Here Group (NASDAQ:HERE) released third-quarter financial results and hosted an earnings call on Friday. Read the complete transcript below.

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Summary

Here Group reported RMB165 million in revenue for Q3, exceeding their guidance, with a focus on optimizing their IP and pop toy business.

Key strategic initiatives include expanding offline D2C stores and robo shops, developing new IP-related products, and maintaining a strong focus on core IPs like Wakuku and Sonono.

Future outlook includes expected revenues of RMB130-140 million for Q4 and a revised FY2026 revenue guidance of RMB600-610 million.

Operational highlights include the opening of seven D2C stores and 15 robo shops, as well as launching new products for flagship IPs.

Management emphasized the importance of building long-term IP value and solid operational capabilities rather than short-term sales targets.

Full Transcript

OPERATOR

Good morning and good evening ladies and gentlemen. Thank you for standing by and welcome to Here Group'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.

Tina Tang (Manager of Investor Relations)

Thank you. Hello everyone and welcome to Here Group'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. Tim Hsieh, 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. Lee and Tim will be available for the Q and A session. I will translate for Mr. Li. You can refer to our quarterly financial results on our IR website at ia.heargroup.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 Securities and Exchange Commission (SEC).

I will now turn the call over to the CEO and founder of here, Mr. Lee.

Peng Li (Founder, Chairman and CEO)

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 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 52.2% of total revenue Sonono's revenue grew 73.1%, quarter over quarter, accounting for 20.2% of total revenue. Sonono 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 growing cross IP engagement. Wakuku users are connecting with Sonono 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 labs. 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 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 pairwinds and celebrity partnerships. These collaborations give us additional momentum and valuable experience. We will continue to benefit from our partnerships. At the same time, we know that building lasting IPs requires brown building and solid operational capabilities. That means building our own systems to reach users directly and engage with them deeply.

Therefore, long term IT momentum will always be our top priority. Revenue should follow from strong IPs not business 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 it's 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 scores and robo shops. 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 ground system. As of today we have opened seven D2C Brand stores. Each store serves as a space for brown 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 engagements. Our robo shop Rollout 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 the trade show in the US as 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, steadily better and faster. Our progress comes down to two things. First, IP ecosystem we are moving from one off head to a repeat engine.

As of March 31, 2026, our IP portfolio includes 20 total IPs. That includes 12 propriocary IPs and eight exclusive lesson strategies. This quarter we focused on diversifying our IP metric. We introduced new epis 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 core branded IP. Its core spirit is defined by four cool starter, 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 strength in IT design, Sublime Team and Omnichannel sales. We completed pre launch prep including character development and mass production. They all gained strong market attention and pre launch darts. The strong market response has validated and strengthened our portfolio. It proves that our IP incubation model is scalable and competitive beyond so we have a strong product pipeline.

In preparation, we will launch them steadily according to our planned condense patterns. For Wakuku, we launched a new Spherefish the Handicraft World of Wakuku Series rhino store on March 28. As of March 2031, the initial launch period, the series achieved strong results. Total omnichannel cells exceeded RMB 20 million. Peak concurrent online viewers reached 28,000 and the total new product explorer topped 100 million. The series focused on hand graph, feel, friendship and warm healing webs.

This depends our emotional connection with users. In May we also released the 520 gift box Wakuku Heartbeat Devil as a hanging card set. Recently we have also launched new products for other IPs. This includes new plush toys, vinyl figures, handing cards and collections for IPs like Zuli, Seonol PDO, Kitty, Kiwi and Ahai. Each of these IPs speaks to a different audience with unique styles and labels. That's how we build a richer IP Metrics for Phenol the new generation product moved on series Rhino plus store 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, robo shop, network and partner channels. First, our self operated Brown 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 Shanghai on April 25 and another Ashian Cycle 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 4, we have rolled out about 15 robo-shops across key cities nationwide. This augment vending machines and placed in high traffic locations. They extend our offline reach without the higher cost of full scale dots. They serve as both scale sales channels and brand touch points. They make our IP more accessible with neglecting available data on product performance and purchasing habits.

Second Partner Channels we continue to work with our channel customers. These partnerships helped us reach more consumers through established retail network. They expand our IPs and brand elements at more offline touch points and help us interact with users. On the online side, our social media presence continues to grow. As of June 4, 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 the smart mobility. This partnership spans core branding in vehicle powder and the 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 iPuku 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 apps and users more spaces to interact. In Beijing at Beijing Airport, we plan to set up a store to enhance ground visibility and we are actively exploring more similar scenarios in Hong Kong.

We plan to create a dedicated ride experience on the boat at Central Pier using our kids building a unique brown

stand Operational discipline is reflected in our capital allocation. We continue to align resource support and cost structure with our strategic adjustments. Whether investing in 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 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.

Tim Hsieh (Chief Financial Officer)

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 third quarter of fiscal year 2026 ending on March 31, 2026 and that in addition to GAAP measures, we will also be discussing non GAAP 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%. While revenue decreased from the previous quarter's 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, well 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, Bakugo, Sonodo and Thiolee, 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. Gross profit for the quarter 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 reflect 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 100.8 million for this quarter to Break this down. Sales and marketing expenses were 57.7 million. These expenses mainly included advertising and promotion expenses.

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 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 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 $34.1 million 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 diluted net loss per share were 0.21 during this quarter.

Basic and diluted adjusted net loss per share was 0.5 during this year. 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 RMB130 million to RMB140 million for the fourth quarter of fiscal year 2026.

We are revising our fiscal year 2026 revenue guidance to a range of RMB600 million to RMB610 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.

OPERATOR

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 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.

Jing Yuan

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

Peng Li (Founder, Chairman and CEO)

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 healing.

This response 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 do want to collect complete sets 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.

However, starting in the first half 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 security to buying what you like or the both. And 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 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 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. And secondly, the core of competition is moving from product capability to full chain IP operation. Long term IP value must be built based on 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. And 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 the majority of their revenue. And these licenses typically last only one to three years and has a high cost. So if a license doesn't get renewed, you are 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 cooperation co creation model rather than relying on a simple licensing deal. That's all. Thank you.

Jing Yuan

Thanks. That's very helpful.

OPERATOR

Thank you. Our next question today comes from Yi Kun Zheng with Citics. Please go ahead.

Yi Kun Zheng

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 Wakuku, Finano, Xiao. So my question is in the future, how to keep strengthen the momentum of these popular IPs. Thank you.

Peng Li (Founder, Chairman and CEO)

Okay, thank you very much for your question. I will answer in Chinese and my colleague will translate for me and. 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, contacts, products and experiences that align with the IP's characteristics and connect with our target audience. 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. the same time, we closely monitor performance across the multiple dimensions to improve resource efficiency.

Second, we strengthened user wellness and engagement through the high quality products and experience experiences. This helps maintain and build IP momentum. We arrange product plans at a steady pace and keep innovating around ip. This year we are planning next generation products for our core IPs along with offerings of new materials and new playstyles. We will expand into new categories at the right time. And beyond physical products. We're developing IP driven experiences through a live asset-light model.

For example, we recently signed a ferry at Hong Kong Center Pier and we turned it into IP theme park on the water. 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 touch points through our DTC stores, robo shops and dedicated branded sections in partner retail locations.

So overall, we believe strong fundamentals helped us manage and extend an IP's life cycle. But it does not come from a single hit product. It comes from consistent, stable and systematic operations.

Yi Kun Zheng

Okay, that's all. Thank you. Thank you, Mr. Lee. It's very clear.

OPERATOR

Thank you. And our next Question comes from DC with securities. Please go ahead.

DC

Management. Good evening. My question is about our company's plan for the category prevention in the future. Thank you. Okay.

Peng Li (Founder, Chairman and CEO)

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 ip. Our strategy focuses on three key areas.

Okay. 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. Second, we're expanding a discipline pace. There is a common trend in industry right now, many stock keeping units (SKUs). Very broad coverage. But that is not our approach. We believe category expansion must align with ips, content and user needs.

Not to just add more stock keeping units (SKUs). We prefer to go deep with our core IPs. Not broad.

Okay. Third, we are watching for opportunities like smart companionship and The Tech-based 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 framework.

Okay. So 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.

DC

Yeah, that's all. Thank you.

Peng Li (Founder, Chairman and CEO)

Thank you. Thank you.

OPERATOR

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

Questions. Please feel free to contact us or submit a request through our IA 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.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.