Liulishuo has already proven itself in China. As of June 2018, it claimed 83.8 million registered users. Using a freemium model, the app has over 2.5 million customers paying for its advanced offerings.

After going public at the New York stock exchange it gathered USD71.9 million, though it was far less then what the founders had expected to raise. Despite opening for trading up 28% at USD16, shares gradually slid throughout the day and closed relatively flat to its IPO price. 

The company announced to use the funds generated from their IPO to continue to research and develop their products. Also to begin to market the products more intensively and in regions where it has not yet established itself.

The app works by recording users speaking. It then analyzes what they have said and delivers lessons based on areas in which they can improve. In other words, it’s a full-on AI-powered personalized learning app as dreamed of by numerous tech executives.

Liulishuo is not the only company to use AI to teach English. In April 2018, online English tutoring giant VIPKid raised USD500 million in Series D+ funding. Much like Luilishuo, CEO CINDY Mi said her company plans to use the funds to develop their content, teaching tools, and develop AI solutions.

The company is already using AI to help manage tutors. The algorithm tracks learners to ensure they remain engaged in their studies. As VP of Technology ZHANG Yanjing told the China Global Television Network last summer, “Interactivity and involvement are crucial in online education. We developed a complicated algorithm to analyze students’ eyes and how they move. And we train the model through deep learning. Each student has different ways to express feelings, so the feedback could be very different.”

CINDY Mi, and others have hinted that AI development at VIPKid will go beyond ensuring the quality of tutors. In a separate press release announcing the funding round, Mi said the funds will be partially used for “latest advances in machine learning to explore and pioneer the future of learning.”

Liulishuo CEO Wang has also hinted that the AI developed by their company may be used for other purposes.

“From day one we have not ruled out the possibility of delving into other realms using AI. But English learning is the one area that we would like to focus on right now,” Wang told China Daily.

The online education market of China

According to iResearch, the revenue of China’s online education market reached CNY251.76 billion in 2018 with a year on year growth of 25.7%, which was estimated to keep a growth rate of 16%-24% in the following 3-5 years. The growth rate may decline but will have a steady rising momentum. The rising acceptance level for online education among users, enhanced online service payment willingness and improvement in the online learning experience and effects are the main reasons for the steady growth of the online education market.

Paying users of China’s online education reached 135 million in 2018, which was an increase of 23.3% from the last year, and the growth is estimated to remain in the range of 14%-21% in the next 5 years. 

There are a number of factors contributing to the steady growth of China’s private education market. The first is the increasing population of children resulting from the loosening of China’s one-child policy in 2013 and the institution of a two-child policy in 2015. Another policy-related driver is the Chinese government’s recent attempts to reform the traditional examination-focused education system, which have resulted in the growth of alternative approaches to learning. At the same time, China’s consumers are becoming increasingly focused on finding more customized, personalized learning pathways, which is creating an environment where new learning providers, and particularly technology-enabled offerings, are achieving strong market acceptance.

China’s education market is still very fragmented with even the largest companies in the sector still having a small market share. The growth in internet and mobile internet penetration has helped drive a rapid increase in China’s online education market in recent years.

Eric Yang, CEO of iTutorGroup, one of China’s biggest online education firms, forecasts that the current 5% market share that online platforms cover of the private education sector will jump to 50% in the next three to five years.

China’s English Language Learning Market

English language learning represents one of the most attractive and promising sectors in China’s private education market. According to the iResearch Report, it is estimated that there are 438 million English language learners in China in 2017, and demand for English learning products and services continues to grow as more and more people aspire to improve their language skills. In addition, young Chinese consumers in particular increasingly desire to learn English in order to improve their general capabilities rather than for specific examination preparation. According to the iResearch Report, the size of China English language learning market, as measured by revenues, reached approximately CNY228.8 billion in 2017. The market size is expected to continue to grow to CNY548.8 billion in 2022, representing a CAGR of 19.6% from 2018 to 2022. As a further indicator of the prominence Chinese society places on English language learning, the Chinese government published its own standard in June 2018 with a focus on English language capabilities, to further improve the evaluation of the English language in China and the ability of Chinese to use the language in real life experiences.

China’s English language learning market includes various segments, typically defined across user groups and learning purposes, each of which has different scale and growth profiles. The three key segments for user groups are pre-school, K-12 and adult. Examination preparation and general proficiency improvement are the two key segments of learning purposes.

While the K-12 segment represents a larger revenue share than the other two segments, the adult segment shows a higher growth rate. The examination preparation segment enjoys significant revenue share with a constant, high growth rate. This is primarily driven by K-12 English examinations preparation. The segment of English language test preparation for studying abroad is also growing rapidly in China. The capability improvement segment is still at an early stage but is gaining popularity among Chinese millennial.          

The encouragement of AI+Education represents a significant opportunity

In education, AI has the capability of delivering a personalized learning experience at lower costs through large-scale data processing, deep analysis of user behaviors, speech recognition, and automatic assessment, and algorithms that recommend the most suitable content.

AI can complement or even fully replace many of the functions served by teachers in a learning setting. AI can assess learner proficiency, provide real-time feedback on performance and curate and deliver educational content in a personalized manner. According to the iResearch Report, the size of the AI-powered online education market in China, as measured by revenue, reached approximately CNY3.7 billion in 2017. The market size is expected to continue to grow to CNY172.4 billion in 2022, representing a CAGR of 118.3% from 2018 to 2022.

Can Liulishuo shrug off its competitors?

Liulishuo could face competition from other educational companies using AI as the center of their business. Companies like VIPKid use AI to help teachers enhance their teaching efficiency, guide the teacher with a suitable curriculum, etc. VIPKid is an English teaching online company just like Liulishuo but with larger funds and larger spending on R&D to improve artificial intelligence resulting in the introduction of new technologies way much faster than its competitors. VIPKid has raised a total of USD825 million in 7 rounds of funding, whereas Liushuo has attracted USD128.9 million (announced) in 5 rounds of funding. Liulishuo also competes with them for talent with technological expertise, which is critical to the sustained development of its technology, products, and services.

Products and services provided by Liulishuo are primarily AI-driven, with AI technologies built into the courses, it transforms the traditional approach to education. Liulishuo operates courses and services on the mobile platform, whereas it is customary in the education industry to have in-person teaching. If users are unable to experience actual improvements in their English proficiency after spending a reasonable amount of time with the AI teacher, they may consider Liulishuos education approach ineffective. Failing to educate and show existing users and potential users about the value and the effectiveness of its innovative approach as well as further promote products and services, Liulishuos growth will be limited and business, financial performance, and prospects may be affected.

Investors agree, as there has been no shortage of capital inflows into the sector over the last decade. Venture capital and private equity investments grew from USD382 million in 2011 to USD2.57 billion in the first half of 2018, according to Deloitte.

Listed Chinese education companies have also been sought-after targets, propelling them to become the world’s largest education firms by market valuation. TAL Education Group and New Oriental Education led the pack in 2018, valued at USD17.7 billion and USD11.3 billion, respectively, according to L.E.K Consulting. 

Still, the industry is not without its problems as the last year has shown as some segments lost their shine following scandals, including child abuse allegations at US-listed RYB Education, which led the central government to tighten controls.

Liulishuos financial performance

Net revenues for the full year of 2018 were CNY637.2 million (USD92.7 million), a 284.9% increase from CNY165.6 million for the full year of 2017. The increase was primarily attributable to growth in subscriptions for the Company’s AI English teacher products including the DongNi English standard courses and the introduction of a new News-based English learning product “Liuli Reading” in 2018.

Cost of revenues for the full year of 2018 was CNY174.7 million (USD25.4 million), a 202.9% increase from CNY57.7 million for the full year of 2017.

Gross profit for the full year of 2018 was CNY462.5 million (USD67.3 million), a 328.8% increase from CNY107.9 million for the full year of 2017 as a result of increased economies of scale. As a result, gross margin also rose year-over-year to 72.6% for the full year of 2018, compared with 65.2% for the full year of 2017.

Regarded as an AI centered online education company, up till now Liulishuo has relatively spent fewer funds for research and development, CNY155.2 million (USD22.6 million), instead has concentrated more on sales and marketing with a spending amount of CNY705.4 million (USD102.6 million). 

Loss from operations, CNY463.5 million (USD67.4 million), has been almost doubled from the year before, due to increased expenses associated with general business growth, user base expansion and general and administrative purposes.

By keeping all the above facts in mind it seems as if Liulishuo has the potential to become a leader in online AI education. As we can see the company's revenue is growing and the users are increasing the model will help them make money in the long run. As far as the competition with giants like VIPKid Liulishuo will have to increase its spending on R&D and concentrate on improving the efficiency of artificial inteligence.