Net profit fell by 60%, iFlytek has difficulty telling the ChatGPT story

iFlytek’s unsatisfactory performance in 2022 did not affect investors’ interest.

On the evening of January 29, 2023, iFLYTEK disclosed its 2022 annual performance forecast, with estimated revenue of 18.314 billion yuan to 20.145 billion yuan in 2022, a year-on-year increase of 0% to 10%; net profit attributable to shareholders of listed companies is 467 million yuan to 623 million yuan, a year-on-year decrease of 60% to 70%.

Although the net profit was almost "halved", the capital market was extremely tolerant of iFlytek. On January 30, the day after the performance forecast was released, iFlytek's stock price hit the daily limit. Looking at the long-term, iFlytek's stock price has also been rising steadily. As of the close of February 10, 2023, iFlytek's stock price was 47.91 yuan per share, up 59.7% from the low of around 30 yuan per share a month ago.

Image source: iFLYTEK

This is largely due to the promotion of ChatGPT. Since January 2023, ChatGPT, a natural language processing tool driven by artificial intelligence technology, has "gone viral" on the Chinese Internet. As Bill Gates said, "ChatGPT is as important as the invention of the Internet and will change the world." Because of its huge commercial value, the capital market has begun to bet on ChatGPT concept stocks.

As a star stock in the field of artificial intelligence in the A-share market, iFLYTEK naturally has great potential and has become the number one target for investors to "increase their holdings".

However, it is worth noting that although iFLYTEK has been tied to artificial intelligence, judging from its financial reports, it has gradually transformed into a hardware company.

This may also mean that iFLYTEK will find it difficult to catch up with the ChatGPT craze in the first place.

AI to the left, products to the right

Although iFlytek still claims to be a "well-known listed smart voice and artificial intelligence company in the Asia-Pacific region" today, judging from its financial reports, iFlytek's business model has undergone tremendous changes compared to when it first went public.

Image source: iFLYTEK

The financial report shows that in 2021, iFLYTEK's three main businesses were educational products and services, information engineering, and open platform, accounting for 32.82%, 15.57% and 16.31% of revenue respectively, totaling 64.7%.

In comparison, in 2007, the revenue pillar of iFLYTEK was voice support software, accounting for 60.85% of the revenue, while the revenue share of industry application products was only 17.02%.

It can be found that over the past decade, iFLYTEK has not continued to delve into voice support software that is closely linked to enterprise AI voice technology, but has instead been committed to promoting the implementation of application products in markets such as education and information engineering.

iFLYTEK chose to focus on peripheral products and terminals, probably because it realized that the market size of the voice recognition industry in a pure sense is limited and it is difficult to provide fertile business space.

Data disclosed by the Forward-looking Industry Research Institute show that although the market size of China's speech recognition industry has grown at a good rate from 2016 to 2020, the overall scale of the industry is expected to be only 11.4 billion yuan in 2020.

Image source: iFLYTEK

In comparison, data from the Forward-looking Industry Research Institute shows that in 2020, the size of China's educational smart hardware market was 34.3 billion yuan, and it is expected that this figure will reach 95.3 billion yuan in 2024.

For this reason, iFLYTEK has outlined an artificial intelligence strategy of "platform + track". The former is committed to providing developers with one-stop artificial intelligence solutions, while the latter is to achieve large-scale implementation of products in education, medical care, office and other fields.

In fact, it is precisely because iFLYTEK has found a practical product implementation plan that its performance has repeatedly set new highs and it has not fallen into the quagmire of losses like the "Four AI Dragons".

But the problem is that as an artificial intelligence company, iFLYTEK does not rely on pure artificial intelligence technology to generate revenue, which has led to a serious disconnect between its technology and specific products.

Three major customer groups, each with its own difficulties

Since its main development orientation is technology implementation, iFLYTEK does not stick to a certain customer group, but instead covers C-end, B-end and G-end.

For the C-end, iFLYTEK has launched smart hardware such as voice recorders, iFLYTEK Hearing, and smart office books; for the B-end, iFLYTEK is committed to providing enterprises with smart education, smart medical care, smart politics and law and other services; for the G-end, iFLYTEK mainly customizes a series of solutions for local governments, and is committed to improving the work efficiency of government departments.

Considering that both the government and enterprises have the need to reduce costs and increase efficiency, there is nothing wrong with iFLYTEK's idea of ​​creating corresponding solutions to meet the needs of G-end and B-end customers.

But the problem is that in the actual operation process, iFLYTEK's G-end and B-end businesses have encountered problems to varying degrees.

Image source: iFLYTEK

The financial report shows that as of the end of 2021, iFlytek's accounts receivable accounted for 23.84% of total assets, a year-on-year increase of 2.13%. Excluding the impact of macro factors, iFlytek's average accounts receivable turnover rate was 2.3 times/year, a year-on-year increase of 0.36 times/year. This is mainly because G-end customers need to go through a process for approval, and a project can take three to five years. If a company relies too much on G-end customers, it may face the risk of insufficient cash liquidity.

On the B-side, although iFLYTEK's technology has certain advantages over general companies, since each company wants to control the entire ecosystem, they tend to develop related technologies on their own.

Source: iFlytek 2022 first half financial report

For example, in 2020 and the first half of 2022, iFlytek's smart car-related business revenue fell by 12.98% and 5.72% respectively. Considering that the first two years were the time when the new energy vehicle market exploded, the decline in iFlytek's related business revenue also highlights the embarrassment of its positioning.

For this reason, iFLYTEK urgently needs to develop C-end business to make up for the low presence and poor liquidity of B-end and G-end businesses. However, since iFLYTEK has expanded its business too widely, it also faces the problem of lack of prominence in its main business and the lack of "specialists" in niche areas.

The financial report shows that in the first half of 2022, among iFLYTEK's various business lines, only the education products and services business accounted for more than 20% of revenue, accounting for 27.49%.

Source: iFLYTEK 2021 Financial Report

Although it is an important revenue pillar, iFLYTEK's educational products and services are facing the problem of declining gross profit margins. The financial report shows that from 2019 to 2021, the gross profit margins of iFLYTEK's educational products and services were 54.34%, 54.25% and 51.66%, respectively, down 3.74%, 0.09% and 2.59% year-on-year, respectively.

The growth rate of operating costs exceeds the growth rate of operating costs, which means that iFLYTEK's educational products and services business needs to invest more costs in technology, channels, sales, etc. in order to seize certain market dividends from the encirclement of competitors.

In fact, from a market perspective, iFLYTEK's educational products and services businesses are indeed facing tremendous market pressure because its competitors have first-mover advantages and more prominent brand images.

Image source: China Business Information Network

Data from China Business Intelligence Network shows that in China's smart learning device market in 2021, the top three brands were BBK, Readboy and NetEase Youdao, with market shares of 28.9%, 6.1% and 5.2% respectively. In contrast, iFlytek's market share was only 4%.

Ultimately, when consumers purchase smart learning devices, they are simply looking at things like eye protection, teaching materials, and question banks. Established educational hardware companies have accumulated rich resources in this regard.

In contrast, the AI ​​technology that iFlytek’s AI learning machine focuses on promotes is difficult for consumers to have a rational understanding of, so it has to “make up lessons” in terms of publicity, distribution, and channels, which has eroded its gross profit margin.

ChatGPT still serves hardware

Against the backdrop of iFlytek's declining performance, ChatGPT suddenly exploded. A research report released by UBS showed that after only two months of launch, ChatGPT's monthly active users exceeded 100 million, making it the fastest growing consumer application in history.

Since investors are optimistic about themselves, iFlytek naturally cannot fail to express their views. On February 7, 2023, iFlytek stated on the investment interaction platform that the company has solid technical accumulation in ChatGPT.

However, it is worth noting that in addition to iFlytek, leading players in China's Internet circle have also begun to increase their investment in the research and development of ChatGPT-related technologies.

According to incomplete statistics, in the past week, companies such as Baidu, 360, ByteDance, Alibaba, and JD.com have officially announced that they will launch ChatGPT products.

Although it is not certain whether iFlytek can make a breakthrough in the siege of a number of Internet companies in this ChatGPT arms war, from a cost perspective, iFlytek does not have an absolute advantage.

In an interview with Deep Web, XiaoIce CEO Li Di said, "If ChatGPT's method is used, the daily cost will be as high as 300 million yuan, and the annual cost will exceed 100 billion yuan."

The 2022 performance forecast shows that as of the end of 2022, the net cash flow generated by iFLYTEK's operating activities is only about 500 million yuan. In comparison, as of Q3 2022, Baidu's free cash flow was 6.6 billion yuan.

More importantly, iFlytek does not seem to intend to apply ChatGPT to search engines, but to integrate it into its own products. On February 9, 2023, Red Star News quoted iFlytek as saying that the AI ​​learning machine will be the first to integrate ChatGPT technology and will be released at the product level on May 6, 2023.

Admittedly, ChatGPT technology can replace teachers to some extent and is very suitable for AI learning machine products, but in addition to this, it can also realize functions such as writing emails, video scripts, and modifying codes, making it more likely to become the information distribution hub of the future.

In this regard, Professor Wang Jingyu of Beijing University of Posts and Telecommunications said in an interview with Financial Times, "ChatGPT is rapidly subverting traditional search engines and may become a new generation of information portal in the future."

From this point of view, although iFLYTEK has built a technology-driven, product monetization strategy, whether it is traditional speech recognition technology or ChatGPT technology, iFLYTEK tends to let technology serve established hardware products, rather than creating the most suitable application scenarios based on technology.

The problem this brings is that iFLYTEK has always been led by the profits behind its products, making it difficult to build a broad enough business moat. It has the name of artificial intelligence but lacks the commercial imagination for it.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.