Here Group Limited Q3 FY2026 Earnings Call

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Here's 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. Tina Tang, the company's manager of investor relations. Please go ahead, ma'am.

Thank you. Hello everyone and welcome to Here's Earnings Call for the third quarter of fiscal year 2026. With us today are Mr. Peng Li, our founder, chairman, and CEO and Mr. Ting Hsieh, our CFO. Mr. Li will provide a business overview for the quarter, then Ting will discuss the financials in more details. Following their prepared remarks, Mr. Li and Ting will be available for the Q&A session. I will translate for Mr. Li. You can refer to our quarterly financials results on our AYA website at aya.heelgroup.com. You can also access a replay of this call on our AYA 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 earnest press release, which also applies to this call, as we will be making forward-looking statements. Please note that all numbers stated in the following management prepare remarks are in R&B 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 release and following with the FEC. I will now turn the call over to the CEO and founder of HERE, Mr. Li.

Okay, thank you. Good morning everyone and thank you for joining us today. I'm very pleased to announce that we achieved about R&B $165 million in revenue this quarter. This exceeded the high end of our guidance. More importantly, we keep improving our IP and PopToy business. We are consistently optimizing our operations and cost structure to build a stronger foundation for long-term growth. As we all know, the first half of the year, especially the first three months is typically a slow season for the pop toy industry. Beyond working with our channel partners and selling through our own direct channels, we stayed focused on our core strategy. That means building internal capabilities, developing IP-related products and content, and optimizing our channels. The marketing environment remains challenging, but consumers' demand for emotional and experience-based spending persists. We build our IP products and services around what consumers actually need. Let me start with our IP performance. Wakuku remains our flagship IP. It contributed RMB $102 million in revenue in Q3, all around 62.2% of total revenue. Sedona's revenue grew 73.1% quarter over quarter, accounting for 20.2 percent of total revenue. Senono launched in the second half of 2025. In less than a year, it has reached a meaningful scale. This is an early validation of our ability to incubate new IPs. More importantly, we are seeing a growing cross-IP engagement. Wakuku users are connecting with Synono and other IPs, while new users are always discovering our increasingly rich IP portfolio. As we move forward, we keep coming back to one key insight. short-term sales are not the real measure of success the real question is whether an IP can win users and earn a lasting place in their hearts and lives IP development and ongoing operations take time they require long-term interaction between the IP and its users. Often in physical spaces, offline D2C stores are a key part of making that happen. Based on our deeper knowledge of the IP industry, we have refined our strategy. In 2025, our growth was mainly driven by our strong productive capabilities and the strength of our IP portfolio. At the same time, we benefited from favorable market circles, channel pair wins, and celebrity partnerships. These collaborations gave us additional momentum and valuable experience. We will continue to benefit from our partnerships. At the same time, we know that building lasting IPs require strong building and solid operational capabilities. That means building our own systems to reach users directly and engage with them deeply. Therefore, long-time IP momentum will always be our top priority. Revenue should follow from strong IPs, not be the target. To achieve this, we have set the following key priorities. First, keep building IPs and brand operations. Create ongoing interaction between IPs and users through different formats deliver great emotional experiences. We will stick to our strategy, focusing on our core IPs while creating and growing new ones. Around our core IPs, we are speeding up the development of innovative products. This will take about three to six months. We expect to launch new products from our core IPs very soon. Second, keep expanding our offline D2C stores and the RoboShop. This extends our brand reach and user touch points. We treat our offline D2C stores as an extension of our IP products. The store itself is a product. It unifies the IP expression within our self-operated brand system. As of today, we have opened seven D2C brand stores. Each store serves as a space for brand user interaction. Our membership system has also been upgraded. We now have a full chain. membership management system in place. This lays the foundation for constant user engagement. Our Roboshop, RoeArch, has also recently began. To date, we have developed around 15 Roboshops in three cities. Third, keep building strong online operations, we want to note that online sales are not our goal. Online activities will serve as one of the tools for IP and product operations. This helps us deliver a great consumer experience. First, keep a measured and steady pace on global expansion. In the near term, We plan to open a pop-up store in South Korea and participate in a trade show in the U.S. at the initial market test. Fifth, keep optimizing our business cooperation with channel partners. We pursue mutual benefits and winning outcomes. We work with them to promote our IPs and products, and to deliver great experiences to users. Building IP value and enhancing user experience is a long journey. But with efficient execution, we can move more steadily, better and faster. Our progress comes down to two things. First, IP ecosystem. We are moving from one of his to a repeated engine. As of March 31, 2026, our IP portfolio includes 20 total IPs. That includes 12 proprietary IPs and 8 exclusive licensed IPs. This quarter, we focused on diversifying our IP metrics. We introduced new IPs with unique styles and different target audiences. We also accelerated our new product launch pace for both flagship and emerging IPs. This quarter, we launched a new call-branded IP, Xiao. Its call spirit is defined by four words, cool, stubborn, brave, and free. This message resonates well with young consumers. To drive the launch, we run an integrated campaign across celebrity, social, and fun channels. Leveraging our strengths in IT design, supply chain, and omnichannel sales, we completed pre-launch prep including character development and mass production. Xiao gained a strong market attention and a pre-launch buzz. The strong market response has validated and strengthened our portfolio. It proves that our IP incubation model is scalable and competitive. Beyond that, we have a strong product pipeline in preparation. We will launch them steadily according to our planned cadence. For Wakuku, we launched a new The Handicraft World of Wakuku series vinyl plush dough on March 28. As of March 2031, the initial launch period, the series achieved strong results. Total Omnichannel sales exceeded RMB 20 million. Peek concurrent online viewers reached 28,000. And the total new product explorer topped 100 million. The series focused on handcraft bill, friendship, and warm, healing labs. This depends on our emotional connection with the users. In May, we also released the 520 gift box, Wakuku Heartbeat Devil, as a hunting card set. Recently, we have also launched new products for other IPs. This includes new plush toys, vinyl figures, hunting cards, and the semi-age collections for IPs like Ziyuli, Xenono, Kido, KiliKili, and RY. Each of these IPs speaks to a different audience with unique styles and labels. That's how we built a richer IP matrix. For Synodon, the new generation product Mood On series Vinyl Plus Doe had its offline launch on May 30th and online launch on June 2nd. Second, Omnichannel Reach, we are boosting IP user interaction with a clear focus. Offline first, online empowering. Offline, we operate through three channels, our D2C stores, Roboshop network, and partner channels. First, our self-operated brand stores and Roboshop. As of today, we have opened seven D2C stores in four cities. We recently opened two new D2C stores, one at Shenzhen, Uniwalk, Qianhai on April 25, and another at Hian, Saige on May 1. Both stores are in prime high traffic business areas and that rank among the biggest in their respective cities. We are closely tracking store performance and scouting locations for new stores. We are also expanding into automatic retail. As of June 4th, we have rolled out about 15 robot shops across key cities nationwide. These unmanned vending machines and placed in high-traffic locations. They extend our offline reach without the higher cost of full-scale stores. They serve as full-scale sales channels and brown touchpoints. They make our APIs more accessible with collecting available data on product performance and purchasing habits. Second, partner channels. We continue to work with our channel customers. These partnerships help us reach more consumers through established retail networks. They expand our IPs and brand elements at more offline touchpoints and help us interact with users on the online side our social media presence continues to grow as of green force our community followers across major platforms is approaching 800,000 we use online channels to build content and community. Doing so empowers our IP and brand operations. We have also run several brand marketing events to build brand awareness and drive user engagement. We partnered with Apollo Go, Baidu's autonomous driving platform to integrate our IPs with AI technology and smart mobility. This partnership spans co-grounding in vehicle exposure and youth-focused content campaigns. In May, we participated in the first China New Culture and Creative Market and Trendy Toy Carnival in Beijing. This is a nationwide-level event co-hosted by three central ministries. Here group was the only non-state-owned enterprise featured in media coverage, including BRTV. Our flagship IP, Akuku, was showcased alongside traditional culture activities as a new oriental aesthetics section. Going forward, we will accelerate the creation of more offline scenarios to give IPs and users more spaces to interact. In Beijing, at Beijing Airport, we plan to set up a store to enhance brand visibility and we are actively exploring more similar scenarios. In Hong Kong, we plan to create a dedicated ride experience on the boat at a central pier using our keys, building a unique bronze stand. Operational discipline is reflected in our capital allocation. We continue to align results, support, and cost structure with our strategic adjustments. Whether investing in a new IP, opening a store, or launching a content initiative, we evaluate each potential investment against a clear ROI framework. We don't make guesses. We allocate capital based on information and data from IP Momentum, our offline network, membership system, and sales channels. Thank you for your continuing support. 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 note that all amounts on RMB terms, that the reporting period is the third quarter of fiscal year 2026, ending on March 31, 2026, and that in addition to gap measures, we will also be discussing non-gap measures to provide greater clarity on the trends in our actual operations. We are pleased to report on our third quarter results, which exceeded expectations on both revenue and gross margin despite navigating a softer demand environment in the broader industry. Total revenue was $164.7 million with gross profit of $56.9 million representing a gross margin of 34.5 percent. While revenue decreased from the previous quarter's $177.3 million, growth margin improved by 350 basis points from 31%. These results reflect our ability to maintain operational resilience and financial discipline in a challenging market environment. We're positioning the company for sustainable long-term growth through strategic cost management and continued focus on our core IP portfolio. Revenues for the quarter were $164.7 million, primarily generated from sales of our three flagship IPs, Makuku, Sinono, and Zuli, compared to $177.3 million in the previous quarter. This change was driven by the cadence of our new product launches and the impact of the Chinese New Year holidays during the quarter, which materially reduced effective working days and temporarily constrained our supply chain and delivery capabilities. For the quarter, it was $66.9 million compared to $55 million in the previous quarter. Our gross margin increased to 34.5% this quarter from 31% in the previous quarter. This margin improvement reflects the early benefits of our strategic cost structure refinements implemented during this quarter, positioning us for enhanced margin performance going forward. On the operational front, total operating expenses were $57.7 million. These expenses mainly included advertising and promotion expenses and staff compensation to support brand building and customer acquisition efforts across multiple platforms. As a percentage of total revenue, non-gap sales and marketing expenses, which exclude share-based compensation, changed to 35% this quarter from 29.6% in the previous quarter. Research and development expenses were $9.5 million. These expenses mainly consisted of IP design and product development expenses. As a percentage of total revenue, long-cap research and development expenses, which exclude share-based compensation, changed to 5.7% this quarter, compared to 5.1% in the previous quarter. General and administrative expenses were 33.6 million. These expenses reflected our co-operational functions, including employee compensation, professional service fees, and other operational expenditures. As a percentage of total revenue. Non-GAAP general and administrative expenses, which exclude share-based compensation, changed to 13.8% this quarter compared to 25.4 million in the previous quarter. Our adjusted net loss was 22.9 million compared to 16.1 million in the previous quarter. Basic and diluting net loss per share was 0.15. on current available information, including our pipeline for upcoming IP releases and seasonal demand. We expect revenues from our pop toy business to be in the range of RMB $130 million to RMB $140 million for the fourth quarter of fiscal year 2026. We are revising our fiscal year 2026 revenue guidance to a range of RMB 6600, which reflects near-term market realities and demonstrates our commitment to providing transparent guidance aligned with current industry conditions. 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, you may press star than 1 on your telephone. If you wish to withdraw your question, please press star than 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. And today's first question comes from Jing Yuan at CICC. Please go ahead.

Good evening, management. Thanks for taking that question. Could management elaborate or change in the consumer demand within the popcorn market, how we've seen in the past year, and how has the competition shift?

Okay, thank you. I'll take this question. First, we see that emotional consumption is really all about companionship. Consumer motivation is driven by a mix of emotional value and collectible value, and their expectations for IP products keep rising. So only products with real character and solid operations can truly connect with consumers. For young buyers, they are buying for immediate emotional satisfaction. Our handicraft world of WAKUKU series focuses on handcrafted feel, companionship, and warm heating directly to what consumers are looking for. This is a recent example for our new product launch for the IP WAKUKU. At the same time, good IP products have real artistic value like to complete that even They didn't buy on the secondary market because they loved the IP. It became the fastest growing category in the pop toy industry of this year. They've seen the market cool down. The main reason is that the normal market cracks of emotional consumption. From chasing, security, the logic of this category has not changed. Consumers still want IP products that fit into their daily lives. We stick to our strategy, creating excellent IPs and products. For example, our recently launched Synono Moot on Series, the new product, has been very popular based on recent consumer response. And for the competitive condition, the competitive landscape is shifting from grabbing territory to competing on ecosystem capability. Firstly, more players have entered the market, but only a few can operate IPs, especially the self-owned IPs, consistently over time. It is still a large market with many small players. And secondly, the core of competition is moving from product capability to full-chain IP operation. Long-term IP value must be built from business. Pop toys are not fast-moving consumer goods. You cannot drive growth simply by adding more SQs. You should need IP design, supply chain to actually put it all together. Taking a fresh IP account for three years, you are looking at a major hit. It's taking a different approach. more than half, we focus on partnership. For co-branded IPs like Xiao, which is just recently launched, we use a deep cooperation, co-creation model rather than relying on a simple licensing deal.

Thanks, that's very helpful.

Thank you. Our next question today comes from Yi Kunzeng with Citix. Please go ahead.

Good evening, management. Thank you for taking my question. And my question is about the momentum of IPs. So far, we have several very successful IPs, such as La Coo Coo, Sinano, Shao. So my question is, in the future, how to keep or strengthen the momentum of these popular IPs? Thank you.

Okay. Thank you very much for your question. I will answer in Chinese, and my colleague will just say for me. 对 这是一个很好的问题 IT的势能 首先是IP自身的特质 也就是说 通俗的讲 它有没有明星像 还有一个 就是IT的持续有效的运营 来去维持IT的势能 那么核心 就是围绕IP的本身特质 还有它的目标用户 来有策略 并且持续的输出 用户喜欢的事件 内容 产品 还有体验

The IP momentum depends on two factors, the IP's characteristics and ongoing successful operation. To maintain this momentum, the key is to consistently deliver events, contests, products, and experiences that align with the IP's characteristics and connect with the target audience. 具体来说呢我们再持续的去做下面几件事 第一件呢就是我们保持资源要聚焦 聚焦在我们这个核心IP上 然后去以此为基础吧 丰富我们的IP矩阵 还有呢就是要有充沛的这个资源投入 才能够保持着我们核心IP的这个运营动作是持续连贯

并且呢从各个维度吧 就是对于我们这种投入的效果来进行考核

然后加强我们在IP运营这个上面的投入效率 OK Specifically, here is what we are doing and will continue to refine in our IP operation strategy First, we remain focused on our core IPs We concentrate resources on our core IPs and build our IP portfolio around them We need steady resources to keep our core IPs running smoothly At the same time, we closely monitor performance across the multiple dimensions to improve resource efficiency.

Okay. Okay.

Second, we strengthen the user wellness and engagement through the high-quality products and experiences. This helps maintain and build IP momentum. We arrange product plans at a steady pace and keep innovating around IP. This year, we're planning next-generation products for our core IPs, along with offerings of new materials and new play styles. We will expand into new categories at the right time. And beyond physical products, we are developing IP-driven experiences through a light asset model. For example, we recently signed a ferry at Hong Kong Center Pier, and we turned it into IP-themed park on the water.

等等方式吧,来打造我们IP的影响力 然后第四点呢,是我们会通过自营门店,机器人商店 还有渠道商的这些品牌专区等形式 然后来持续强化我们在IP线下的触点 OK 还有渠道商的这些品牌专区等形式 然后来持续强化我们在IP线下的触点 OK So overall, we believe strong fundamentals have to manage and extend an IP select circle. But this does not come from a single-seat product. It comes from consistent, stable, and systematic operations. Okay, that's all.

Thank you, Mr. V. It's very clear.

Thank you. And our next question comes from DC with Hoitai Security. Please, please go ahead.

We've always been interested in the future of the product spread. But our goal is to surround our IPs to develop, not to do new products and new products. We're mainly considering our IPs' performance. So to surround our core IPs, to be able to develop some spread products. Our planning direction will be represented in the next three areas. Okay.

Yes, we do. We are continuously exploring the category expansion opportunities. Our principle is to extend from our IPs, not to launch the new categories for their own sake. At this stage, we mainly consider where each IP is in its lifecycle. Then we carefully explain into merchandise around our core IPs. Our strategy focuses on three key areas. A key focus for us, we gradually expand into IP-related merchandise, Particularly lifestyle products The idea is to transform our IPs From collectibles on a shelf Into everyday companions in people's lives The second thing is We will maintain a balanced mood for the product The current market is The problem is DoSKU and doSKU But we don't plan to do that Our decision is IP development must be The content and user needs

So we're expanding a discipline pace.

There is a common trend in industry right now, many SKUs, very broad coverage, but that is not our approach. We believe category expansion must align with IP's context and user needs, not to just add more FKUs. We prefer to go deep with our core IPs, not broad. We are watching for opportunities like smart companionship and tech plus IP development. The combination of AI and pop toys is becoming a new direction. We're actively researching it, but we're still exploring and don't have any specific friends yet. and the connection between the user and the user and the user. To sum up, stay focused on IP. We go deep in our core categories, then gradually expand into merchandise. We are not trying to cover everything instead. Our goal is to make sure every new category truly supports the emotional connection between our IPs and our users. Thank you.

That's all. Thank you. Thank you for the answer. That's helpful. Thank you.

Thank you. As there are no further questions, I'd like to hand the conference back to management for closing remarks.

Feel free to contact us or submit a request through our AI website. We look forward to speaking with everyone in our next call. Have a nice day.

Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.