Here Group Limited (HERE) Earnings

Management highlights

### Core Business Strategy - Long-term IP development and sustained user engagement are top priorities, rather than short-term revenue targets; the company is focused on building scalable internal capabilities to incubate long-lasting, user-centric IPs. - The company has shifted from a single IP portfolio to a repeatable IP incubation engine. As of March 31, 2026, the portfolio holds 20 total IPs: 12 proprietary and 8 exclusively licensed, with diverse styles targeting different audience segments. - The competitive landscape is shifting from market share capture to ecosystem capability competition; HEAR's focus on self-developed IPs and full-chain IP operation gives it a competitive advantage over peers that rely heavily on short-term, high-cost licensed IPs. ### Product Development Highlights - Launched the new co-branded IP Xiao, which resonated strongly with young consumers, generated strong pre-launch market buzz, and validated the scalability of HEAR's incubation model. - Launched *The Handicraft World of Wacoku* series on March 28; initial omni-channel sales exceeded RMB 20 million, with peak concurrent online viewers of 28,000, reflecting strong emotional connection with users. - Released new product lines (plush toys, vinyl figures, collector cards, and special collections) for multiple emerging IPs, building out the broader IP matrix. ### Omni-Channel Expansion - Offline-first strategy: As of the call, HEAR has opened 7 self-operated D2C brand stores in 4 cities (including two new stores opened in prime high-traffic locations in Shenzhen and Xi'an in Q3), and rolled out 15 unmanned RoboShops across 3 major cities to extend reach at lower cost, while collecting valuable user purchase data. - Online channels are focused on content and community building, not direct sales; total follower count across major social platforms is approaching 800,000, supporting ongoing IP engagement. - Completed high-profile strategic partnerships: integrated IP with Baidu's ApolloGo autonomous driving platform for co-branded exposure and content campaigns, and was the only non-state-owned enterprise featured at the national-level China New Culture and Creative Market Trendy Toy Carnival in Beijing. - Planned upcoming offline expansions include a new brand location at Beijing Airport and a themed ferry experience at Hong Kong Central Pier to expand user touchpoints. ### Operational and Financial Discipline - Aligns all capital allocation and cost structure with strategic priorities, evaluating every potential investment (new IP, store opening, content initiative) against a clear ROI framework based on data rather than speculation. - Delivered 350 basis points of gross margin improvement quarter-over-quarter (to 34.5%) through strategic cost structure refinements, despite broader softening in industry demand.

Guidance

- For Q4 FY2026, HEAR management expects pop toy business revenue to fall in the range of RMB 130 million to RMB 140 million. - Management revised full-year FY2026 revenue guidance downward to a range of RMB 600 million to RMB 610 million. This revision reflects current near-term market realities and aligns guidance with prevailing industry conditions.

Segment performance

The company operates through individual IP product segments, with three core segments representing the majority of total revenue in Q3 FY2026: 1. Wacoku (flagship IP): Generated RMB 102 million in revenue, accounting for 62.2% of the company's total Q3 revenue. 2. Sedona: Generated revenue that grew 73.1% quarter-over-quarter, accounting for 20.2% of total Q3 revenue. 3. Synorno: Launched in H2 2025, reached meaningful scale in less than a year, with early validation of HEAR's IP incubation capability. Overall total company revenue for Q3 FY2026 was RMB 164.7 million, with gross profit of RMB 56.9 million and gross margin of 34.5%.

Risks & headwinds

- The broader pop toy marketing environment remains challenging, with overall softened consumer demand in the industry. - The industry has recently experienced a market correction after excessive supply chain growth reduced product scarcity, leading to near-term cooling of market demand. - Most competitors rely heavily on short-term, high-cost licensed IPs, which creates revenue risk if licenses are not renewed; while HEAR's proprietary IP portfolio mitigates this, the broader industry contraction creates indirect market headwinds.

Analyst Q&A

• Q: What shifts in consumer demand and the competitive landscape has HEAR observed in the pop toy industry over the past year? /

  A: Consumer demand has shifted from chasing scarce products toward prioritizing emotional value, companionship, and collectible value. Consumers increasingly expect IP products to fit into their daily lives, with portable, everyday items like plush toys and bag charms seeing strong growth. The broader market is currently in a normal correction after overexpansion of supply chains reduced early product scarcity. / A: On the competitive side, the market has shifted from grabbing market share to competing on full-chain IP ecosystem capabilities. Most new players lack the ability to consistently operate self-owned IPs over the long term, and competition now requires integrated capabilities across IP design, supply chain, branding, and sales that few companies can deliver. HEAR’s focus on a balanced portfolio of majority self-owned IPs with long-term partnerships creates a competitive advantage. (798 chars)

• Q: How will HEAR maintain the strength and momentum of its existing popular flagship IPs going forward? /

  A: IP momentum depends on two core factors: strong inherent IP characteristics and consistent ongoing operations aligned with those characteristics to connect with target audiences. HEAR concentrates resources on core IPs and monitors performance across multiple dimensions to improve resource efficiency, rather than spreading investments too thin across new projects. / A: The company also maintains steady cadences of new product innovation aligned with each IP, expands into new experiences (such as the upcoming themed Hong Kong ferry ride) to deepen user engagement, grows influence through strategic partnerships and celebrity collaborations, and expands offline touchpoints to increase ongoing user interaction. Sustainable momentum comes from systematic consistent operations, not single hit products. (721 chars)

• Q: What are HEAR's plans for future product category expansion? /

  A: HEAR pursues category extension only from its existing IPs, not expansion for expansion's sake, and aligns expansion plans with each IP's current lifecycle stage. The first priority is expanding into IP-aligned lifestyle merchandise, to move IPs from shelf collectibles to everyday companions for users. / A: HEAR rejects the industry trend of broad coverage with large numbers of SKUs, instead prioritizing deep expansion around core IPs aligned with user needs. The company is also actively researching opportunities combining AI technology with smart companionship pop toys, but is still in the exploration stage with no specific launch plans finalized. (512 chars)