Voicecomm files for Hong Kong IPO

The provider of software that facilitates human-to-computer communication has filed for a Hong Kong IPO that could value the company at about $500 million

Key Takeaways:

  • Shanghai Voicecomm has filed for a Hong Kong IPO, reporting its revenue growth accelerated to 51% in the first nine months of last year from just 22% annually in the two previous years
  • The company says the market for its conversational AI software is at an “inflection point,” driven by the recent explosion in cloud computing, big data and 5G technologies


By Doug Young

Artificial intelligence (AI) is a double-edged sword for tech startups, providing opportunities for big growth but also big losses due to the need for heavy R&D spending. In such an environment, the company that can show profits is a relatively rare find and something investors might want to consider more closely than the many money-losing options in the market.

Shanghai Voicecomm Information Technology Co. Ltd. could offer such an option, following its application this month for a Hong Kong listing that could value the company at about $500 million. Voicecomm sits in a relatively sweet spot at the confluence of humans and machines, providing software that facilitates human-to-computer communication using conversational AI (CoAI) technologies.

Voicecomm is a decidedly mid-tier player in its space, ranking seventh in CoAI solutions for enterprises in China with 0.8% of the country’s overall market for CoAI solutions, according to third-party data in its prospectus filed with the Hong Kong Stock Exchange on Jan. 12.

Its current customers come mostly from four industries. Leading the list is city management and administration clients, which made up about half of its total last year, followed by telecommunications at 22%, automotive and transportation at 18%, and finance at 9%. The company is also looking for opportunities in other industries as demand grows for its CoAI technology, including media, healthcare, e-commerce and retailing,

Voicecomm looks interesting for its growth that has recently accelerated faster than the overall market, which is also growing quite rapidly with an explosion of demand created by a new generation of AI, cloud computing, big data and 5G technologies. Voicecomm said such technologies are “massively transforming the paradigm of enterprise-level information production,” adding that the commercialization of CoAI technology is now “embracing its inflection point.”

The overall market for CoAI solutions for enterprises in China is expected to more than triple from 53.2 billion yuan ($7.47 billion) last year to 190 billion yuan by 2027, translating to annual growth of 29%, according to third-party data in the prospectus. Much of that growth will come as more companies start to use CoAI solutions, with the penetration rate for such use expected to rise from 10.4% in 2022 to 15.6% by 2027.

Voicecomm was previously growing roughly in line with industry rates, though the growth suddenly began to accelerate last year, possibly reflecting the “inflection point” the company spoke of in its prospectus. Its revenue rose from 347.2 million yuan in 2020 to 515 million yuan in 2022, representing annual growth of about 22%. But that growth suddenly jumped to 51% last year, with revenue climbing to 488 million yuan in the first nine months of 2023 from 324 million yuan in the year-ago period.

While accelerating growth is always a good sign, another good sign is that the quality of that growth also looks quite good, as Voicecomm benefits from economies of scale. It’s also benefiting from two trends within its business.

Higher-margin businesses

The company breaks down its sales into two types of customers: one that buys combinations of software and hardware, and the other that buys only software. The software-only type typically carries higher margins, and has grown from 18% of its business in 2020 to 38% in the first nine months of last year.

Voicecomm also breaks down its revenue into two other customer types: enterprises, and systems integrators that build entire systems for big clients like local governments and big state-run enterprises (SOEs). Sales to enterprise customers, which are typically the more lucrative of the two, have grown from 11% of its business in 2020 to about 22% in the first nine months of last year.

The combination of greater economies of scale and more focus on more profitable software-only sales and enterprise customers has helped to lower the company’s cost of sales as a percentage of total revenue from 68% in 2020 to 59% in the first nine months of last year. As that happens, its gross margin grew from 32.2% to 41.1% over the same period.

The company’s strong growth and improving margins have made it generally profitable when excluding some non-operating factors. That said, its adjusted net profit grew at a relatively slow 20% between 2020 and 2022, quite a bit slower than its 48% revenue growth over that period and 80% rise in gross profit.

On its bottom line, Voicecomm was profitable on a net basis in 2020 and 2021, but slipped into the red in 2022 and the first nine months of 2023, mostly due to changes in fair value of redeemable capital contributions.

While the picture for this company really does look quite positive, we should also point out a few potential problems as well. One of those is unpaid bills, which is likely to become a bigger factor for many Chinese companies in the years ahead as the economy slows after years of breakneck growth. The company’s losses from unpaid bills ballooned from 2.2% of its revenue in 2020 to 8.3% in 2022, though the figure fell back to 2.4% in the first nine months of last year.

One other factor to watch is R&D spending, which is often one of the biggest pain points for AI companies that must invest heavily in new product development to stay ahead of their competitors. Voicecomm’s R&D expense more than quadrupled from 13.7 million yuan in 2020 to 64 million yuan last year, and jumped further still to 75.6 million yuan – or about 15% of its revenue – in the first nine months of 2023. Still, that spending ratio looks far better than many other AI companies whose R&D spending can often exceed their total revenue.

In terms of valuations, other AI companies like SenseTime (0020.HK), iFlytek (002230.SH) and Fourth Paradigm (6682.HK) mostly trade at price-to-sales (P/S) ratios of around 6. A similar ratio for Voicecomm would value it at about $500 million. At the end of the day, the company looks quite attractive due to its position in a market with big growth potential, its improving margins and likely return to profitability in the years ahead.

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