Earnings Call Transcript - AIXI Q4 2023

Operator, Operator

Good day ladies and gentlemen. Thank you for standing by, and we warmly welcome you all to the Xiao-I First Full Year 2023 Earnings Conference Call. Currently all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections you may disconnect at this time. Now, I will turn the call over to Berry Xia, IR Director of Xiao-I. Berry, please proceed.

Berry Xia, IR Director

Thank you operator and greetings to all participants. Welcome to Xiao-I's 2023 earnings conference call. Present with us today are Mr. Max Yuan, Chief Executive Officer, and Mrs. Kelly Weng, Chief Financial Officer. We announced our 2023 unaudited financial results earlier today. The press release is available on the company's IR website as well as from Newswire Services. A replay of this call will also be available in a few hours on our IR website. During this call, we will discuss our business outlook and make forward-looking statements. Please note that these comments are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Also the forward-looking statements are based on our predictions and expectations as of today. Actual events or results could differ materially due to some risks and uncertainties. Including those mentioned in our filings with the SEC. The company does not assume any obligation, to update any forward-looking statements except as required under applicable law. Also please note that unless otherwise stated all figures mentioned during the conference call are in U.S. dollars. With that, let me now turn the call over to your CEO, Max Yuan. Please go ahead, Max.

Max Yuan, CEO

Thanks Berry. Good day everyone and thank you for joining us today. The year 2023 marked a turning point for the general TV AI sector with tremendous growth on the horizon. I think it is undeniable and not easy. This technology has the potential to revolutionize the entire technology sector, and become an integral part of nearly every business sphere. As a game changer, AI hosts immense value up for grabs. In terms of financial performance, 2023 was a year of stable growth for our company. Our total revenue reached an impressive $59.2 million reflecting a remarkable year-on-year increase of 22.8%. This growth was primarily driven by our strategic focus on AI model services, particularly our Hua Zang LLM, which spearheaded the growth of our MaaS business by 48.5%, reaching $19.2 million. Simultaneously, our non-MaaS business also experienced healthy growth, with revenues increasing by 13.4% to reach $40 million. I am delighted to announce that 2023 has been a pivotal year for us, marked by groundbreaking initiatives. If you were present at our 2023 interim results call, you may recall the exciting news I shared with you in July 2023. We launched our own ChatGPT, Hua Zang Universal Large Language Model. In simple terms, it encompasses a wide range of capabilities and advances that address challenges faced by global AI models. It is designed to be controllable, customizable, and deliverable. Another highly promising initiative I want to highlight is our Hua Zang ecosystem, which was built upon the strong foundation of our Hua Zang LLM and was introduced in October 2023. This ecosystem represents a revolutionary development, with significant implications for the industry. Also, it not only streamlined our processes but also empowered us to provide tailor-made solutions to our customers, enabling them to create a unique and branded conversational AI experience. In just a few months since its launch, we have successfully implemented the Hua Zang ecosystem, facilitating the commercialization efforts of our partners in various industries. The system is now collaborating with thousands of ecosystem partners across more than 50 industry fields, including finance, healthcare, automobile, and manufacturing. This success validates the commercialization path of the Hua Zang ecosystem. With such robust support, I eagerly anticipate unlocking significant commercial potential and generating substantial returns for the company in the near future. Next, I want to emphasize the critical importance of strong research and development capability for our ongoing success, and our ability to create innovative solutions in the rapidly evolving field of AI technology. We are dedicated to meeting the needs of our customers by listening to their feedback and requests and responding with new solutions and enhanced features. As of March 31, 2024, our research and development team consists of 158 talented individuals, making up 56.2% of our overall workforce. Among them, we have 104 Bachelor's Degree holders, 17 Master's Degree holders, and seven individuals with doctorates. Many of our senior engineers have accumulated more than a decade of experience in the computer, internet, and AI industries. Additionally, we collaborate with a number of AI experts from universities and research institutes. I'm pleased to share that as of December 31, 2023, we had a total of 258 patent applications, including pending, expelled, and transferred cases, excluding granted patents. We also attained 318 patent grants and registered 137 software copyrights. In 2023 alone, we filed 36 new patent applications, received 39 patent grants, and registered seven software copyrights. Among these, there were six patent applications specifically related to large models, all filed in 2023, and three registered software copyrights in the same category. Additionally, there were two patent applications related to OOTD fusion, our upcoming new network architecture for realistic and controllable virtual trials. It is worth noting the high popularity of OOTD on GitHub and the discussions on platform X indicating significant attention from potential consumers and promising prospects for product commercialization. To further strengthen our capabilities, we have established joint laboratories with institutions such as the Institute of Software of the Chinese Academy of Science, China Normal University, and Hong Kong University of Science and Technology. Furthermore, we have fostered close partnerships with Tsinghua University, Fudan University, Shanghai Jiao Tong University, Beijing University, our post and telecommunications, and Peking University. Together, through our ongoing commitment to research and development, we are poised to conquer new horizons and shape the future of AI technology. Moving on to another key strategic focus, globalization, our efforts to enhance global expansion gained momentum with the establishment of two overseas subsidiaries in the U.S. and the United Arab Emirates. These strategic initiatives are integral to our vision of becoming a global leader in AI technology, enabling us to better serve our customers, and uncover opportunities in new markets. In conclusion, 2023 was a year of unprecedented growth, innovation, and strategic expansion for Xiao-I as we embarked on the journey ahead. Fueled by the successes of the past year, we are confident that we are well positioned to continue our trajectory of growth and leadership in the AI industry. Looking ahead into 2024, we expect that the Hua Zang LLM is set to further strengthen its commercialization efforts, delving deeper into understanding and meeting customers' needs. We expect our B2B operations to continue demonstrating a robust and consistent growth strategy, with around 20% growth rates on a yearly basis. At the same time, the advent of LLM has significantly expanded the potential for AI in consumer applications. We believe the integration of AI models into consumer applications has become more seamless and impactful for achieving innovation and meeting consumer demand more effectively. Hence, we further expand our business into the B2C market. On the front of our R&D, we will continue to make endeavors and investments to strengthen our product capabilities. Collaborative efforts with our partners and customers to integrate our large language model will be a central part of our approach. As you may have noticed, we have recently announced very exciting progress regarding several new products, including OOTDiffusion. As I mentioned earlier, it's a new network architecture for realistic and controllable virtual trials, and the Diff daily investor focus platform utilizes the once-the-air technology to provide capital market analysis and insights to support professional investors' decision-making. Our commitment to pushing boundaries and revolutionizing industries will propel us towards a future where AI has a profound impact on people's lives. Together with our partners and customers, we will continue to embrace new challenges and opportunities to shape the world through cutting-edge AI solutions. Now, let me turn the call over to our CFO, Kelly, to go over our financials.

Kelly Weng, CFO

Thank you, Max, and welcome to everyone on the call. Before I go into numbers, please note that all numbers presented are in U.S. dollars, and all comparisons are on a year-over-year basis unless otherwise stated. For a more comprehensive breakdown, please refer to our earnings press release. Driven by strong digital transformation needs in enterprises, we've hit a record top line for the year. We experienced a 22.8% growth from the previous year. Not just that, the robust performance also translated into a 270 basis point expansion, bringing our gross margin to an impressive 66.6%. As pioneers at the frontier of cognitive AI, we've unveiled our large language model. This innovative model has propelled our R&D investments to unprecedented heights, underscoring our ongoing dedication to harness and spearhead the transformative power of core AI technology. With that, we expect to capitalize on vast opportunities in the AI realm. Breaking it down further, the increase in net revenue was primarily due to the increased sales of cloud platform products. These numbers helped offset the declines in other areas, led by a continued shift toward subscription-based cloud platform products from one-time software purchases. Keep in mind that some of our revenue channels, like tech development services and software purchases, typically shine in the last quarter of the year. I'd also like to bring to your attention that the rise in the cloud platform product sales is actually driven by the development of our MaaS business. By nature, our MaaS business is mostly delivered through cloud platform products. In 2023, our MaaS business grew by 48.5%, reaching $19.2 million, with the primary contributions attributed to our Hua Zang large-language model. At the same time, the MaaS business accounted for over 30% of total revenue for the first time. On the profit front, we hit $39.4 million in gross profit, marking a 28% increase from $30.8 million a year earlier. Moreover, our gross margin expansion unfolded as planned, standing at 66.6%, up from 63.9% in the previous year. The increase was primarily attributed to the significant increase in the proportion of revenues from sales of cloud platform products with a higher profit margin of 74.8%. Once again, I need to point out that this was mainly driven by the strong growth of the MaaS business. In board the core concept of providing AI models as a service to users, rather than directly selling the models themselves. Our MaaS business model effectively reduced the barriers to using AI technology, enabling a broader range of businesses and developers to conveniently access and leverage AI models. Now, moving to our operating expenses. Our total operating expenses were $61.3 million, up 18.7% from $33.9 million in the same period last year. Still, the majority of our operating expense increase was driven by a 118.3% rise in R&D expenses, which reached $52.4 million. This reflects our focused investment in the advanced large language model. We expect our latest release, Hua Zang, will play a pivotal role in our long-term growth as our core-creating model metrics, owing to the subjective forgoing as well as the pipeline of announced products under development. Amid ongoing infrastructure growth, we currently forecast our R&D investment to remain at around 50% of our total revenue. As a result, our operating loss for 2023 was $21.9 million, compared with an operating loss of $3.1 million a year earlier. Net loss was $27 million, compared to a net loss of $6 million in 2022. Looking ahead, we remain committed to managing costs and enhancing efficiency as we focus on allocating resources strategically, particularly in the private area of AI technology R&D. We believe this approach will position us well for continued growth and success. Thank you for your attention. We will now open the floor for questions. Operator, please go ahead.

Operator, Operator

Thank you. We will now take our first question from Brian Lantier from Zacks Small-Cap Research. Please go ahead.

Brian Lantier, Analyst

Good evening and good morning to those joining from the East Coast. I just wanted to touch base on the OOTDiffusion project. Get a little bit more color maybe around when you see that becoming a commercial product and what you think the eventual pricing model will look like. Will it be principally a cloud service, or do you think that could be a new model that you'd be looking at?

Max Yuan, CEO

Thank you for your question, Brian. I need to clarify some details for our management team to ensure effective communication. The product OOTD is a brand new offering, set to launch in May. It will target consumers and will have a business model similar to that of the GPTs, operating on a subscription basis. The first edition will derive from other subscriptions, but there will also be one-off generative business models later on. Additional payments will be based on the generated content. We hope this information answers your question. Thank you, Brian.

Brian Lantier, Analyst

Great. Thank you. If I could just follow up with one other question regarding the, I think you called it the Diff, the daily investor focus. I haven't seen too much information on that. Will that be a consumer product for everyday investors? Or would that be a product you'd be marketing to some of your banking clients?

Max Yuan, CEO

Brian, in response to your question about the Daily Investor Focus, this product is a new platform designed to serve as an agent or co-pilot for potential investors and customers. Initially, it will be applied in the financial industry, but the platform will expand to various other scenarios. This includes applications beyond finance, such as writing research reports, asset analysis, and market analysis reports. We see opportunities in different verticals that could benefit from report writing capabilities. For the financial industry, we plan to launch the first product based on this platform in May, named Daily Investor Focus. This product will specifically target retail investors, assisting them in gathering market information, sentiment, and occasional alerts from the capital markets. Our goal is to provide retail investors with comprehensive data support to enhance their confidence and resources regarding investment information. The platform leverages our large language model and a multi-agent workflow, utilizing various agents to process consumer requests. We believe this innovative business model and platform will significantly improve our consumers' experiences, making their investments simpler and providing more insights and access to market information. Thank you.

Brian Lantier, Analyst

Great. Thank you so much for that.

Operator, Operator

Thank you. We will now take our next question. Please stand by. This is from the line of Wilson Lou from Foration Investment. Please go ahead.

Wilson Lou, Analyst

Yes, this is Wilson. And it sounds very attractive and interesting. So I have a question for you. I would like to ask how you view the future development trend of the fixed data model industry?

Max Yuan, CEO

Thank you, Wilson. I'll translate for Max now. There is a pivotal moment for the commercialization of large language models and AI technologies. The prevailing view in the industry is that we need to achieve AGI. It's often stated that one must prioritize scale and computational power, subscribing to the belief that larger models yield better performance—essentially, bigger is better. However, we are not entirely convinced by this notion. There is a caveat, though; it’s costly. The larger the model, the higher the training costs. This necessitates substantial computing power and data, and there’s no straightforward solution. It's akin to trying to turn lead into gold; it involves much trial and error, translating to considerable computing power requirements. Consequently, we believe the most crucial step right now is to deliver a customizable large language model based on our current architecture and technology framework, with cost-effectiveness and potential for commercialization. In business-to-business contexts, we find that mid-tier large language models do not need to exhibit top-tier performance. Simply put, you don’t need a cannon to shoot at a target. The existing capabilities of large language models are adequate to significantly boost corporate operational efficiency. Ultimately, what’s more important is the economic viability and user experience. Therefore, the key to large language models is to align them with business needs and process them sensibly. On the consumer side, the advent of large language models is rapidly expanding the range of AI product applications. We are increasingly witnessing various uses of AI—a true Blue Ocean. This year, we may see the emergence of highly popular applications developed from large language models, such as the Daily Investor Focus and OOTDiffusion. These are the paths the company is exploring. We hope this answers your question. Thank you.

Wilson Lou, Analyst

You're welcome.

Operator, Operator

Thank you. We will now take our next question. This is from Anthony Chang from BE Investment. Please go ahead.

Anthony Chang, Analyst

Hi. Dear management, thank you for the answers. I would like to follow up on your previous answer that there are indeed many different applications and scenarios for your business model. I can hear that you have clients in financial institutions, telecommunications, pharmaceuticals, manufacturing, and local government. But which client base are you going to focus more on and what are your strategies for those client bases? Thank you.

Max Yuan, CEO

Thank you for your question, Anthony. It's a very good one because it addresses the critical aspect of which customer segment we will prioritize. We have two primary dimensions: business-to-business and business-to-consumer. As you noted, our customer base is extensive, spanning industries such as manufacturing, finance, and logistics. We will delve deeper into these customer segments and utilize their business development processes and strategies to assess their capacity for adopting more AI technology applications. Our focus will be on understanding their pain points to deliver customized large-function models alongside integrated AI solutions. Within the business-to-business context, we will leverage the delivery cases we've gathered over more than 20 years of commercialization experience to provide enhanced applications and solutions. However, we also believe that advancements in technology will significantly impact business-to-consumer applications, thus we will increase our focus on that side as well. For instance, OOTDiffusion is the algorithm we plan to introduce to our consumers, with a product built upon it. Additionally, we will be launching the Daily Investor Focus in May. We are also developing hardware products aimed at addressing ESG concerns and responding to unmet market needs. Our vision remains to enhance lives through AI technologies while ensuring that our products reach the right commercialization process across various segments. In summary, we aim to better understand our customer base to deliver tailored, enhanced products rooted in our large language model and associated AI technologies. We will continue to investigate consumer opportunities and address underserved business segments. Thank you.

Operator, Operator

Thank you. We will now take the next question. This is from Isaac Chan from HandGrant Holding Group Limited. Please go ahead.

Isaac Chan, Analyst

Thank you for taking my questions. We have noticed that the company has disclosed its plans to enter overseas expansion and expand into the consumer market. Could you provide information regarding the company's B2C strategy and overseas expansion strategy for this year? Thank you.

Max Yuan, CEO

Thank you, Isaac, for your question. We want to address your inquiry regarding our overseas business expansion strategy. Our focus today is on commercialization. We will continue to explore opportunities in the B2B market to ensure steady growth with our current customer base. For overseas expansion, we have revised our strategies based on extensive market analysis and research on global AI application scenarios, including the MENA region, Southeast Asia, the United States, and Europe. Interestingly, in areas where we have strong R&D capabilities, AI applications have not met expectations. This indicates that our company has significant potential to succeed. We are well-prepared to introduce more mature and experienced products to international markets. Our corporate structure has been adjusted to support this expansion, and in the latter half of this year, we expect to launch more products overseas to enhance our product offerings. On the consumer side, we believe our AI capabilities have reached a point where we can improve the satisfaction and experience of our consumer products. By leveraging our LLM technology, RPAs, and deep learning, our goal is to offer superior products to consumers. The initial applications we are releasing include OOTDiffusion and the Daily Investor Focus, with more to follow. In summary, for both B2C and international expansion, we are confident that we will utilize our strong AI technology capabilities and achieve significant growth in the consumer market. We aim to provide products that exemplify AI for good. Our mission is to ensure AI technology is transformative and inclusive, developing solutions that are both advanced and empathetic. We strive to positively impact people's lives by making AI technologies accessible to those who need them most, improving their quality of life globally from B2B to B2C. That is our strategy in response to your question. Thank you.

Operator, Operator

Thank you. We will now take our next question. This is from Zheng Yang from BE Investment. Please go ahead.

Zheng Yang, Analyst

Hi, first thanks for your presentation, and I have some questions regarding IMD investment. So as we know the IMD is very important for high-tech companies like Xiao-I. Well I'm just curious about how much your IMD investment is, and after the investment when are you expecting to turn a profit? In the meantime, would there have the liquidity gap? Thanks.

Kelly Weng, CFO

Thank you, Zheng. This question is for Kelly. To answer your question, we will be leveraging our large customer base to drive continued growth in the TD segment. Our revenue from this area has been strong, and we anticipate it will maintain solid year-over-year growth of about 20%. This expectation reflects our confidence in our business operations and the opportunities in the Chinese market, not only for TD but also for the B2C segment we've discussed. We will be launching more products using a wolf pack strategy to introduce applications sequentially, anticipating incremental revenue from the TD side. Regarding our R&D investment, approximately 50% of our revenue is currently allocated to this area, though this ratio will decrease compared to last year. Our main R&D focus will be on the model as a service product and the development of Hua Zang LLM, which are key to maintaining our competitive advantage in the AI industry. As for our profitability projections, we expect around 20% revenue growth on the B2B side and in the domestic market, with additional upside potential from our B2C segment and international markets. Our SG&A expense rate has already been reduced to 15%, and with an expanding revenue base, we expect to enhance operational efficiency further in 2024. We predict that about 50% of revenue will continue to support R&D to ensure we remain at the forefront of technology. Consequently, we believe the company can significantly reduce losses in 2024 and might even achieve profitability. In terms of cash flow, with rising revenue and optimized costs, we anticipate operating cash flow to turn positive. We will continue to leverage our long-term technological advancements in line with market demand to commercialize our technology through the regular launch of new products, broadening our product offerings, and refining our product matrix. Our goal is to establish a sustainable growth trajectory for our business. In summary, our financial outlook and strategic initiatives underscore our commitment to maintaining a balanced approach that nurtures our core business while exploring new opportunities and investing in innovation, with a focus on addressing our commercialization challenges. We believe this strategy will support our growth, deliver value to our stakeholders, and positively impact the AI technology landscape. Thank you for your question.

Operator, Operator

Thank you. Seeing no more questions in the queue, let me turn the call back to Mr. Yuan for closing remarks.

Max Yuan, CEO

Thank you operator and thank you all for participating in today's call and for your support.

Operator, Operator

Thank you all again. This concludes the call. You may now disconnect.