Following the commencement of the third quarter, iFlytek Co., Ltd. (abbreviated as “iFlytek”, 002230.SZ) reported a net loss for the parent company after non-recurring items, turning from profit to loss.
On the evening of October 19, iFlytek released its third-quarter report. In Q3 2023, the company achieved a revenue of 47.72 billion yuan, a year-on-year increase of 2.89%; a gross profit of 19.37 billion yuan, up 3.62% year-on-year; however, the net profit attributable to the parent company was only 25.79 million yuan, a decline of 82% year-on-year. The net profit for the parent company after non-recurring items again turned from profit to loss, recording -20.19 million yuan. iFlytek stated in the announcement that the significant profit reduction was due to the company’s investments in general artificial intelligence cognitive large models and other areas.
Moreover, in the first three quarters, iFlytek achieved a business revenue of 126.1 billion yuan, slightly down by 0.27% year-on-year. The net profit attributable to shareholders of the listed company was 99.36 million yuan, down 76% year-on-year.
After reaching a new high of 81.88 yuan per share on June 20 this year, iFlytek’s stock price has dropped by one-third. As of the close on October 19, iFlytek’s stock price closed at 53.80 yuan, up 0.62%.
Investments in large models impacted current period profits
Specifically, iFlytek’s net profit attributable to the parent company in the third quarter decreased by 116 million yuan compared to the same period last year, and the net profit for the parent company after non-recurring items decreased by 168 million yuan year-on-year. iFlytek stated that the main reason is the company’s aggressive capture of the historical new opportunities in general artificial intelligence and investments in areas like cognitive large models.
The Paper noted that iFlytek’s R&D expenses in the third quarter amounted to 9.81 billion yuan, a year-on-year increase of more than 10.04% from 8.92 billion yuan in the same period last year. Compared to 8.01 billion yuan in the second quarter, it increased by 22.50% quarter-on-quarter. Sales expenses increased by 9.86% to 8.34 billion yuan from 7.59 billion yuan in the same period last year.
However, The Paper also noted that bad debts were a major drag on profits. As of September 30, iFlytek’s notes receivable and accounts receivable totaled 125.35 billion yuan, an increase of 20.97% from 103.62 billion yuan at the beginning of January. The credit impairment loss of iFlytek mainly came from bad debts in accounts receivable. As of September 30, iFlytek’s credit impairment loss reached 2.82 billion yuan, compared to only 15.6785 million yuan in the same period last year, an increase of up to 1703%.
iFlytek did not provide an explanation for the surge in credit impairment losses, only stating that investments in areas like large models impacted the profits of the current period. iFlytek commented, “Despite the impact of the above-mentioned investments (large models) on current profits to a certain extent, the new capabilities built by the company in terms of core technology autonomy and the latest advancements in moving towards general AI cognitive large models have laid a solid foundation and a unique first-mover advantage for the company’s long-term sustainable development in the digital economy era.”
This year, there have been multiple factors affecting iFlytek’s performance. Since its IPO in 2008, iFlytek’s net profit has only recorded a quarterly loss once. However, a rare net loss occurred in the first quarter of this year. iFlytek explained that the special socio-economic environment of the first quarter affected the company, compounded by factors like increased U.S. sanctions.
iFlytek’s operational data began to improve in the second quarter. As a result, iFlytek stated that the company has moved past its temporary challenges in the first half of the year and re-entered a positive development trajectory. “While significantly increasing investment in the iFlytek Starfire cognitive large model R&D, the company still achieved positive growth in revenue, gross profit, and cash flow in the second quarter, and also realized positive net profit attributable to the parent, net profit after non-recurring items, and cash flow.”
With the increased investment in large models, iFlytek’s third-quarter profits were once again affected.
iFlytek announced that it will launch the iFlytek Starfire Cognitive Large Model V3.0 as scheduled on October 24, aiming to match ChatGPT comprehensively. Additionally, it will upgrade the large model’s coding capabilities, releasing medical large models and the iFlytek XiaoYi APP.
However, what remains to be verified by the market is whether fully matching ChatGPT with the large model will trigger a surge in iFlytek’s performance.
Major shareholders and chairman have reduced their holdings
As of September 30, there were four shareholders of iFlytek with changes in their shareholdings in the third quarter, and one shareholder newly entered the top ten shareholders.
Specifically, China Mobile Communications Corporation (abbreviated as “China Mobile”, 600941), iFlytek’s largest shareholder, and Liu Qingfeng, the company’s chairman and second-largest shareholder, both reduced their holdings, selling 4.0768 million shares and 39.9561 million shares respectively. After the reduction, their shareholdings were 243.6374 million shares and 128.2972 million shares, respectively.
China Mobile’s divestment plan is still in progress. According to iFlytek’s previous announcements, China Mobile, aiming to recoup investment costs and achieve good shareholder returns, plans to reduce its stake in the company by no more than 23.1567 million shares between August 22 and December 31, either through centralized bidding or block trades. Meanwhile, Liu Qingfeng sold a total of 39.96 million shares on August 14, involving an amount of 2.35 billion yuan, reducing his shareholding ratio from 7.27% to 5.54%. iFlytek explained that Liu Qingfeng’s reduction was due to the maturity of the 2.35 billion yuan debt incurred from his increased shareholding in 2021, which required repayment of the principal.
University of Science and Technology of China Asset Management Co., Ltd. (abbreviated as “USTC Holdings”) did not fully execute its reduction plan. According to iFlytek’s pre-disclosure announcement, USTC Holdings planned to reduce its stake in the company by no more than 23.23 million shares, accounting for 1% of the company’s total share capital, from April 21, 2023, to October 12, 2023. As of October 20, the reduction period has passed, and USTC Holdings only reduced its stake by 0.36% in the second quarter.
Furthermore, Hong Kong Central Clearing Limited (Stock Connect) and renowned retail investor Zhang Wei increased their shareholdings, adding 18.572 million shares and 16.9 million shares respectively. After the addition, their shareholdings were 103.072 million shares and 58.88 million shares, respectively. Wang Renhua, one of the founders of iFlytek and the chief scientist, became one of the top ten shareholders with a shareholding of 21.2511 million shares.
Notably, Zhang Jianping’s wife, Fang Wenyan, who appeared in the second quarter, disappeared from the list of top ten shareholders. Well-known private equity investor Ge Weidong did not reduce his holdings in iFlytek.
It’s worth noting that one insurance company appeared among iFlytek’s top ten circulating shareholders in the third quarter. This insurer is China Life Insurance Company Limited, holding a total of 18.0023 million shares. In the first quarter of 2023, Huaxia Life Insurance Co., Ltd. also appeared on the list of iFlytek’s top ten circulating shareholders.