The fourth paradigm re-enters the IPO: losses expand, how to break the "AI circle"?

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Text | The author | Yi xin Xiuyi, typography | Cathy, Executive Producer, | Yoda

AI companies that are deeply losing money have reached the crossroads of life and death.

The fourth paradigm of decision-making AI unicorns has previously submitted a second table to the Hong Kong Stock Exchange and once again broke through the IPO.

According to the data of China Insight Consulting, in terms of revenue in 2020, the fourth paradigm occupies 18.1% of the market share in China's platform-centered decision-making artificial intelligence market, which is the largest market share.

The "Fuji Study" found that the fourth paradigm added the performance data of the third quarter of 2021 to the new version of the prospectus: in the first three quarters of 2021, the fourth paradigm's revenue was 1.345 billion yuan, an increase of 134.47% year-on-year; but at the same time, its loss further expanded, with a net loss of 1.478 billion yuan in the first three quarters of last year, a loss of 160.22% year-on-year.

In an old article from October last year, we focused on the fourth paradigm, which is endorsed by the five major banks, and is deeply trapped in the "AI strange circle" of increasing revenue and not increasing profits; To this day, it still cannot escape the "loss curse" of the AI industry.

When the dividend of the AI industry fades, R&D investment is rolled in, and the fourth paradigm of IPO is broken again, can we find a way to break the situation? As a result, "Fuji Research" updated some of the data and charts of the old October article, as follows:

Another AI unicorn shed blood rush IPO.

In addition to the "FOUR LITTLE DRAGONS OF AI", the fourth paradigm of the so-called decision-making AI unicorn submitted a prospectus in August to be listed on the Hong Kong Stock Exchange.

According to the prospectus, in the first three quarters of 2018-2021, the fourth paradigm accumulated a loss of 3.316 billion yuan in the past four years, and at the same time it was clearly stated in the prospectus that it may not be able to achieve or subsequently maintain profits.

Focusing on the vertical segmentation track of decision-making AI, in addition to the common loss problem of the AI industry, the fourth paradigm faces competition and squeeze from integrated Internet companies such as BAT.

It's not easy to break the ai loss spell, and it's even harder to beat the Internet giant! The IPO is just a new beginning, under the squeeze of the Internet giants, how does the fourth paradigm "rise" to profit?

Genius scientist, "bleeding" unicorn

Dai Wenyuan, the founder of The Fourth Paradigm, is a 38-year-old genius scientist who won the world championship of the ACM International Collegiate Programming Competition. Yin and Yang mistakenly chose the direction of AI technology and got to know the top Chinese scholars in the field of AI - Yang Qiang, a professor in the Department of Computer Science and the first academician of the International AI Association in the Chinese community.

Dai Wenyuan, who has achieved success in learning, did not choose to deepen the academic community, continued to reach the peak of academic peaks, embarked on the road of entrepreneurship, and created the fourth paradigm in 2015.

At first, the fourth paradigm tried to make an efficient tool-level product, but eventually it was dispersed due to customer needs.

The team then underwent a paradigm shift, developing a machine learning platform that can be used by non-professionals, Prophet, in July 2016. In the words of Dai Wenyuan, it is a small white who does not understand technology at all, and by using this data architecture platform, it takes about 2 weeks to become an AI expert.

In the AI industry, the fourth paradigm focuses on decision-making AI vertical tracks. According to enterprise investigation data, in February this year, it received strategic investment from Tencent and other strategic investments, raising more than one billion US dollars; as a result, the fourth paradigm is valued at nearly 3 billion US dollars and is regarded as a decision-making AI unicorn.

According to the prospectus, as of now, the fourth paradigm has completed 11 rounds of financing, and the investment shareholders can be described as a star lineup: Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications five state-owned banks; in addition, there are Sequoia China, Innovation Factory and so on.

From 2018 to the first three quarters of 2021, its revenue was 128 million yuan, 460 million yuan, 942 million yuan and 1.345 billion yuan, respectively, and the gross profit for the same period was 0.55 billion yuan, 200 million yuan, 430 million yuan and 623 million yuan, respectively.

Behind the double growth of revenue and gross profit, the fourth paradigm is still "increasing revenue without increasing profits" and escaping the "curse" of AI losses: in 2018, 2019, 2020 and as of the first three quarters of 2021, net losses of 372 million yuan, 718 million yuan, 750 million yuan and 1.478 billion yuan were generated, with a cumulative loss of 3.318 billion yuan in the past four years.

During the same period, the fourth paradigm operating loss was $336 million, $551 million, $560 million and $995 million, respectively, and adjusted operating losses were $213 million, $318 million, $386 million and $391 million, respectively.

It is worth noting that the loss of the fourth paradigm has been accumulating year by year, achieving a revenue growth rate of 2 times in the first half of 2021, but the net loss exceeds that of the whole year of 2020.

"No.2 Research" believes that although decision-making AI is optimistic about the capital market and the fourth paradigm sits on the endorsement of the five major lines, it still cannot avoid the status quo of losses and bloodshed.

Research and development accounted for 70%, and the "prophet" was difficult to return to

With the doubling of revenue growth, losses are also expanding, why is the fourth paradigm difficult to escape the strange circle of "increasing revenue without increasing profits"?

In the view of the "No Two Study", sales and marketing expenses, general and administrative expenses and research and development expenses are eroding the profits of the fourth paradigm; the sum of the three is much higher than the operating income in the same period.

In 2018, 2019, 2020 and the first three quarters of 2021, sales and marketing expenses were $96.58 million, $136 million, $248 million and $367 million, respectively, while general and administrative expenses were $116 million, $224 million, $246 million and $486 million, respectively.

In terms of R&D expenditure, the fourth paradigm R&D expenditure from 2018 to the first three quarters of 2021 was 193 million yuan, 416 million yuan, 566 million yuan and 844 million yuan, accounting for 151.2%, 90.6%, 60% and 62.8% of the revenue in the same period, respectively.

As a technology-intensive industry, R&D investment is a "compulsory course" of the fourth paradigm, but R&D investment is uncertain, and how to land it into commercial results remains to be examined.

The fourth paradigm admits in the prospectus that it is expected that R&D expenses will continue to increase (in absolute terms); and that the commercialization of R&D results may face practical difficulties, and the large expenditure invested in R&D may not produce corresponding benefits.

In the first half of 2021, the fourth paradigm's R&D expenditure climbed to 844 million yuan, accounting for 62.8% of the total revenue; in addition, the fourth paradigm acquired Guangzhou Jianxin, Shanghai Isahai, and the capital increase ideal technology, with a total amount of 398 million yuan.

The "No Two Study" found that at present, the revenue source of the fourth paradigm is divided into two major blocks: the Prophet platform and application products, application development and other services; in three and a half years, the revenue from the Prophet platform has gradually occupied the C position.

From 2018 to 2020 and the first three quarters of 2021, the revenue of its prophet platform and products was 5.23 million yuan, 254 million yuan, 619 million yuan and 690 million yuan respectively, accounting for 4.1%, 55.3%, 65.7% and 51.3% of the total revenue.

During the same period, the fourth paradigm served 18, 32, 47 and 55 benchmark users, respectively; benchmark user revenue contributed 56%, 58%, 61% and 51% of the total revenue, respectively. In the past four years, benchmark users have accounted for more than half of the revenue.

In the prospectus, the fourth paradigm defines Fortune Global 500 companies and listed companies as benchmark customers. The average revenue from each benchmark user increased from $3.9 million in 2018 to $8.3 million in 2019 and further increased to $12.3 million in 2020. This revenue reached $12.4 million in the first three quarters of 2021.

"No. 2 Research" believes that decision-making AI is still in the early stages, although the Prophet platform brings a certain amount of revenue, but as a technology-intensive product, it needs to maintain a certain intensity of R & D investment; in the short term, the fourth paradigm is difficult to find a profit dawn.

Decision AI Blue Ocean? Vertical competition is fierce

According to the china insight consulting report, in 2020, the expenditure of Chinese intelligent workers reached 128 billion yuan, and it is expected to grow to 609.5 billion yuan in 2025, with an average annual compound growth rate of 36.6%.

According to the application field, artificial intelligence is roughly divided into four categories: decision-making artificial intelligence, visual artificial intelligence, speech and semantic artificial intelligence and artificial intelligence robots.

Different from the well-known "AI Four Little Dragons", the fourth paradigm chooses a more vertically segmented decision-making AI, whose typical applications include but are not limited to smart marketing, risk management and supply chain management optimization.

According to the report of China Insight Consulting, in 2020, the expenditure plan of China's decision-making artificial intelligence market will reach 26.8 billion yuan, and it is expected to grow to 184.7 billion yuan in 2025, with an average annual compound growth rate of 47.1%; higher than the expected annual compound growth rate of vision, voice and robots, the latter three are 36.4%, 33.2% and 23.8% respectively.

Although the decision-making AI vertical segment is a blue ocean of growth, the competition in the potential market is equally fierce. According to the China Insight Consulting Report, in terms of revenue in 2020, Fourth Paradigm has become the largest decision-making AI provider in China with a market share of 18.1%, but it faces competition from integrated Internet companies.

The fourth paradigm also admits in the prospectus: in the various industry verticals that have been involved, there are a number of leading technology companies, non-artificial intelligence solution providers, etc. that compete with the company.

The "Fuji Study" found that integrated technology companies, represented by traditional Internet giants such as BAT and Huawei, are competing to enter the decision-making AI track.

Although the fourth paradigm has a certain first-mover advantage, compared with the Internet giant, it does not have advantages in popularity, coverage, user base, capital reserves, etc. Coupled with the delay in seeing the dawn of profitability, when many giants are rolling down with the general trend, the fourth paradigm's discourse power in the vertical field of decision-making AI is in jeopardy.

The fourth paradigm also admitted in the prospectus that increased competition may lead to a decline in sales, a decline in prices, a decline in profit margins and a loss of market share.

In addition, artificial intelligence solutions are not irreplaceable, in addition to Internet giants, finance, e-commerce and other sub-sectors of industry there are other AI startups eyeing the tiger.

In the prospectus, the fourth paradigm specifically mentions the potential impact of the Data Security Act. It stressed that a number of measures have been taken to ensure legal compliance; however, laws and regulations on privacy and data protection are often complex and constantly changing, with uncertainties.

In the view of "No Two Research", China's AI is in the early stage of development, and any "wind and grass" will involve industry nerves; although the decision-making AI vertical track is vast, the industry competition it faces is better than other AI fields.

For integrated Internet companies, AI solutions are only a part of their diversified business; but in the fourth paradigm, decision-making AI is the foundation of their survival and cannot be lost.

It's not just the AI loss spell...

After the "AI Four Little Dragons", the fourth paradigm can also be called a dark horse in the AI industry: sitting on the investment endorsement of the five major banks + star institutions, the aura of decision-making AI unicorns...

However, the fourth paradigm is also difficult to escape the "curse" of the AI industry such as increasing revenue and not increasing profits, and losses expanding year by year.

Compared with the common loss problem of the industry, the bigger test it faces may lie in the competition of traditional Internet giants such as BAT.

Unlike the AI Tigers, the fourth paradigm is rooted in the decision-making AI vertical track; this blue ocean with an expected compound annual growth rate of 47.1% has attracted many competitors, including many mature Internet companies. In terms of the volume of market capitalization alone, it is not in the same order of magnitude as the latecomers, and the competition is relatively more brutal.

Even if the IPO door is successfully opened, the industry war of the fourth paradigm has only just begun. It first needs to be answered: how to break through from the squeeze of Internet giants and truly "start" in the decision-making AI track.

Resources:

"Interpretation of the Fourth Paradigm IPO Document in Hong Kong: Focusing on Decision-making AI, Revenue Exceeded 780 Million Yuan in the First Half of the Year", Wisdom Things

"The fourth paradigm went public in Hong Kong, with a loss of 3 billion yuan in three years, and the R&D investment in the three "gold-devouring beasts" is only the "tip of the iceberg"", Bowang Finance

"AI unicorn fourth paradigm sprint Hong Kong stocks, sitting on the investment of the five major banks but losing 3 billion yuan should look at? Jiang Han's field of vision observation

"The Fourth Paradigm Burns 3 Billion in Three and a Half Years, BAT Competition is a Bigger Test", Radar Finance