QuantaSing Group Limited

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Qantas Things 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. Leah Guo, Investor Relations Director of the company. Please go ahead, ma'am.

Thank you. Hello, everyone, and welcome to Qantas News Earnings Call for the third quarter of fiscal year 2025. With us today are Mr. Peng Li, our founder, chairman, and CEO, and Mr. Ting Jie, 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. Lee. You can refer to our quarterly financial results on our IR website at ir.quantuscent.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 press release, which also applies to this call. as we will be making forward-looking statements. Please note that all members' status in the following management's 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 relief and filings with the SEC. I will now turn the call over to the CEO and founder of Quantosync, Mr. Li.

Okay, good morning everyone. Thank you for joining us Q3 2025 earnings call. I'm pleased to share an update on our performance and the strategic direction as we continue our transformation journey. This quarter marked a significant milestone in our evolution. We achieved revenue of RMB 570.7 million. This reflects our ongoing strategic shift from traffic-driven to product-driven business models. More importantly, we completed the consolidation of LiceOne on March 31st. This positions us at the forefront of the high-growth pop toy market. I should note that our Q3 results include only balanced sheet consolidation from this acquisition. Profit consolidation began on April 1st and will be reflected in our Q4 results. Before I discuss our existing new venture, let me update you about our existing businesses. They continue to demonstrate the strength of our disciplined approach to growth. We maintain strict ROI assessment across all results allocation decisions. This ensures we invest promptly in promising opportunities while maintaining financial discipline. In our financial literacy program, our offerings remain well received by users. We expanded our community outreach with three major financial anti-fraud education initiatives this quarter. These programs not only fulfill our social responsibility commitments, but also strengthen our broad presence among the general public and the broader society. Our senior-focused recreation and leisure courses continue to excel with strong retention rates. Particularly noteworthy is our calligraphy program, which has achieved repeat purchase rates exceeding 65%. We also developed an innovative combination of online learning and offline graduation trips, successfully delivering our first trip to over 60 participants with a 100% satisfaction rate. Our second cohort of over 50 participants demonstrates the growing demand for this integrated approach. Building on this success, the 6th annual Qianshi Cup Calligraphy Competition attracts over 800 participants. Selected works were featured at national education events in Beijing's Chaoyang District. Expanding beyond calligraphy, our study tour business now spans 16 cities across four course categories. We delivered over 60 sessions. Early pre-sales for our 2025 tour packages generated a strong initial response. This validates strong market demand for our integrated approach. Meanwhile, our health and wellness product business through Zhixiutang continues to deliver stable performance while serving senior customers with expanding portfolio of tailored products and services enhancing our revenue diversification and depending engagement with the key cohorts. Our existing business continues to generate positive cash flow, providing a solid foundation for our strategic expansion. The solid performance in our existing business stems from a fundamental philosophy. This philosophy has guided us throughout our history. We identify promising market opportunities through careful analysis and disciplined execution. Our proven formula combines through market evaluation, test and scale methodology, and data-driven decision making. What sets us apart is our commitment to sustainable growth. We build on brand strengths and product excellence rather than traffic-driven models. We have true long-term value creation comes from developing core competitions. There are in product development and the brand beauty. This approach ensures more stable, sustainable growth compared to businesses relying primarily on marketing expenditures. This disciplined approach has preserved our robust cash position. It enables us to capture Capital lies on strategic opportunities like the last one, acquisition, while maintaining financial resilience. We continually evaluate all our business lines based on ROI performance and the strategic fit. This ensures optimal results allocation. This brings us to our most significant strategic move this year. Our entry into the pop toy market represents the nature evolution of our strategic philosophy. Let me share why this market captured our attention. According to Frost and Sullivan, the global top toy market is massive and is expected experience steady growth in the future. In terms of GMV, the global toy market grew at a CAGR of 5.2% from RMB 631.2 billion in 2019 to RMB 773.1 billion in 2023. and is expected to further grow at a CAGR of 5.1% to reach RMB 9,993.7 billion in 2028. The PopToy business exemplifies our product-driven growth strategy with success factors such as premium IP quality, innovative product design, and sustained investment in IP cultivation and operations. When amplified through precision marketing and operational strategies, the fundamentals collectively forge enduring brand loyalty and long-term IP vitality. After careful market evaluation, we identified LessOne as the ideal platform to enter this high-growth market. What made this partnership so compelling was how LessOne's product development expertise perfectly complements our strength in market operations. This creates powerful synergies. Last one has demonstrated excellence in IP development and event guard design intelligence. This perfectly complements our established competencies in marketing and operations ecosystems. Private traffic momentization and omni-channel commercialization Together, we create a complete value chain from IP creation to monetization. I'm pleased to report that we are already seeing promising results since our management team began executing last month's growth strategy in December 2024. Let me walk you through our two-pillar approach to building this business. Starting with product excellence and brand development, Let's Run has built a strong IP matrix. This features popular characters such as Wakuku, Youli, Funini, Fela, and Pidou. Among other distinctive IPs, Since our investment in December 2024, we focused on operating IP Wacoku. This was incubated in 2024 and achieved excellent market performance in Q1 2025. The market validation has been remarkable. Our Wacoku Pandata raised released on March 29th achieved the second highest single-day sales record in our key distributor partners Beijing flagship store history. This exceptional performance demonstrated both our market strategy and innovation capabilities. Built on this momentum, the launch of a second-generation Wakuku fuzzy series, the Fox and Bunny Trick-or-Treat collection on May 11 at key distribution partner locations in Shanghai and Nanjing achieved record-breaking single-day sales at our flagship partner store in Shanghai. This performance highlights our product's strong customer appeal in China's premium urban markets, including major economic hubs and their rapidly developing counterparts. The subsequent online release on May 20th on leading Chinese customer platforms generated immediate purchase momentum with impressive sales figures and sustained growth in user engagement and organic content creation. Bakuku has built breakout cultural momentum through its distinctive design and aesthetic appeal. The brand has earned unsolicited endorsements from A-list celebrities. Today, prominent artists, actors, and athletes are showing are showcasing Wacoku products. This approach is driving deep engagement and user-generated content across social media platforms. What makes this even more impressive is the Wacoku Semi-Thon, which has now surpassed 1 billion organic impressions across digital platform. Another significant IP in our portfolio has made significant strides in establishing itself as a culturally relevant IP through a variety of initiatives, such as partnering with contemporary luxury women's wear brand to create a limited edition within art stores. This was launched through exclusive pop-up events at prestigious locations. Tai Gu Li sanatorium in Beijing and SKP in Xi'an. This collaboration significantly evaluated the IP's artistic credentials. Additionally, our groundbreaking blue and white theory has successfully bridged the gap between heritage and modernity. We will first integrate cultural heritage with contemporary design, creating collectibles and lifestyle products that bring traditional craftsmanship to modern customers. Moving to our second pillar, distribution and the market expansion. We are implementing a comprehensive omni-channel strategy. We are exploring innovative direct-to-customer retail formats through expansion pop-ups, and I'm excited to share some progress. Our first pop-up store debuted on May 24 at Beijing Chaoyang Joy City, consistently ranked among the capital's most visited shopping destinations. This isn't just a retail place. immersive space that brings together four key elements, cultured IP exhibitions, integrative art installations, exclusive product drops, and social sharing environments. At the same time, we attracted a semi-IP showcase at Beijing Solana lifestyle shopping park. As of our earnings disclosure date, Lezwan has established segmented sections in key distribution partner stores across multiple core commercial districts nationwide. We've completed product coverage and standardized display pilots in key cities and major commercial areas. We initially formed a nationwide network of offline consumer touchpoints and broad display presence. Simultaneously, we are enhancing our online capabilities to empower less ones. Our multi-platform approach now includes self-operated channels on social media platforms, which are driving a strong initial response and encouraging user-generated content engagement. Looking beyond China, we are expanding internationally with new sustainability there is Indonesia, Thailand, and Malaysia. Our collaboration on June 2nd with key distribution partners at their Bangkok flagship store marks a significant step in our global partnership strategy and our first international offline pop-up. In Southeast China, we are partnering with top-tiered local influencers, generating buzz and sales through social platforms, which is boosting brand awareness in the region. Moving forward, we will focus on advancing our IP-driven products international expansion plan. to strengthen our presence in global markets and enhance our content and product reach. Our first international collaboration demonstrates both the global appeal of our IP portfolio and our systematic approach to international expansion. I know many of you have questions about potential risks to this long-term viability of the pop toy industry. Let me address the key concerns we are hearing from investors. The reason we are confident in the long-term viability of this industry comes down to fundamental customer behavior shifts. Pop toys have become powerful vehicles for self-expression, particularly among millionaires, nails, and Gen Z. The sector has proven resilient, with key players sustaining strong growth, even in economic downturns. This stems from the industry's collector-driven model and accessible pricing, which foster lasting engagement. Today's consumers increasing prioritize emotional value over pure functionality. They are seeking comfort, identity, affirmation, and connection through their purchases. And PopToys deliver exactly that. As we look to the future, Q4 will reflect full consolidation of last month's operations, giving clearer visibility into our combined performance potential. While maintaining steady operations in existing businesses, We are accelerating pop toy business growth through dedicated teams and strategic resource allocation. All of this is guided by consistent ROI tracking to ensure that we maximize returns on every investment. Our proven test and scale approach remains key. we expect positive cash flow. Through we anticipate some near-term profit volatility as we continue to optimize and scale our options. Beyond all operational strategies and market tactics, What truly matters for long-term success are two key elements, product excellence and brand power. These are essential for fueling sustainable growth and delivering long-term value to shareholders. Thank you for supporting our transformation journey. We are excited about the road ahead. and we'll keep you updated on our progress. 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 third quarter of fiscal year 2025, ending on June 30, 2025. And then in addition to gap measures, We'll also be discussing long-term measures to provide greater clarity on the trends in our actual operations. In March, we completed the acquisition of a 61% equity stake in Shenzhen Yiqi Culture, also known as Let's Fund, for total cash consideration of 235 million RMB through a multi-step transaction. we began consolidating last month's results into our financials starting April the 1st, and then assets and liabilities have been included at fair value in our consolidated balance sheet as of March 31st. Please note that the income statement discussion that follows does not include last month's operating results for the quarter. For the third quarter of fiscal year 2025, Our total revenues were 570.7 million, representing a 39.6% decrease year-over-year. This reflects our deliberate approach to business development as we transition from traffic-driven growth to high-quality growth. Among our revenues, individual online learning services generated revenues of 467.2 million, accounting for 81.9% of total revenues. This business line continues to operate effectively, generating steady cash flow that supports our strategic initiatives. Our gross billings from individual online learning services were $515.6 million, representing a decline of 47.5% year-over-year. We view this as a natural progression due to the strategic transformation of our product mix. Revenues from enterprise services were 48.1 million, a decline of 26.1% from a year ago, and representing 8.4% of total revenues. The decline was mainly due to fewer marketing services for enterprise customers. Revenues from our consumer business were 48.7 million, down slightly from 49.4 million a year ago. The slight change was primarily attributable to the decline in bidule revenue, partially offset by a modest increase in wellness products revenue. And finally, revenues from others were 6.7 million, up significantly from 3 million in the same period last year, primarily due to revenue from the company's newly initiated business. Gross profit for the quarter was 474.2 million with a gross margin of 83.1% compared to 84.6% in the same period last year. This margin change reflects our strategic shift towards more product-focused offerings, which naturally carry a different cost structure. On the operational front, we continue to prioritize effective cost management while investing in our strategic initiatives. Total operating expenses were $441.1 million, a decrease of 45.2% from $804.9 million in the same period last year. To break this down, sales and marketing expenses decreased by 45.8% to $395.2 million, primarily due to reductions in marketing and promotion expenses, labor outsourcing costs, and sales costs. As a percentage of total revenue, non-GAAP sales and marketing expenses, which exclude share-based composition, decreased to 69.1% from 76.9% a year ago. Research and development expenses declined by 46.2% to 20.9 million, reflecting our focused approach to product development and decreased staff costs. As a percentage of total revenue, Non-GAAP R&D expenses, which exclude share-based compensation, decreased to 3.6% from 3.7% a year ago. General and administrative expenses decreased by 31.2% to $35 million, mainly due to lower staff costs and subsequent decline in share-based compensation expenses as a percentage of total revenue. non-GAAP G&E expenses, which exclude share-based compensation, is 3.9% compared to 3% a year ago. We achieved a net income of $41.1 million, representing a net margin of 7.2%, despite the decline in revenues. Our adjusted net income, which excludes share-based compensation, was $37.8 million, representing an adjusted net margin of 6.6%. Basic and diluted net income per share were both 0.25 during the quarter. Adjusted basic and diluted net income per share were both 0.23 during the quarter. Regarding our balance sheet position, as of March 31, 2025, we held $1,134. 4.9 million in cash and cash equivalents, restricted cash, and short-term investments, representing an increase of 108.6 million from 1,022.3 million as of June 30, 2024. This enhanced liquidity position demonstrates our ability to generate cash in this period of transition, and our financial foundation remains robust as we forge ahead with our strategic evolution. Looking ahead, our disciplined capital allocation, strong cash generation capabilities, and ROI-focused assessment methodology provide us with a solid foundation during this transformative phase in our business. As we move into the next quarter, our financials will provide greater visibility into the results of our strategic transformation. as we will be consolidating last month's operating results for a full quarter period. Our strategic resource allocation away from traffic-driven businesses and improved operational focus give us confidence in our ability to execute. We remain committed to maintaining our robust financial position and transparent communication with our shareholders as we progress in our strategic evolution. 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 and 1. To withdraw your question, please press star and 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. Our first question today comes from Michael Kim with Zach. Please go ahead.

Great. Good morning and good evening, everyone. Thanks for taking my questions. First, just curious if you could speak a bit more to the strategic vision for Let's Van and just how you plan to leverage the company's marketing expertise to enhance growth going forward. Thanks.

Yeah, sure. Thank you for your question. I will answer in Chinese. 自从2020年成立以来, S1始终在围绕着全球艺术家的一个挖掘和 IP 孵化, IP 运营, 版权的商业化,潮玩的文化推广。 Since its launch in 2020, Let's Run has built its presence across global artist discovery, IP incubation and management, copyright commercialization,

prompting prop toy culture and related industry investments. Our goal is to become a global leader in IP and cultural innovation, as well as a top player in the prop toy industry.

基于来斯万在潮玩业务方面有坚实的IP和产品的一个基础, 以及经过验证的一个运营的方法论, 量子之歌会全面的赋能来斯万这家公司, OK.

Leveraging Let's Wants established the IP portfolio and proven operational expertise in PopToys. Quanticene will drive Let's Wants' omnichannel expansion. We will share our fundamental capabilities, particularly in our founding team's expertise in corporate leadership, business operations, digital infrastructure development, and user growth to bridge online and offline retail channels. Our collaboration will establish a complete ecosystem, spanning IP development through immersive consumer experiences.

这样的协同不光是简单的资源叠加, 而是基于量子之歌在成人在线教育这个领域积累的两大核心能力, 来去跟潮玩行业进行一个高度的契合。 首先是数据驱动的精准营销, We have mature market marketing and brand operation capabilities that can accurately reach our target group and create brand volume. Second, it is community operation and user experience. Our core team has accumulated very rich social management and active experience in past businesses through deep integration of product operation, market, and other capabilities. We believe that Let's Run can achieve more efficient brand upgrade and business growth in the market.

This collaboration represents modern resource consolidation. It's powered by the Qantas' two core competencies, honed in iDOT online learning that translates perfectly into PopToys. First, our data-driven marketing approach lets us precisely target consumers using our proven brand management system, creating comprehensive brand impact. Second, with our extensive community management expertise, we will enhance user experience to drive community engagement and loyalty. Through fully integrating product development, operations, and marketing capabilities, we are confident that Swan will successfully upgrade its brand while expanding its business in the pop toy market.

具体来说在下面几个方面, OK. To be specific,

We will cultivate world-class operational competencies across the following dimensions to ensure flawless execution and tangible business outcomes. The first is our original IP incubation. We've developed a systematic IP cultivation framework and methodology that identifies emerging cultural trends, executes targeted creation development, and implements rapid market validation. This data-informed approach has already used 10 distinctive IP assets as of March 2025.

第二点是产品的全域的研发, 以潮流的态度为基础, 用用户艺术的视角为标准, 基于消费者的圈层的需求, 达到IP行业的产品力, 为IP产品生态的打造做好最重要的一环。 Second is holistic product innovation strategy.

We merge cutting-edge trend sensibilities with artistic integrity. translating nuanced consumer insights into market-defining IP products, fortifying the cornerstone of our enduring IP ecosystem. Third is our IP influence expansion initiative. We run a smart social network, connect online and offline channels smoothly, and launch creative campaigns, creating a complete promotion loop that keeps our IPs hot and trending.

The fourth point is to create an all-round supply chain and prioritize the top factories in the industry. Based on strategic cooperation with factory partners to produce high-quality products, continuously optimize the efficiency and quality of our supply chain to protect our front-end needs. The fifth point is a strategic cooperation between Shinhua and retailers. At the same time, we started to establish our offline self-serve network and offline self-serve channels. Both is end-to-end supply chain optimization.

We team up with the best factories in the business, building strong partnerships to build top quality products We're always finding ways to speed up production and improve quality so we can keep up with what consumers want. Fifth and finally is our Omnichannel growth strategy. We are building ties with trusted distributors while rolling up our own direct sales channels, both online stores and physical retail spots, to build a complete, flexible sales network. Our IP Poptoys business runs as one complete system, We always put products first, constantly improving how we work to quickly boost the last one's performance and bring fresh energy into the industry.

Okay, that's all for the questions. Thank you.

Great. That's very helpful. And then just maybe to follow up, any sense of what the current sales mix for Let's Run looks like just in terms of products, IP, you know, channels, or maybe geographies?

Hi, Michael. I'll take your question. Yeah, that's a good question. I think just as mentioned by Matt, our chairman and CEO just now, at the end of this quarter, Let's Run has already created 10 original IPs. Since our investment in Last One in December last year, we are focusing this year on building two to three standout IP-based PopToy products to establish our brand in the market. We are growing our IP portfolios through continuous in-house development and licensing third-party IPs, constantly upgrading both our product quality and business skills. Last one has strong IP development capabilities and well-established partnerships with major pop toy retailers. This year, we are doubling down on these relationships, working closely with key partners to launch hit IP products through co-marketing and joint operations. This approach will boost both brand recognition and sales performance this year. And also, we are rapidly expanding our PopToy IP lineup while building our own retail network, both online and offline. Our successful pop-up store at Beijing Chaoyang Joy City that launched in May last month proved the model. And based on its strong performance metrics, we are now accelerating the route out of more branded stores. We expect our direct retail sales to grow significantly through late 2025 and into 2026. Concurrently, we are optimizing our omnichannel online operations by integrating social media traffic, e-commerce platform resources, and proprietary online channels to create a seamless integrated online to offline marketing ecosystem. From a regional perspective, currently mainland China remains our primary revenue source. We have begun expanding internationally this year, especially since the acquisition and consolidation of the business, launching in Southeast Asia and laying the groundwork for North America. committed to growing globally, and while 2025 marks our first step overseas, we expect our geographic sales mix to become more diverse in the coming years. Thank you.

Great. Thanks for taking my questions.

The next question comes from Alice Kai with Citibank.

Please go ahead.

Hello. Thank you, Benjamin, for taking my question. And I have two questions. So, typically, first, what revenue contribution do you expect from that land in Q4? And second, given the decline in education revenues, how will you balance the shortage allocation between the legacy business and new initiatives? And will you continue reducing Thank you, Alice. I will take your question.

It's very, very important. So as we have just disclosed, the profit and loss statement of last one business will be merged and consolidated into QSG Group's consolidated financial statements starting from April the 1st. And also, Wabuku and our key IP and also other IPs, all of the financial statements will be merged in the future starting from April the 1st. and we will disclose specific information in a timely manner. Since investing in LAS1, based on its excellent product strengths, we'll continue to focus on operating Wacoku and one to two other core IPs, as I just mentioned in the last question. Currently, the overall sales process of LAS1 is very good, with a significant increase year-on-year improvement since our acquisition. Also, currently, we are cooperating with key channel partners, and the shipping price has a certain discount on the terminal price because of this sales model. At the same time, this year we will increase the proportion of our own self-operated channels and overall income level and also the price level will gradually improve. And in terms of the Q4 estimate and forecast, I think with the deepening of our strategic adjustment of the business model and also the improvement of our integrated operation with last one, it is expected that the pop toy business will account for a very significant level of overall revenue at the consolidated level in the next quarter, starting from the next quarter, in fiscal year 2025 Q4. We will continue to optimize the operating system of the pop toy business, and we will also disclose revenue guidance as soon as possible at the proper time. In terms of the traditional education-related business, we continue to search for and explore high-quality growth business models, and we are independently evaluating their performance based on specific business types from a fundamental perspective. I think the current decline in revenue from the education-related businesses is also our deliberate result of the strategic transformation from traffic-driven to product-driven business model. As you can see, although our revenue has declined, we still maintain stable profit performance and a solid balance sheet. Next, we will continue to evaluate the ROI, of such kind of KPIs, and especially the long-term user value of this type of business in order to optimize the overall business foundation. For Lactran's PopToy business, it has a great growth potential and business model. And it seems that the funds, operating resources, and foundation we have accumulated are sufficient to support the development of this business, maybe we will disclose a separate business segment in the next quarter. And this business, independently, we see that has a very bright future in terms of both the revenue and the mid-term and long-term bottom line. For the revenue recovery or maybe in the next quarters or next year, we will still independently evaluate the optimization of business models and revenue growth arrangements for different types of businesses. For the overall revenue growth of the group, we expect the revenue of the pop toy business to continue to show a strong growth trend which we will be seeing in the relevant figures in the subsequent quarterly disclosures. We will evaluate the revenue growth of other business segments specifically and only attempt to start growth again on the basis of meeting conditions such as product quality driven, good UE performance, and good user feedback, such kind of product-driven based KPIs. Yeah, so that's my answer. Yeah, hope that helps. Thank you.

Thank you, Tim, for your updates. Very helpful.

Thank you, Alex.

Since there are no further questions, I'd like to hand the conference back to management for any 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 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 attending today's presentation. You may now disconnect.