract more qualified candidates based on the current hiring trends of the most competitive industry peers. The next value added we provide is to then push the position to only to those users who have the most qualified candidate resources. Notice that here, we use the next generation push or recommendation algorithms, similar to those used by TikTok, instead of old technology, such as browsing that most e-commerce sites are using today. Those users will then go out and make calls to their qualified candidates within their own social private networks. This is more efficient than reaching out candidates by cold calling from a stranger. Once the candidate gets the job, passes the probation, the hiring company pays us a fixed percentage of the annual salary of the hired candidates as a fee to us, and we share a portion of the fees with the headhunters or consultants who referred the job to the eventual hire. Our platform's users and their acquaintances are high-income earners with strong spending power. Approximately 70 percent of our active users are in the age range of 25 and 40, and approximately 89 percent of the users have received some college education. Due to its advanced technology, Lucas normally needs less than half the time required to find qualified candidates when compared to those traditional recruitment firms who rely on their own in-house headhunters and consultants. And we have a strong growth pathway ahead of us. We have posted revenue growth of CAGR compound annual growth rate of roughly 86% from 2020 to 2023. Strong organic growth is expected to continue in the near to medium term as we look to disrupt the growing human capital and outsourcing markets in China, which are still growing at a decent pace. According to market research firm Forth & Sullivan, The growth in the Chinese human capital market and IT outsourcing market are going as a cage of mid to high teens for the next several years. The human capital management market is expected to roughly reach about $50 billion by 2026, driven by the growth in number of private enterprises in China, the advantages in improving enterprise efficiency and saving costs and productivity. as well as China's large discrepancy between the supply and demand for talented professionals. The IT outsourcing market is expected to reach roughly $160 billion in U.S. dollars by 2026, driven by increasing number of companies choosing to outsource IT services to facilitate their technology development processes. and the large base of software engineers and related professionals in China, which ensure the sufficient supply of IT talents for the IT outsourcing service industry, as well as the promotion of industrial digitalization, including the promotion of digital transformation of small and medium-sized enterprises and upgrading of enterprises' intranets. Therefore, we are confident to continue to gain market share thanks to our technology, which we believe is one of the most advanced on the market and today is well recognized by our peers as we were awarded as one of the technologically advanced small and medium-sized enterprises by the MIT, which is the Ministry of Industry and Information Technology in China. In addition to our organic growth in China, We also expect to target in-organic growth through M&A outside of China. Our near-term focus will be on the Asian countries, such as Vietnam, Thailand, Indonesia, and Malaysia, which are some of the farthest-going regions in the world. In the future, we are targeting revenue from China will be less than 3%, so less than half by the end of 2025. With this approach, I will look to leverage my proven track record, having executed over 30 M&A transactions in the U.S. and Asia, with overall value exceeding $80 billion when I worked for three Fortune 500 companies, including Sun Microsystems, Alcatel-Lucent, and most recently as Vice President of Corporate Development at Western Digital. With that review behind us, I want to I would like to review our 2023 achievements. So the first is 2023 highlights. So 2023 was a strong year for Lucas as a revenue grew 92.3% versus 2022. Our growth was driven by the growth in our corporate customers and active users, as well as the post COVID recovery in China. Since 2022, we have achieved an impressive revenue growth of roughly 86% CAJA. And the active user size, importantly, we have recruited our active users from roughly 431,000 by the end of 2022 to 638,000 at the end of 2023, reflecting a roughly 48% year-over-year growth. Active users are the lifeblood of our business model as they serve as our agents, recruiters, consultants, and salespeople. Our active users may engage in such activities as recommending job opportunities to their friends, providing us with information on which companies might have job openings that might potentially be our clients, or recommending or forwarding videos or articles generated on our network to their friends. Over 80% of our users remain active in a 12-month period as of December 31st, 2023, and they have strong incentive to stay active on our platform because A, they can make money by acting as a part-time headhunter or providing information to us on potential clients, and B, maintain an active language with their friends and compatriots in a positive way and see for those users who are stay-at-home moms, they can acquire useful industry information and news so that they can keep abreast of their respective industries and prepare them to reenter the workforce in a productive way should they choose to do so. Our active users are not only the avenue by which we generate revenues, but they also serve as our competitive advantage and barrier to entry for those would-be competitors. Due to our early move advantage, which allow us to gain many users and train the model with over hundreds of millions data sets, will make it challenging for new competitors to enter the field. As you may be aware, the more data and longer the time to train a model and the more accurate it will become. That's why companies like TikTok are so successful because their algorithms can push very accurate recommendations to its users based on the user's historical behaviors, and we are doing the same on our platform. We expect to further grow our active users to about 1 million in a year or two. On the customer side, during 2023, we grew our corporate customers to 582, a significant increase from 391 at the end of 2022. Corporations are seeing the value of our platform and how quickly their job openings are getting responses and filled with the most qualified candidates. Importantly, with our corporate customers count increased roughly 49% in 2023, our revenue growth was 92.3%, exhibiting that our older customers, those who know us best, are increasing their businesses with us. So during 2023, we brought on new corporate customers in the clean energy and high-end manufacturing sectors, which are going rapidly in China. And we continue to increase our growth margin every year as we increase our growth margin by 32 basis points in 2023, compared to 2022. Our net profit margin is RMB 78.2 million in 2023, compared with RMB 36.4 million in 2022, representing 114% growth. Unlike most of our peers in the artificial intelligence space, we have achieved profitability in each of our last four years. With that, I will now review the financial results for the fiscal year 2023. The financial results for the year are provided in detail within our Form 20F, which has been filed today, as well as within our press release, which was issued earlier. I will aim to provide some color on the key areas on the financial results, as well as an outlook on certain areas where I can. First, on the regular side, Total revenue for the fiscal year ended December 31, 2023, was RMB $1.474 billion, or in U.S. dollar, $208 million. Compare that to RMB $767 million, or $106 million in U.S. dollar, reported in fiscal year 2022, representing 92.3% growth. Recruitment services, which are service fees for filling individual open positions, increased 59.6% to revenue 659 million, or 92.8 million in US dollar terms. Outsourcing services, which are service fee for providing overall IT project solutions, increased 136.5% to RMB $714 million, or in U.S. dollar term, $100.6 million. Other services, which include the selling of healthcare and training services, increased 95.5% to RMB $101 million, or $114.2 million in U.S. dollar terms. Gross margin, Gross profit margin for the fiscal year 2023 was 28.4 compared to 28.1 in the fiscal year 2022. The increase in gross margins was due to productivity gain as well as a more favorable product mix. On the operating expenses side, total operating expenses for the fiscal year ended December 31, 2023 was RMB $351 million or $49.4 million in U.S. dollar terms, an increase of 91.1% compared to, remember, $184 million reported in 2022. Selling and market expenses increased by 51.7% compared to 2022 due to continuous investments in brand promotion of our proprietary platforms, Star Korea and Columbus, for promoting activity that directly contribute to new user growth and acquisitions of customer leads. General and administration expenses increased by 127.1% compared to 2022 due to an increase in user support operating expenses as the user number increased and more experts from various industries were invited to maintain activity level of our users, and the increase in professional service expenses related to IPU activities. Research and development expenses increased by 97.3% compared to 2022 due to continuously investments in AI-enabled technologies, including generative, transformer, GPD, and related artificial intelligence generator content technologies, AIGC, as well as investments in our proprietary platforms, Star Korea and Columbus, which gave us a cutting edge in business expansion and market competition. On the net income side, the U.S. GAAP net income for the fiscal year 2023 was probably $70 million, or $11 million in U.S. dollar terms and 115% increase compared to the RMB $36.4 million or $5 million in U.S. term reported in 2022. Earning per share, EPS in fiscal year 2023 was U.S. dollar 14 cents representing a 133.7% increase compared to that of 2022. Outlook, as we look into 2024 and beyond, we believe we will see continued strong organic growth in China as the overall human capital management and IT outsourcing markets continue to grow. We are actively pursuing M&A opportunities in Asian countries such as Vietnam, Thailand, Indonesia, and Malaysia, where they are the fastest growing region in the world. We believe outside China M&As not only accelerate growth, but also has the effect to mitigate the concentration of Chinese risk. As we target, our revenue from China will be less than 50% by end of 2025. We look for traditional companies in the recruitment, training, or insurance agency companies in the Asian countries that our technology and established SOP can vastly improve their efficiencies and create synergies. These are local brick-and-mortar type of companies that have solid client bases and stable revenue streams. They are profitable and immediately attractive to our top and bottom lines. Since they are traditional break and model type companies that can be benefited enormously by our established AI and SOPs, they don't need to reinvent the wheel to spend the money on developing the technology themselves. And instead, just reapply our readily available technology and SOP that should double or triple the revenue based on our prior experience in China. Now, in terms of efforts in R&D, We intend to establish a research center in Irvine, California, led by our executive director, Dr. Wang, to further solidify our technological lead in the generative AI and GPT, which we have obtained two patents granted in 2023 and additional one patent granted in 2024. So I'm going to wrap up. So let me just conclude with some of the key points about Lucas. We are continuing to grow and take market share because of our industry-disrupting and patented platform and technology, particularly in AI, data analytics, and blockchain technologies. We have an early move advantage, a large and growing active user base, and thousands of hours and over hundreds of millions of data sets invested in refining our platform to become a very accurate and quick response with the highest recommendation accuracy on the market. Importantly, while currently our platform is exclusive for human resources, our platform is scalable to sell many non-standard and high-value products and services that are most effectively sold by referrals or personal endorsement rather than cold call from a salesperson who is a stranger. Looking out a few years, as we have demonstrated the capability of our technology, we expect to further expand our business by selling our proven AI technology and PaaS systems, which has much higher gross margin of reaching around 80% give and take as a software, not a service, resulting in overall gross margin expansions for our company. With that, operator, we will be happy to take any questions.