Thank you. Hello everyone, and welcome to HEAR's earnings call for the second 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 Ting will discuss the financials in more details. Following their prepared remarks, Mr.

Li and Ting will be available for the Q&A session. I will translate for Mr.

Li. You can refer to our quarterly financial results on our IR website at ir.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 the filing with the SEC. I will now turn the call over to the CEO and the founder of HEAR, Mr.

Li.

Good morning everyone, and thank you for joining us today. Just over 3 months ago, we held our first earnings call as a pure-play pop toy company.

We shared our vision of focused acceleration. Today, I'm pleased to report that we have not only maintained that momentum, but also began translating it into the durable long-term value we promised.

This quarter marks a significant milestone. It's our first full quarter operating as a dedicated IP trend company.

We have a clear and firm strategy, and we are continuously optimizing execution in a rapidly changing market environment. Building on our Q1 outperformance, Q2 delivered strong results.

Total revenue reached RMB 177.3 million, representing a 39.4% quarter-over-quarter growth. This performance exceeded the high end of our guidance, and reflects a sustained and steady momentum following our strategy.

We continue to focus on our flagship IPs to create ultimate product appeal. Our flagship IP, Wakuku, contributed RMB 129.4 million, accounting for 73% of Q2 revenue.

Shinonome is another potential flagship IP. It has been gaining momentum since its initial launch in July 2025.

It generated over RMB 19.2 million in revenue this quarter. This is not just about product success; it demonstrates that our IP-first strategy is successfully converting more casual consumers into a growing base of core users.

This quarter, based on our observation on changing market conditions and our evolving operational insights, we improved our strategy implementation in a timely manner. We have gained a deep understanding.

Product sales for a period of time are not the only metric to measure an IP's success. The ultimate goal of our operations is to build IPs that users love and that possess lasting vitality.

We expanded the sales contribution from offline distributor channels. This allows users to experience IP products more intuitively.

We have opened 5 offline D2C stores, positioning as a dedicated venue for brand user interaction. We are continuously optimizing the operational experience.

Our online operations team has also improved our user membership system. This quarter, we refined our core operational systems.

This covers IP portfolio health, product appeal, supply chain efficiency, channel effectiveness, and user engagement. These efforts aim at building enduring value, not just focusing on quarterly revenue.

Building on the framework we discussed last quarter, let me walk you through the performance of our two-pillar growth strategy this quarter. Pillar one: IP ecosystem, moving from creative hits to a systematic pipeline.

In Q1, we demonstrated our ability to turn IP launches into cultural phenomena. The Wakuku-themed street in Shanghai was a great example.

This quarter, we refined our operational approach. We identified what works and applied those lessons systematically.

Our IP and product development now rely on continuously improving mechanisms, a data-driven systematic engine. Let me share a snapshot of our IP portfolio.

As of December 31, 2025, we had a total of 18 IPs. That includes 11 proprietary, 5 exclusively licensed, and 2 non-exclusively licensed IPs.

This diversified portfolio forms our IP ecosystem foundation. We have established a comprehensive end-to-end mechanism, covering everything from IP planning to product production and promotion.

The Wakuku on the Road series launched in late November 2025. It built on Wakuku's proven success.

It took our daily companions concept to new heights. We introduced a mini authorized form-factor for full scenario integration, placing Wakuku in the entirely new category of collectibles as everyday companions.

The market response was immediate. We achieved total omnichannel sales surpassing 18 million within one week, along with over 84,000 presale registrations, over 56,000 peak concurrent online users, and over 100 million in total new product exposure.

For Shinonome, the success of its latest release is clear. The Whisper of Cloud series vinyl plush doll hit over 11 million in omnichannel sales within a week, with more than 60 peak concurrent online users and total exposure reaching 170 million.

An IP's journey begins at launch, but extends far beyond. This quarter, Wakuku was invited by the Tianjin Culture and Tourism Bureau to serve as a promotion ambassador.

This demonstrates our success integrating IP with culture and tourism development. Recently, Wakuku also launched a co-branding collaboration with Lukfook Jewellery (六福珠宝).

This continuously enhances IP influence. We are planning to enrich our IPs' narrative worlds through a light content strategy.

That's short-form storytelling that deepens emotional connections. To expand IP influence from physical spaces into narrative spaces, it expands sustained emotional engagement between IPs and fans.

Pillar two: omnichannel reach. Our approach ranges from online brand visibility to offline user experiences.

We are continuously deepening the connection between IPs, products, and users. Our diverse channels are not just sales points; they are portals for IP user interaction and experience.

They continuously empowering the IP ecosystem. Building on last quarter's the massive organic reach, our numbers are strong.

As of February 26, 2026, our total cumulative followers across major social platforms in China reached approximately 700,000, and our cumulative social media exposures exceeded 1.8 billion. This growing digital footprint forms one of the foundations of our brand and IP-driven model.

For offline channels, we position our D2C stores as brand user interaction and experience hubs. Since December 2025, we have opened 5 D2C stores in Beijing, Shenzhen, and Chongqing.

To date, an additional 2 stores are in the preparation stage. A notable example is the grand opening of our Shenzhen UpperHills flagship store on February 1 this year.

We invited a celebrity to serve as store manager for a day. This drew a massive crowd and it generated strong same-day sales of approximately RMB 250,000.

This validates the power of our offline experiential approach. Our Shanghai K11 pop-up generated strong social media buzz and even became a trending topic, and this event at the mall became one of the key drivers of foot traffic and sales.

On 2026 New Year's Eve, we held HEAR's Qimengdao-themed exhibition and light show in core commercial districts such as Wangfujing in Beijing, Gulou in Tianjin, and K11 in Shanghai. Through this landmark public spaces, we achieved high traffic reach and deepened the interaction between the brand and consumers.

At the same time, we are deeply leveraging the powerful and creative tools of the AI era, and innovating vigorously in the area of smart sales terminals. We expect to deploy our intelligent sales robots to more offline locations for user interaction in the near future.

The change in gross margin this quarter reflects our strategic expansion of partnerships with more offline distributor channels. We are committed to providing more interactive and tactile experience through a diversified offline channels to our consumers.

This deepens IP connections and strengthens user loyalty through physical engagement. We firmly believe that the strategic investment will lay a solid foundation for the company's long-term healthy development.

Our international strategy continues to gain momentum. On one hand, as our supply chain capability improved, we are working with domestic distribution partners to promote overseas export sales.

On the other hand, we are actively seeking local overseas partners for IP and product sales collaborations. As we continue to refine our approach, the appeal of various international markets is steadily increasing.

This quarter, we continued to optimize our organizational structure and core operating platform. We refined our cost structure.

We now have a leaner and more focused team and cost structure compared to the first fiscal quarter. We are building an integrated operational system that will be a crucial competitive advantage.

On the supply chain front, our production capacity is now approximately 50 times that what was at the beginning of 2025. This progress, further step from last quarter, lays a solid foundation for creating hits products this year.

Operational excellence provides a solid foundation for our capital allocation. We will continue to invest in high-potential IP development, strategic thematic expansion, and our light content initiatives.

We will continue to systematically build cultural assets based on IP. As a dedicated IP trend company, we are committed to continuously improving our operational efficiency and financial health.

The journey of building an enduring company requires patience and discipline, and we are fully committed to both. I will now turn it over to Ting 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 second quarter of fiscal year 2026 ending on December 31st, 2025, and that in addition to GAAP measures, we also be discussing non-GAAP measures to provide greater clarity on the trends in our actual operations.

We are pleased to report another quarter of solid financial performance, marked by continued revenue growth and a further improvement in our profitability metrics. This demonstrates the sustained, successful execution of our strategy as an IP-based, product-driven pop toy company.

Total revenue reached 177.3 million, representing a 39.4% increase from the previous quarter. Gross profit reached 55 million with a gross margin of 31%, compared with total revenue of 127.1 million and gross margin of 41% in the previous quarter.

Adjusted net loss from continuing operations continued to narrow to 16.1 million, down from 17.1 million in the previous quarter. These results reflect the growing traction of our pop toy products and the operating leverage we are beginning to realize in our focused business model.

Revenues for the quarter were 177.3 million, entirely generated from the sales of pop toys and related activities, compared to 127.1 million in the previous quarter. This sequential growth is primarily driven by our offline channel sales.

Gross profit for the quarter was 55 million, compared to 52.4 million in the previous quarter. Our gross margin decreased to 31% this quarter from 41% in the previous quarter.

The margin decline reflects our strategic expansion of offline channels, which generated lower per-unit margins than direct online sales. This channel diversification strategy is designed to enhance IP engagement and strengthen customer loyalty through physical retail experiences, aligning with the company's long-term vision as a leading IP trend company.

On the operational front, total operating expenses were 93.2 million for this quarter. To break this down, sales and marketing expenses were 52.8 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 29.6% this quarter from 21.7% in the previous quarter.

Research and development expenses were 9.1 million. These expenses were mainly consisting 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 5.1% this quarter compared to 12.5% in the previous quarter. General and administrative expenses were 31.3 million.

These expenses reflected our operational functions, including employee compensation, professional services, and other operational expenditures. As a percentage of total revenue, non-GAAP general and administrative expenses, which exclude share-based compensation, changed to 12.7% this quarter from 23.2% in the previous quarter.

Our net loss from continuing operations was 25.4 million, compared to 25.8 million in the previous quarter. Our adjusted net loss from continuing operations was 16.1 million, compared with 17.1 million in the previous quarter.

Basic and diluted net loss from continuing operations per share were 0.16 during this quarter. Basic and diluted adjusted net loss from continuing operations per share were 0.1 during this quarter.

Regarding our balance sheet position, our accounts receivable amounted to 32.6 million as of December 31st, 2025, primarily attributable to revenue from our offline channel sales. It's worth noting that despite significant revenue growth from offline channels during this quarter, our accounts receivable balance actually decreased markedly compared to September 30, 2025.

This improvement reflects our intensified efforts to enhance customer engagement management capabilities and strengthen collections discipline. Our inventories were 111.8 million as of December 31st, 2025, representing a significant increase from the prior quarter.

This was primarily driven by enhanced supply chain capacity and efficiency, as well as inventory build proactively in anticipation of the Chinese New Year factory closures and new product launches in the upcoming quarter. We view this as a strategic move to ensure we are well-positioned to meet upcoming demand.

Looking ahead, we remain excited about the growth prospects for our pop toy business. Based on currently available information, including our pipeline for the upcoming IP releases and seasonal demand, we expect revenues from our pop toy business to be in the range of 140 million to 150 million for the third quarter of fiscal year 2026, and in the range of 750 million to 800 million for the full fiscal year 2026.

This forecast reflects our confidence in the pop toy market opportunity and our ability to scale our IP portfolio and expand internationally. That concludes my prepared remarks.

Operator, let's open up the call for questions. Thank you.

Good evening. Thanks management for taking my question.

Just one quick question. The revenue guidance for third quarter suggests a quarter-over-quarter decline of about 15% to 20%.

Is it primarily due to seasonality, or are there any specific adjustments due to your IP launch schedule for the upcoming quarter? Thanks.

Thank you, Alice, for your question. Indeed, both factors have contributed, but the core message is that we are actively building momentum for subsequent growth.

Firstly, regarding seasonality, given that our current business primarily operates through a distributor model, distributors naturally slow down their operations and inventory stocking during the Spring Festival holiday. This is within our expectations and represents a common seasonal fluctuation in this industry.

Secondly, regarding the rhythm and pace of our product launches, this is not an adjustment, but rather a proactive arrangement based on our annual planning. Our products are typically planned 3 to 6 months in advance, with dynamic optimizations made based on market feedback.

Currently, we are fully prepared for our product pipeline in the coming quarter and beyond, with major new products expected to launch successively starting from this end of March. Therefore, what we are seeing in the short term is a normal seasonal dip.

From a medium- to long-term perspective, this is proactive management on our part to welcome a new product cycle and optimize inventory and channel pace. Thank you for your continued attention.

Thanks, it's very helpful.

李总、Ting总，晚上好。感谢接受我的提问。那首先恭喜公司获得了一个非常好的季度业绩。那我这边有一个问题是关于未来的公司合作这方面的。我们注意到公司下面的深圳一起还有光线传媒近期是成立了一个合资公司。想请教一下这个合作是否表示公司未来将和光线传媒在比如说内容创作、IP开发等领域展开比较深度的协同？I'll translate myself. My question is about the cooperation with other companies in the future.

We noticed that the Shenzhen Yiqi has recently established a joint venture with Enlight Media. Does this partnership mean you will be working closely with Enlight Media in areas such as content creation and IP development?

Thanks. Hi, I think Mr.

Li will answer this question. 李总，这个...

我来回答，对。那个，I will answer the question in Chinese, and Tina will translate for me. Okay.

对，非常感谢您的问题啊。然后，我们这个合作呢，其实是说明了一个我们很重视的问题，就是这个内容对于我们的IP的战略的一个重要性。Okay, Tina.

Thank you for your interest. Regarding our cooperation with Enlight Media, it is a key part of our efforts to deepen our IP strategy.

首先呢，大家看到了在过去一年里面，我们已经成功的验证了就是从一个IP形象到爆款产品的这么一个商业化的路径。然后呢，我们聚焦我们的主要的IP，然后打造出了爆款，建立了就是我们最关键的核心基础，也就是产品力。Okay.

First, over the past year, we have successfully tested and confirmed the commercial path from IP images to pop toys. By focusing on our core IPs to create hit products, we have built a solid foundation centered on the product strength.

其次呢，我们一直都强调，IP的一个生命力其实在于要有持续的一个内容的赋能。那这个就好像是一把刀的这个刀刃和刀背一样。所以我们不光是关注就是盲盒、毛绒这些我们的实际产品，我们也同时要着眼这个IP的一个长期的发展。所以的话呢，我们就在一边在引进优秀的内容人才，另外呢我们也要跟行业里面顶尖的这种伙伴，比如光线来合作，然后呢用适当的这个内容来对IP进行加持，然后为IP去注入这种文化内涵，加深用户跟IP之间的这种情感互动。Okay.

Second, we have always stressed that vitality of IP comes from continuous content support, and it's very important to this. We focus not only to selling the physical product like the blind boxes and the plush toys, but also on the long-term develop our IPs.

We are now enhancing our IPs through the suitable content forms. We're doing this by bringing in excellent content talents like the Enlight Media and cooperating with the top industry partners.

Our goal is to add a cultural meaning to our IPs and strengthen the emotional connection between users and IPs.

对，所以您提到的这个跟光线的合资公司，其实就是我们践行以上说的这个产品和内容共同驱动的这么一个合作项目。然后借号的话呢，我们通过这种合作，会去探索就是我们的IP在包括影视内容、衍生品开发等等吧，就是很多方面的这种可能性。所以后面的具体规划，我们在有实质进展的时候，再来跟大家披露。Okay.

Finally, the joint venture with Enlight Media you mentioned is exactly one of the specific project to carry out our product and content dual-drive strategy. We hope to explore more possibilities for our IPs in areas like the film and television content and derivative development through such cooperation.

As for specific future plans, we will disclose them to the market when there's a substantial progress. Thank you.

That's all. Thank you.

Good evening management, thank you for taking my question. My question is about our operations strategy.

The company was very successful in IP operation last year. Are there any new strategies for IP operation and marketing in this year?

Thank you.

Thank you for question. I'll take this.

This year, the core keyword for our IP operations and marketing strategies is a comprehensive upgrade from maybe we can call that opportunistic creativity to a systematic IP factory. This is reflected in three key areas.

The first one is on the product front. We have built a replicable assembly line for IPs.

Extreme product excellence is the foundation of everything. Through our product committee mechanism, we rigorously select IPs based on three dimensions: the visual distinctiveness, storytelling potential, and audience resonance, ensuring that every character we launch has the genetic makeup to become a classic.

Concurrently, we have established a complete process from discovery and incubation to development and launch, and then to fulfill the full life cycle management, making it possible to replicate and sustain hit products. A great product in itself is the best nourishment for IP.

We continuously strengthen our in-house teams and integrate outstanding external resources, injecting vitality into our IPs with product excellence. Secondly, on the operations front, we have developed an iterable omnichannel marketing methodology.

Over the past year, we have continuously summarized and optimized our operational experience, forming a replicable playbook that we constantly refine and iterate. This year, we will flexibly deploy differentiated marketing strategies based on the unique characteristics of different IPs and products.

Whether it's celebrity collaborations, brand co-branding, crossovers with major sports events, or integrated online-to-offline user engagement activities, our goal is to leverage precise operational support to ensure great products are seen and loved by more people. Third, on the content front, as just discussed by Mr.

Li and the Citi analyst, we are opening a new chapter of light content empowerment for IPs. This is a crucial step in our journey from purely physical space to narrative space, and from product moments to sustained storytelling.

Through appropriate content, we infuse our IPs with cultural substance and emotional depth, transforming them from mere trendy toys into cultural symbols with stories and vitality. This multidimensional empowerment across products, content, operations, and branding has one ultimate goal: to build truly enduring, evergreen IPs.

That's our evolving strategy as of so far. Thank you.

Thank you.

Thank you, management, for this opportunity. My question is about our channel expansion.

I wonder how is the performance of our recent offline stores? Has it reached our expectation, and what's the channel expansion plan in year 2026?

Thank you.

I'll answer your question. Thank you for your interest in our store operations.

Regarding our offline stores, I will address this from three dimensions: the short-term performance, strategic positioning, and future plans. Firstly, regarding short-term performance, our newly opened stores have generally met or even slightly exceeded our internal expectations.

Since late last December in last year 2025, we have opened 5 D2C stores in Beijing, Shenzhen, and Chongqing. Although they have been operating for just over 1 month, their overall performance has been solid, and they have broadly achieved nearly break-even, a commendable result for newly opened stores in their initial phase.

Of course, due to differences in customer profiles across various shopping districts, we are continuously fine-tuning the operational strategies for individual stores. Second, regarding strategic positioning, we value these stores not only for their sales contribution, but also and more importantly, for their role as brand landmarks and user touchpoints.

Our offline direct sale stores are core scenarios for fostering deep interaction between our IPs and users. To this end, we recently established a user operations center, the organization in our company, aimed at integrating online and offline data and user, and planning more cohesive interactive activities with our IP platform and the product launch pace.

As a crucial component of this strategy, the value of our stores for brand showcasing and user connection far exceeds mere sales figures. Thank you.

Thank you very much.

Thank you again for joining our call today. If you have any further 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.