Incident: Foxit Software released the 2023 annual report and the 2024 first quarter report. In 2023, the company achieved revenue of 611 million yuan, an increase of 5.33% over the previous year; realized net profit to mother of -0.91 million yuan, increasing losses year-on-year; realized net operating cash flow of -38 million yuan, changing from positive to negative year-on-year, mainly due to the company's increased investment in the market and R&D. By the end of 2023, the company's contract debt was 241 million yuan, an increase of 40.87% over the previous year. Looking at 2023Q4 alone, the company achieved revenue of 168 million yuan, a year-on-year increase of 9.93%; realized net profit to mother of -30 million yuan, increasing losses year-on-year; realized deducted non-net profit of -81 million yuan, and losses increased year-on-year. In Q1 2024, the company achieved revenue of 169 million yuan, a year-on-year increase of 16.87%; achieved net profit to mother of -11 million yuan, and losses narrowed year-on-year; realized deducted non-net profit of -121 million yuan, and losses narrowed year-on-year.

The apparent financial metrics for 2023 are under pressure due to the subscription transformation. On the revenue side, the company achieved revenue of 611 million yuan in 2023, an increase of 5.33% over the previous year. Excluding about 4.67% of the impact of foreign exchange rate fluctuations, the year-on-year increase was 0.66%. There was no significant increase in the company's revenue growth rate, mainly due to the company's accelerated subscription transformation. By product, PDF editors and readers achieved revenue of 487 million yuan, up 1.46% year on year; development platforms and tools achieved revenue of 32 million yuan, down 1.72% year on year; enterprise document automation solutions achieved revenue of 35 million yuan, up 15.33% year on year; PDF tools and online services achieved revenue of 57 million yuan, an increase of 53.46% year on year.

On the profit side, the company achieved net profit of -91 million yuan in 2023. Excluding share payment fees, impairment of goodwill, and loss of investment in joint ventures, the deducted non-net profit from the company's own operations is about -88 billion yuan.

The subscription transformation is progressing smoothly, and core metrics have increased dramatically. In 2023, the company accelerated subscription transformation. Behind the slowdown in apparent revenue growth, it corresponded to the good progress of subscription transformation and the increase in the overall value of the business. In 2023, the company achieved subscription revenue of 216 million yuan, an increase of 75.55% over the previous year, accounting for 35.36% of revenue; achieved ARR 250 million yuan in subscription business, an increase of 80.60% over the previous year; and achieved subscription-related contract liabilities of 161 million yuan, an increase of 71.30% over the previous year.

Furthermore, the company's core products continue to maintain a high renewal rate, with an overall renewal rate of about 91%. Since apparent revenue does not reflect the actual operating situation of the company, according to the relevant audit report issued by the accounting firm, the company achieved an annual comprehensive business volume of 850 million yuan to measure the actual business value of the company in 2023, an increase of 20.05% over the previous year. We believe that the company is still in the process of subscription transformation. The subscription transformation is conducive to increasing customer value and customer stickiness, but it has a certain impact on short-term financial data. In the future, as the company gradually completes the subscription transformation, the company's apparent revenue and profit are expected to improve significantly.

The overall expansion of channels has been smooth, and the decline in global PC shipments has dragged down revenue for some channels. In 2023, the company achieved revenue of 208 million yuan from channels, an increase of 22.39% over the previous year, accounting for about 34.01% of revenue. Among them, due to the decline in global PC shipments, the company's revenue from core PC channel providers was basically the same as the same period last year, but if the influence of this channel was excluded, the company's revenue from the channel increased 38.24% over the same period last year. The company's revenue mainly comes from overseas. Looking at overseas market segments, North American market revenue increased 0.34% year over year; European market revenue increased 23.57% year over year. Among them, the slowdown in revenue growth in the North American market is mainly due to the rapid growth of the subscription business. In addition, revenue from channels in major regional markets also achieved good growth: the North American market grew 8.55% year over year; the European market grew 59.53% year over year; and the Chinese market grew 45.45% year over year. The slowdown in channel revenue in the North American market, in addition to being due to its large revenue base, was also affected by the fact that channel revenue from core PC channel providers in 2023 was basically flat compared to the previous year. If revenue from core PC channel providers is excluded, channel revenue in the North American market increased 19.75% year over year.

24Q1: Revenue growth in the European and American markets accelerated, and the results of “double transformation” gradually became apparent. In Q1 2024, the company achieved good growth on the revenue side. Among them, revenue from the North American market increased 11.01% year on year, and revenue from the European market increased 25.97% year on year. Furthermore, the “subscription+channel” dual transformation continues to advance steadily. 2024Q1 achieved subscription revenue of 74 million yuan, an increase of 73.30%; the subscription business achieved ARR of 281 million yuan, an increase of 13.09% year over year. In terms of ARR growth in a single quarter, 2024Q1 had a net increase of 31 million yuan, an increase of 41% over the 2023Q1 net increase of 0.2 billion yuan. In terms of channels, 2024Q1's revenue from channels was 63 million yuan, an increase of 49.01% over the previous year, accounting for 37.44% of revenue.

Profit forecast: We expect the company's revenue for 2024-2026 to be 679/8.14/1,006 million yuan, with revenue growth rates of 11.1%/19.9%/23.7%, respectively; net profit to mother of -0.53/-0.12/78 billion yuan, respectively. Maintain a “buy” rating.

Risk warning: Subscriptions and channel transformation fall short of expectations, artificial intelligence development falls short of expectations, and market competition intensifies.