U.S.-Listed Liulishuo’s Dilemma between Profitability and Sustainability
With increased revenues at greater expenses, technological advantage and deeper resource-integration are where Liulishuo's sustainability lies, as AI-based tech continues to be a big disruptor in the adaptive online education market.
Jan. 14th, 2019 /EqualOcean/ - Liulishuo (流利说), a Shanghai-based AI-powered English language learning platform, (means “speaking fluently”) went public at the New York Stock Exchange under the ticker “LAIX” on Sep. 27, 2018. Morgan Stanley and Goldman Sachs are the joint bookrunners on the deal. The company filed for a USD 100 million US IPO.
Lower than its target but in line with its previous expectations, Liulishuo has raised USD 72 million . The funding will be used for research and development, sales and marketing and general working capital of operation.
Founded in 2013, Liulishuo aims to redefine language learning in China’s online education market with the innovative technologies, ushering a new era of AI-empowered linguistic learning.
An AI-based mobile learning experience is much different from the traditional one in the classroom or online teaching, which is vulnerable to the high costs to grab teaching resources and attracting new users/learners, sometimes high expenses to pay the rents as well. Liulishuo’s rival VIPKid also chases after the massive English language learning opportunity in China by providing online oral English tutoring. But Liulishuo sets forth to exploit the transformative digital gold-mine opportunity through a shift from teacher-centric to learner-centric and more adaptive.
The company’s founder WANG Yi (王翌) is a former Princeton computer science doctor and product manager at Google. WANG employed the “freemium” business model to attract users with free services at first and then convert free users into premium users.
Winning premium users is not that easy. Combining gamification learning process and social media’s psychological drive, the English Liulishuo APP employs voice recognition technology and artificial intelligence algorithms to evaluate users’ verbal English speaking skills and offer ratings and individualized feedbacks towards each task. Users can share results on his/her social networks at last. The company reads users’ mind, helping build users’ confidence by giving them a sense of accomplishment.
In the first half of 2018, Liulishuo generated USD 35 million in revenues, growing 6 times compared to the same period in 2017. In the company’s unaudited financial results for the third quarter ended September 30, 2018, Liulishuo has 97 million registered users, approximately 900 thousand are premium users. Thanks to the flagship APP “English Liulishuo”, “DongNi English” and “IELTS Liulishuo”, the company recorded a MAU (monthly active user) of over 7 million for the first half in 2018, and an average amount of time spent on their products/services exceeded 1 hour.
However, the company is exposed to low a conversion rate (1.2% of Liulishuo, below the average 2%-4% in the industry) and huge investments in ensuring users experiences. In a field with low barriers to entry, it is crucial for the company to keep users’ loyalty, which inevitably led to huge investments and expenses in R&D and marketing, which thus plagued Liulishuo’s profitability.
In the third quarter of 2018, the company recorded net revenues of USD 26 million, growing 265% (YoY), and a gross profit of USD 19 million as a result of increasing economies of scale effect. The cost of revenues simultaneously increased 245% from USD 2 million for the same quarter of 2017 to USD 7 million. Its aggressive sales and marketing expenses as a percentage of net revenues declined to 113% this year from 170% in the third quarter of 2017. Yet, the gross margin needs to deliver 85% - with a recognition of revenue that can cover the cost of revenues and the operating expenses - to break even, while the disclosed one was 73% - rendering a net loss of USD 21 million - an 120% increase for the same quarter of 2017. This indicates that it’s still losing money.
Regarding its post-IPO performance, as of Jan. 10, 2019, its stock price (NYSE: LAIX) has slipped from USD 12.55 at its debut to USD 8.65 with a USD 415 million market cap. Though this stock performance is not that satisfactory, the stark increase of its premium users of Liulishuo’s products and services - an impressive 158% compared with the same period in 2017 - has pointed out the company’s ability in monetizing its services at early stage.
Owing to an unparalleled advantage that Liulishuo is building the world’s largest database covering a broad range of users from different districts and with different proficiency levels, it is able to build its own moat by training AI NLP (natural language processing) algorithms based on those data. Assuredly, every aspect of human society is going to be revolutionized by AI in the future. Technology advances and resource-integration are definitely going to drive Liulishuo’s long-term growth, while “English learning is just one of the so many education scenarios that AI can change”, as Wang noted.
To attract more users, Liulishuo also works with offline and online English education institutions or companies - as its “To B” (business) strategy - to provide language services for them, which contributes to higher brand awareness and core technology recognition .