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 Group's earnings call for the first quarter of fiscal year 2026. With us today are Mr. Peng Li, our founder, chairman, and CEO, and Mr. Tim Xie, our CFO. Mr. Li will provide a business overview for the quarter, then Tim will discuss the financials in more details. Following their prepared remarks, Mr. Li and Tim will be available for the Q&A session. I will translate for Mr. Li. You can refer to our quarterly financials results on our IR website at ir.heregroup.com. You can also access a replay of this call on our 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 statement 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 prepared remarks are in RMB 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 filing with the SEC. 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 RMB 165 million in revenue this quarter. This exceeded the high end of our guidance. More importantly, we keep improving our IP and pop toy business. We are consistently optimizing our operations and the cost structure to build a stronger foundation for long-term growth. As we all know, the H1 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 market environment remains challenging, but consumers' demand for emotional and experience-based spending persists.
We build our IP products and the 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, or around 52.2% of total revenue. SINONO's revenue grew 73.1% quarter-over-quarter, accounting for 20.2% of total revenue. SINONO launched in the H2 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 SINONO 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 product capabilities and the strength of our IP portfolio. At the same time, we benefited from several market cycles, channel tailwinds, and celebrity partnerships. These collaborations gave us additional momentum and valuable experience. We will continue to benefit from our partnerships. We know that building lasting IPs requires strong building and solid operational capabilities. That means building our own systems to reach users directly and engage with them deeply.
Therefore, long-term 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 robo shops. This extends our brand reach and the user touchpoints. 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 robo shop, ROART, has also recently begun. To date, we have developed around 15 robo shops 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. Fourth, 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. as initial market tests.
Fifth, keep optimizing our business cooperation with channel partners. We pursue mutual benefits and win-win 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-off hits to a repeat engine. As of March 31, 2026, our IP portfolio includes 20 total IPs. That includes 12 proprietary IPs and eight 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 co-branded IP, Xiao.
Its core spirit is defined by four words: cool, stubborn, brave, and free. This message resonates well with young consumers. To drive the launch, we ran an integrated campaign across celebrity, social, and fun channels. Leveraging our strengths in IP design, supply chain, and the omni-channel sales, we completed pre-launch prep, including character development and mass production. Xiao gained strong market attention and 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 Xiao, we have a strong product pipeline in preparation. We will launch them steadily according to our planned cadence.
For WAKUKU, we launched a new series, the "Handicraft World of WAKUKU" series vinyl plush doll on March 28th. As of March 31, the initial launch period, the series achieved strong results. Total omni-channel sales exceeded RMB 20 million. Peak concurrent online viewers reached 28,000. The total new product explorer topped 100 million. The series focused on handcrafted feel, friendship and warmth, healing vibes. This deepens our emotional connection with the users. In May, we also released the 520 gift box, WAKUKU Heartbeat Devil, as a hanging card set. Recently, we have also launched the new products for other IPs.
This includes new plush toys, vinyl figures, hanging cards, and ceramics collections for IPs like ZIYULI, SINONO, Kido, KILIKILI, and Awai. Each of these IPs speaks to a different audience, with unique styles and labels. That's how we build a richer IP matrix. For Sinono, the new generation product, "Mood On" series vinyl plush doll, had its offline launch on May 30 and online launch on June 2nd. Second, omni-channel reach. We are boosting IP user interaction with a clear focus. Offline first, online empowering.
Offline, we operate through three channels: our D2C stores, robo shop network, and partner channels. First, our self-operated brand stores and robo shops. 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 Xi'an SKP on May 1st. Both stores are in prime high-traffic business areas, and that's ranked 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 robo shops across key cities nationwide. These are manned vending machines and placed in high-traffic locations. They extend our offline reach without the higher cost of a full-scale store. They serve as both sales channels and brand touchpoints.
They make our IPs more accessible with collecting valuable 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 extend 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 June 4th, our cumulative 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-branding 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, WAKUKU, was showcased alongside traditional culture exhibits at the New Oriental Aesthetics Section. Going forward, we will accelerate the creation of more offline scenarios to give our IPs and users more spaces to interact. At Beijing Airport, we plan to set up a store to enhance brand visibility, we are actively exploring more similar scenarios. In Hong Kong, we plan to create a dedicated ride experience on the boats at Central Pier using our IPs, building a unique brand stand. Operational discipline is reflected in our capital allocation. We continue to align resource support and the 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 the information and the 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 are in RMB terms, that the reporting period is the Q3 of fiscal year 2026, ending on March 31, 2026, and that in addition to GAAP measures, we'll also be discussing non-GAAP measures to provide greater clarity on the trends in our actual operations. We are pleased to report on our Q3 results, which exceeded expectations on both revenue and gross margin, despite navigating a softer demand environment in the broader industry. Total revenue was RMB 164.7 million, with gross profit of RMB 56.9 million, representing a gross margin of 34.5%. While revenue decreased from the previous quarter's RMB 177.3 million, gross 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 are 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 RMB 164.7 million, primarily generated from sales of our three flagship IPs, WAKUKU, SINONO, and ZIYULI, compared to RMB 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. Gross profit for the quarter was RMB 56.9 million, compared to RMB 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 refinement implemented during this quarter, positioning us for enhanced margin performance going forward.
On the operational front, total operating expenses were RMB 100.8 million for this quarter. To break this down, sales and marketing expenses were RMB 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-GAAP 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 RMB 9.5 million. These expenses mainly consisted of IP design and product development expenses. As a percentage of total revenue, non-GAAP 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 RMB 33.6 million. These expenses reflected our core 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 from 12.7% in the previous quarter. Our net loss was RMB 34.1 million compared to RMB 25.4 million in the previous quarter. Our adjusted net loss was RMB 22.9 million compared to RMB 16.1 million in the previous quarter. Basic and dilutive net loss per share were RMB 0.21 during this quarter. Basic and diluted adjusted net loss per share were RMB 0.14 during this quarter. Looking ahead, we remain excited about the growth prospects for our pop toy business. Based 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 Q4 of fiscal year 2026.
We are revising our fiscal year 2026 revenue guidance to a range of RMB 600 million-RMB 610 million. This revision 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 then one on your telephone. If you wish to withdraw your question, please press star then two. 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. Today's first question comes from Jing Yuan at CICC. Please go ahead.
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Good evening, management. Thanks for taking that question. Could management elaborate what change in the consumer demand within the pop toy market, how we've seen in the past year, and how has the competition shift? Thanks.
Okay. Thank you. I'll take this question. 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. 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 healing. This responds 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. Some collectors still want to collect a complete set or even buy on the secondary market because they love the IP. Companionship and portability have become very important product dimensions.
The plush and bag charms saw strong growth in 2025 and became the fastest-growing category in the pop toy industry. Starting in the H1 of this year, we've seen the market cool down. The main reason is that supply chain grew too quickly, which reduced the early scarcity. This is actually a normal market correction. The industry is moving back to the core of emotional consumption, from chasing scarcity to buying what you like, or the both. For us, the underlying 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 SINONO "Mood On" series, the new product, has been very popular based on recent consumer response.
For the competitive condition, the competitive landscape is shifting from grabbing territory to competing on ecosystem capabilities. 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. Secondly, the core of competition is moving from product capability to full chain IP operation. Long-term IP value must be built from within. Pop toys are not fast-moving consumer goods. You cannot drive growth simply by adding more SKUs. You should need IP design, supply chain, brand, and sales all working together as one system. Honestly, very few companies can actually pull it all together. Thirdly, the industry is taking a fresh look at owned IPs.
For most pop toy companies, licensed IPs account for a majority of their revenue, and these licenses typically last only one to three years and have a high cost. If a license doesn't get renewed, you're looking at a major hit to your revenue. We've taken a different approach. We have built a systematic capability to create and sell our own IPs. Our IP portfolio is much more balanced. More than half of our IPs are self-owned, and even with our licensed IPs, we focus on long-term partnership. For co-branded IPs like Xiao, which is just recently launched, we use a deep co-creation model rather than relying on a simple licensing deal. That's all. Thank you.
Thanks. That's very helpful.
Thank you. Our next question today comes from Yikun Zheng with CITIC. Please go ahead.
[Non-English content] Hey. Good evening, management. Thank you for taking my question. My question is about the momentum of IPs. Far, we have several very successful IPs, such as WAKUKU, SINONO, Xiao. My question is, in the future, how to keep both strength and 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 translate for me.[Non-English content]
IP momentum depends on two factors, the IP's characteristics and ongoing successful operations. To maintain this momentum, the key is to consistently deliver events, content, products, and experiences that align with the IP's characteristics and connect with our target audience.
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Specifically, here is what we are doing and will continue to refine in our IP operations 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 multiple dimensions to improve resource efficiency.
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Second, we strengthen the user awareness and engagement through 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. Beyond physical products, we're developing IP-driven experiences through a live asset model. For example, we recently signed a ferry at Hong Kong Central Pier, and we turned it into IP theme park on water.
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Third, we actively manage our IP brands through partnerships. This includes the placement in variety shows, celebrity partnerships, and brand collaborations to grow our IP influence over time. Fourth, we're strengthening offline touchpoints through our DTC stores, robo shops, and dedicated branded sections in partner retail locations.
Overall, we believe strong fundamentals help us manage and extend an IP's life cycle. This does not come from a single hit product. It comes from consistent, stable, and systematic operations. Okay, that's all. Thank you.
Thank you, Mr. Li. It's very clear.
Thank you. Our next question comes from Di Shi with Huatai Securities. Please go ahead.
[Non-English content] Management, good evening. My question is about our company's plan for the category expansion in the future. Thank you.
[Non-English content]
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 life cycle. Then we carefully expand into merchandise around our core IPs. Our strategy focuses on three key areas.
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First, merchandise is a key focus for us. We gradually expanding 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.
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Second, we're expanding at a disciplined pace. There is a common trend in industry right now: many SKUs, very broad coverage. That is not our approach. We believe category expansion must align with IP's context and user needs, not to just add more SKUs. We prefer to go deep with our core IPs, not broad.
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Third, we are watching for opportunities like smart companionship and tech plus IPs 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 plans yet.
[Non-English content]
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.
Yeah. That's all. Thank you. Thank you. 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.
No questions, please feel free to contact us or submit a request through our IR 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.