iFlytek's Path to Leadership in the AI Industry
In recent months, the film "The Wandering Earth 2" has garnered immense popularity, not only for its heartwarming themes—like the idea that "everyone can be a hero"—but also for its showcase of advanced technologies, particularly exoskeleton robots. This trend has sparked significant interest among artificial intelligence (AI) companies, with many announcing optimistic developments. One notable example is iFlytek Co., Ltd. (002230.SZ), a leading player in the AI industry, which recently shared exciting updates about its forthcoming product launches during its investor relations activity on January 30. Among these announcements was the planned release of an integrated soft and hard robot product by 2023, followed by a series of other robotics offerings such as exoskeleton and home service robots.
However, despite the buzz surrounding these innovative products, iFlytek's financial performance over the past year paints a more sobering picture. The company disclosed its earnings forecast, revealing a stark expected decline in net profit for 2022, with projections estimating a range between 467 million and 623 million yuan, representing a dramatic drop of 60% to 70% compared to the previous year. This raises critical questions about the impact of these new AI products on reversing iFlytek's financial downturn.
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The financial industry was somewhat taken aback by iFlytek's performance in 2022. The company anticipates revenues between 18.31 billion and 20.15 billion yuan, marking a minimal growth rate of 0% to 10% year-on-year. In stark contrast, the adjusted net profit—essentially the profit after excluding one-time charges—is projected to fall by around 5 billion yuan, dropping by an estimated 45% to 60%. This dissonance of increasing revenues but dipping profits has been an ongoing concern for iFlytek since early 2022.
iFlytek attributed its financial inconsistencies to the significant investments made in expanding its operational platforms within education and healthcare sectors, as well as efforts in developing new products and achieving technological self-sufficiency. Approximately 800 million yuan was invested into these areas in 2022 alone. While this expenditure did not yield immediate income, the company believes it sets a firm foundation for future profitability and reinforces its position as an industry leader.
The question remains: Can the introduction of smart robotic products help iFlytek escape its current financial challenges?
The landscape of financial performance over the years reveals a troubling trend for iFlytek. Between 2019 and 2021, the company's adjusted net profits rose from 489 million yuan to nearly 1 billion yuan, showing impressive growth rates year on year. However, the past two years have seen this growth trend falter, leading to lower profit growth rates—and in some instances, negative growth. Understanding the roots of this downturn is crucial.
One potential issue lies in the company's approach to research and development (R&D) expenditures. iFlytek has opted to capitalize its R&D expenses rather than treating them as immediate costs. Capitalization means spreading the costs of R&D over several accounting periods rather than expensing them outright, which superficially improves current profitability but leads to increasing amortization charges in subsequent years. In essence, while capitalizing R&D expenditures may improve a company's profits in the short term, it can cause sustained pressure on profits due to rising amortization costs.
The company’s financial reports from 2018 to 2021 indicate that a significant portion of R&D costs—between 38% to 50%—was capitalized, creating a scenario where amortization adjustments significantly eat into profits. For instance, in 2021 alone, amortization from intangible assets within R&D expenses exceeded 1 billion yuan, which directly countered profits for that financial period, a situation that must be of grave concern to chairman Liu Qingfeng.
Alongside financial complexities stemming from R&D expenses, many industry analysts are questioning the robustness of iFlytek's actual business landscape. Founded in 1999, iFlytek has established itself as a public enterprise specializing in intelligent voice technology and AI. Over the years, the company has expanded its reach to areas including natural language processing and computer vision technologies. However, despite diversification across sectors such as education, healthcare, and urban intelligence, questions arise regarding the creation of a sustainable competitive edge.
The company’s business portfolio spans a wide array of operations, including smart education, healthcare services, urban systems, and various consumer applications, such as the well-known iFlytek Input Method and smart recording pens. Despite this variety, the lack of a dominant business area resembling a fortress against competition raises concerns among stakeholders.
For instance, the educational offerings, which contributed 27.49% to revenue during the first half of last year, represent the sector where iFlytek has historically held strong margins, often exceeding 50%. However, recent data indicates a deterioration in this segment, with gross margins fluctuating negatively in recent years. With market dominance dwindling, iFlytek is not exempt from competition. According to statistics from Frost & Sullivan, the intelligent learning device market has become fragmented, with significant players like Budweiser and Youdao capturing 28.9% and 6.1% market shares respectively. This intensifies the pressure on iFlytek, which faces challenges in establishing a recognizable brand amidst fierce competition.
As if the financial hurdles and a complex business landscape weren't enough, the competitive environment for AI firms has taken an aggressive turn with notable contenders from both established tech giants and startups entering the fray. Recent statements made by Baidu's founder, Li Yanhong, advocate for the rapidly evolving landscape of AI technology, with predictions of a "golden decade" for creators in this industry.
Baidu, along with companies like Alibaba and Tencent, has been keenly investing in AI, emphasizing expansive ecosystems that integrate gaming, social networks, finance, and healthcare. Their rapid advances in AI platforms and applications pose substantial threats to iFlytek, which has yet to carve out a solid profit-generating model.
Furthermore, the increasing number of AI startups, including AI chip companies, has contributed to an environment where those lacking an established profitability path like iFlytek are at a distinct disadvantage. Recent market reports indicate a slowdown in investor enthusiasm for AI, with many unicorns in the sector, including SenseTime and Cambricon, facing growing financial difficulties.
The situation is compounded by the decline of major investments. In the past year, financial assets held by iFlytek in affiliated AI companies saw value adjustments resulting in significant losses. For the financial year of 2022, iFlytek reported a decline of 587 million yuan, further affecting net profit. As Sohu founder Zhang Chaoyang noted, while the internet provided opportunities for dreamers and innovators, the real test lies in establishing consistent revenue streams that sustain long-term success.
Given the multitude of challenges spanning operational inefficiencies, competitive pressures, and fluctuating investor confidence, iFlytek's leadership must navigate this intricate maze to recover and thrive in an increasingly competitive space. Finding sustainable revenue generation strategies will be paramount for Liu Qingfeng and iFlytek if they hope to emerge victorious in this fast-evolving era of artificial intelligence.