The company released its quarterly report for the third quarter of 2023: the income in the first three quarters was 443 million yuan, + 3.7% compared with the same period last year, and the net profit was-61.32 million yuan, compared with + 7.96 million yuan in the same period last year, of which 23Q3 income was 156 million yuan, + 10.4% year-on-year, and net profit was-13.87 million yuan, compared with-12.44 million yuan in the same period last year. 23Q3 achieved revenue-side acceleration and losses narrowed month-on-month compared with 23Q2, both significantly better than we expected.

Core subscription indicators continue to increase, and channel transformation is progressing steadily. The period from 2022 to 2024 is the transition period of corporate subscription, and the related indicators of subscription are the core variables. According to the company's financial report, as of 23Q3, the amount of subscriptions to ARR reached 213 million, and the ARR growth of YoY+85%,23Q1/Q2/Q3 in a single quarter was 2200, 2600 and 27 million yuan respectively, showing an accelerated trend. 23Q3 subscriptions account for 35.5% of revenue and 92% of renewal rates. From a regional perspective, subscription revenue in the North American / European market increased by 76.6% and 111.8% respectively in the first three quarters compared with the same period last year. At the same time, revenue from channels continued to rise, with 23Q3 channels accounting for 34.8%, slightly higher than Q2. The effectiveness of the dual transformation strategy of corporate subscription priority + channel priority continues to be verified.

The company is adopting a variety of strategies to accelerate the pace of subscription transformation: 1) actively guide stock authorized customers to subscribe by means of short-term profit concession and function improvement; 2) improve the ability of channel sales subscriptions and provide corresponding IT technical support; 3) integrate subscription version proprietary features such as esign, AIGC, multi-end and multi-user collaboration into the product. We expect that under the influence of the above strategy, the subscription transformation will accelerate next year.

Consolidate the leading position of AI documents, PDF editors have been fully integrated with AIGC. In April, the company's overseas cloud product PDFEditor Cloud took the lead in integrating AIGC technology; in May, it released new product lines PDFEditor Suite and PDF EditorSuite Pro and increased prices; and in August, it released a new plug-in Foxit PDF Assistant in ChatGPT Plugin Store.

After the September version upgrade, the company's overseas version of PDF editor fully integrated AIGC, can achieve document summary, content rewriting, real-time interaction, and will continue to iterate more AIGC functions. The company has gradually realized the landing of AIGC in the office scene and improved user stickiness, and successfully established the brand image of the leader in AI documents, which will also contribute to the development of new customers.

Investment analysis opinion: by raising the profit forecast, the company's net return profit from 2023 to 2025 is expected to be-0.53 + 41 million yuan (the original forecast is-0.86 million million). In the period of accelerated subscription transition, the company's apparent income is easily affected by the recognition of the revenue of the subscription model and the fact that the subscription price is lower than the permanent license. It is suggested that we should pay more attention to the core indicators such as the proportion of subscription revenue and ARR. Since the company established the double transformation strategy of "subscription first" and "channel priority" in July 2022, it has achieved remarkable results. We believe that its growth logic can be summarized as four "multiplication" of customer value, customer number, domestic space and brand awareness, while the introduction of AIGC capability accelerates the multiplier pace. With the completion of the subscription transformation and the return of apparent income growth to normal in the next two years, there is a lot of room for net profit margin to rise. Maintain a "buy" rating.

Risk tips: unable to make a profit in the short term; channel promotion not up to expectations; Adobe Inc exerting greater competitive pressure; changes in overseas business environment.