YXT.COM Group Holding - Earnings Call - Q2 2025

Transcript

Speaker 4

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to YXT.com’s earnings conference call. At this time, all participants are in a listen-only mode. Please note that today's event is being recorded. Joining us today are YXT.com’s CEO, Director, Founder, and Chairman, Peter Lu, CFO, Shen Cao, and Chief Growth Officer, Alan Wang. Peter will begin with a brief greeting, and then Mr. Cao will present the CEO's prepared remarks on his behalf. Following that, Mr. Cao will provide a detailed overview of our financial performance for the year. You can refer to YXT.com’s H1 financial results on our website at ir.yxt.com. You can also access a replay of this call on the 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 statements in our earnings 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's prepared remarks are in RMB terms, and we will be discussing non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported in our earnings release and filings with the SEC. I will now turn the call over to the CEO, Director, Founder, and Chairman of YXT.com, Peter.

Speaker 0

Hello, everyone. This is Peter Lu, CEO of YXT.com. Thank you for joining us today.

Speaker 3

Hello, everyone. This is Shen Cao from YXT.com, speaking on behalf of our Founder and CEO, Peter. Welcome to YXT.com's 2025 H1 Earnings Conference Call. Thank you all for joining us today. Firstly, let's take a moment to look at what's happening across our industry. The corporate learning industry is undergoing its most significant transformation in decades, driven by the rapid adoption of artificial intelligence (AI). Intelligent, adaptive, and data-driven learning ecosystems are replacing traditional training methods. AI is not just enhancing existing processes; it's fundamentally changing the way organizations develop talent, keep critical knowledge in-house, and stay ahead in a disruptive world. The shift driven by AI even goes beyond the training industry. It presents the first-ever opportunity in which workforce enablement has more meaning than just learning and development.

Traditionally, training that focused on teaching the known what was often considered as a cost center with difficulties evaluating ROI. AI-powered development activities can provide know-how in a compelling manner and are now recognized as a strategic lever for driving innovation, agility, and growth. Organizations that embrace this transformation are building more resilient workforces capable of adapting to rapidly changing market conditions and technological advancements. Let me walk you through our financial results. Over the first half of 2025, we have made deliberate decisions to reposition YXT.com for sustainable and high-quality growth. This has involved shifting our focus towards large enterprise clients, prioritizing scalable and higher margin solutions, particularly in AI, and optimizing our cost structure. While these changes have impacted specific short-term metrics, they are already driving measurable improvements in profitability and operational efficiency. Let me walk you through the details.

Before we go through the financial results, let me note that all amounts are in RMB terms for the first six months ended June 30, 2025, and all comparable earnings are on a year-over-year basis unless otherwise noted. Our total revenue declined by 7.8% year-over-year to RMB 152.9 million compared to the same period of last year, but this figure marks essential nuances. This decrease was primarily driven by two factors. The first one is our strategic shift. We intentionally reduced our exposure to small and medium-sized businesses, which had a higher churn and low lifetime value. This resulted in a net reduction of 123 subscription customers down to 2,358, but the remaining clients are larger enterprises with more stable demand.

The shift is also reflected in our net revenue retention rate, which moderated to 103.8% from 102.8% in the same period of last year, still demonstrating strong retention, albeit without a temporary boost from smaller customers. In terms of our business model, we further streamlined our revenue mix with subscription-based corporate learning solutions, now accounting for 94.6% of total revenue, RMB 144.7 million. The decline of non-subscription revenue, down 39% year-over-year to RMB 7.7 million, is in line with our strategic focus, focused on reducing lower margin offline services and building recurring scalable revenue streams, notably our AI-related product. Monthly recurring revenue more than doubled to RMB 0.5 million, up from RMB 0.2 million last year, a clear sign that our investments in AI are yielding measurable impact and will play a large role in future growth.

Despite the decline in revenue, we achieved a 4 percentage point improvement in gross margin, reaching 65.1%. This expansion was fueled by our enhanced operational efficiency and optimized product mix. Our cost of revenue fell by 17.1%, mainly driven by lower staff expenses, optimized the third-party infrastructure, and reduced reliance on costly offline solutions. Higher margin subscription and AI products now represent a growing share of our revenue, driving improved profitability. We achieved meaningful cost reductions across key operating areas, with sales and marketing expenses declining 13.5% year-over-year through declined ad contact optimization and process improvements. Similarly, our R&D expenditure decreased 19.2% as we enhanced development productivity and focused the resources on higher priority initiatives. The G&A line item increased 20.5%, primarily due to the increase of professional services and the share-based compensation expense from our January 2025 long-term incentive plan.

While the share-based incentive plan creates a short-term cost pressure, we view these equity grants as a critical investment in retaining and motivating our leadership team to execute our multi-year growth strategy. On a GAAP basis, we reported a net loss of RMB 73.9 million compared to net income of RMB 21.4 million in the same period of last year. However, last year's profit included a one-off RMB 78.8 million gain from the consolidation of CIBS PG. Our adjusted net loss improved by 15% year-over-year to RMB 64 million, demonstrating tangible progress in core operations. We ended the period with RMB 235.7 million in cash and short-term investment, down from RMB 418.2 million at year end 2024. This reduction reflects planned investment in AI R&D and working capital needs, but we remain well capitalized with a disciplined approach to debt management. Moving forward, our strategy remains centered on three pillars.

First, we will deepen enterprise relationships by delivering more value to our large clients to improve retention and revenue. Secondly, we continue to scale our AI solutions with early results confirming their potential as a powerful driver of both growth and profitability. Third, we remain committed to cost management and strive for the right balance between optimizing our existing expense structure and making targeted investments that deliver the highest returns. We are seeing clear progress in executing our strategy, and we are confident these efforts will drive sustainable, profitable growth moving forward. Thank you for joining us today. We are now very happy to answer your questions.

Speaker 4

Thank you. To ask a question, please press star one-one on your telephone and wait for your name to be announced. To withdraw your question, please press star one-one again. Please stand by while we compile the Q&A roster. Our first question comes from William Lu, an individual investor. The line is open.

Speaker 1

Hello, everyone. This is William, and I'm an individual investor. I want to ask a question for our CFO, Mr. Cao. You mentioned that in this presentation the gross margin of our company has increased by 4% to 65% in the first half. I really want to know what specific improvements in operation or product innovation have contributed to your expansion. Is this still continuing in the second half of the year? Thank you.

Speaker 3

Thank you. The improvement in gross margin is a direct outcome of our efforts to boost operational efficiencies, including optimizing our product mix and reducing reliance on costly offline solutions. By focusing on higher margin subscription-based and AI products, we have improved profitability while maintaining product quality. We believe the structural shift in our revenue mix provides a sustainable margin profile going forward. In addition to a shift towards higher margin solutions, we have made significant cost reductions in our cost of revenues, including optimizing third-party infrastructure and reducing staff expenses. These actions have allowed us to expand our margins despite a revenue decline. We anticipate that the trend driving margin expansion, such as the growing share of AI and subscription-based products, will continue into the second half of this year.

Speaker 4

Thank you. Our next question comes from the line of Duncan Yi of Five Arrow. Your line is now open.

Speaker 2

Hello. Thank you. Thank you, CEO, and also thank you, CFO. I have a question. I think I have actually two questions. The first one is about your strategic shift towards the larger enterprise, as you mentioned, which is the reason for your revenue to decline year on year. I understand it is like the new strategy for the company to shift toward a larger enterprise. Could you please elaborate for us how this transition is going to impact the company in the long run, especially to the revenue growth and the customer retention in the near future?

Speaker 0

Thank you, Duncan. Let me take on that question first. This is Alan Wang. I'm the Chief Growth Officer of YXT.com. Let me just make sure I'm understanding your questions right. You're asking about our shift from small to medium-sized enterprises to large enterprises, and you want to understand how that could impact our company's performance in both short-term and long-term, right?

Speaker 2

Yes.

Speaker 0

As you probably understand, the Chinese market is a little bit different from the U.S. market in that in the U.S. market, we have a very robust small to medium-sized enterprises, whereas in China, the market is majorly driven by large to mega enterprises. These companies are more resilient in their own business. They are more profitable, and they are more willing to spend on learning and development initiatives. In the past few years, we've made our strategic decision to move away from small to medium-sized enterprises and onto the large and even mega enterprises. We've seen that these larger mega enterprises will show a stronger retention behavior, stronger retention performance with us, a higher potential for resale and upselling opportunity with us.

As we move away from small to medium-sized enterprises to large companies, we believe the company's performance metrics will continue to improve, both on gross margin rates, on our retention rate, as well as on our customer's holistic lifetime value. That's the rationale behind it, and we've seen the performance change in the key metrics, and we'll continue to do that. We'll continue to emphasize on large to mega enterprises. That being said, we will not deliberatively let go of the small enterprise. The smaller companies, if they're willing to stay with us, we'll continue to keep them with us, but we will stay away from investing heavily, allocating heavy resources onto them because our judgment is that they are not the ideal client for us.

By focusing on the large enterprises, by innovating products to respond to their needs, we believe we'll have a more healthy, more robust business model. Duncan, does that answer your question?

Speaker 2

Yes, I think that is very, very comprehensive. Thank you. I actually have a follow-up question for both Alan and Mr. Cao. I noticed that your AI-related product, for the monthly recurring revenue, I see a growth by more than 200% than last year. I think that is very impressive. Could you provide more insight into the specific AI solution driving this growth? Also, how does the company plan to scale up this product offering going forward in the future? Do you have any expectation for the growth rate for the next quarter or for the full year?

Speaker 0

Thank you, Duncan. That is one of the highlights from our operation in the past few months. Yes, compared to some of our peer companies, we are more successful or even the most successful in commercializing AI products. Some of the key products we offer to our clients as of now include using AI to generate courses. Traditionally, we've hired instructors, professors, teachers to draft out these teaching content, these learning programs. Now we are leveraging our know-how in course design with the help of large language models to generate high-quality courses at a much lower cost. We provide such capabilities to our clients using a product called AI Coursemaker. We're essentially transferring the capability of coursemaking to our clients. This is one of the leading selling AI products. We also provide AI products focusing on generating tests. Generating standardized tests is difficult for most of the companies.

How to devise a set of questions, quizzes to test the participants on their mastery of the knowledge is something our clients will need. AI test-making is another product we offer to our clients. Besides course-making, test-making, we also provide AI simulations, role-plays, where AI will generate a scenario where the participants will come in and practice their communication skills, their problem-solving skills with AI. We also provide AI capability assessment tools called behavioral event interviews. We also provide AI candidate screening, AI interview tools. Essentially, these tools will leverage the reasoning power of large language models. We do post-training on these large language models based on years of experience and years of usage data we have in these scenarios. These are the products we use. We've seen a fast-growing penetration and coverage of AI products through our accounts, as indicated by the numbers that Duncan just mentioned.

We anticipate that to continue to grow even faster. We have rolled out a series of marketing campaigns to drive AI products to our clients. Also, the Chinese market, objectively speaking, is more willing to spend on AI as triggered by a deep seek earlier this year. The companies are more willing to adopt new AI solutions, and we have a whole suite of products ready. We have the marketing campaigns set in place. We have the commercial policies, discount policies, volume rebate policies set in place, and we are confident to drive the growth in AI product penetration and coverage.

Speaker 4

Thank you. I would now like to turn the call back over to Mr. Cao for closing remarks.

Speaker 3

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. Have a good day. Thank you. Thank you very much.

Speaker 4

This concludes today's conference. Thank you for your participation. You may now disconnect.