iFLYTEK in the catch-up

Author: Pan Yan

Producer: Global Finance

"China must establish an independent and controllable general large model base, which is the key to achieving general artificial intelligence and international benchmarking."

Recently, API (Application Programming Interface) developers have received "supply cut" notification emails from OpenAI. It is reported that from July 9, 2024, OpenAI will begin to block API services from non-supported countries and regions, including Chinese mainland and Hong Kong, China.

The "supply cut-off" notice stirred the nerves of the market and added new variables to the competitive situation of the domestic large model industry. The hardest hit is none other than the "shell" developer team that used to be based on OpenAI's technology.

But some people also see an opportunity, while OpenAI is banning APIs in China, the domestic large model market has set off a wave of beach-grabbing actions, and launched their own "migration" plans with lightning speed.

On June 26, iFLYTEK announced the launch of the "iFLYTEK Xinghuo API Inclusive Policy", including the Xinghuo Lite version is free forever, the Xinghuo Pro version is free for 1 month, the Xinghuo Max version is free of 100 million tokens, and the first public release of the Xinghuo 4.0 Ultra version is the first buy one get one free, while providing 1V1 support services for technical experts.

In fact, the iFLYTEK Xinghuo large model also has a "king bomb" advantage, that is, starting from the V3.5 version, it is based on China's first pure domestic computing base "Feixing No. 1" training, the original "Made in China". It is reported that the "Feixing-1" is an independent and controllable large-scale model computing power base platform based on the Ascend ecosystem jointly developed by iFLYTEK and Huawei.

In the final analysis, this is a chase race for domestic models to catch up with the world-class general models.

Big Model Tournament

Represented by the advent of ChatGPT in November 2022, artificial intelligence has undergone a directional change, from discriminative AI to generative AI, and the underlying technology of the latter is large models, which has rapidly set off a large model technology competition around the world.

After entering 2023, there will be a wave of hype about the concept of pan-AI in China. Since the beginning of 2023, iFLYTEK's share price has skyrocketed to a historical peak of 80.68 yuan per share, and its market value has climbed to 170 billion yuan.

iFLYTEK, which is seizing the opportunity, will also gradually move its R&D focus to AI in 2023, and even announced an all-in large model. In May 2023, iFLYTEK officially launched the "Spark Cognitive Model" and continues to update and upgrade iteratively.

On June 27, 2024, iFLYTEK Xinghuo has been upgraded to V4.0 version. Liu Qingfeng said at the press conference that iFLYTEK Xinghuo V4.0 has surpassed GPT-4 Turbo as a whole in terms of text generation, language understanding, knowledge question answering, logical reasoning, and mathematical ability.

However, while the "national team" is struggling to catch up, GPT is also constantly updating and improving. Recently, OpenAI's chief technology officer, Mira Murati, revealed that GPT-5 could be released in late 2025 or early 2026, reaching the level of "doctoral-level" intelligence in specific tasks.

It can be predicted that after the launch of GPT-5, the industry will usher in another major leap, and the catch-up of domestic large models will continue.

Liu Qingfeng also mentioned in the upgrade press conference that once GPT-5 is released, the gap will be pulled to about a year, because people have more computing power, more data, and larger models. "But we're confident we'll continue to play catch-up fast."

What is the source of tragedy?

The game of the brave will continue, but on the eve of the iFLYTEK Spark V4.0 upgrade conference, iFLYTEK is shrouded in public opinion.

Recently, the news of the sudden death of an employee of iFLYTEK who worked overtime was circulating on social media. According to the news circulating on the Internet, the deceased employee was an advanced test of iFLYTEK, and suddenly felt unwell at home after work, and his family called 120 to send him to the hospital and passed away after being rescued. Later, iFLYTEK reported the information internally, and the news of the employee's death was true.

In fact, this is the second employee of iFLYTEK to die of a sudden heart attack in the past year. In August 2023, some media learned from the public relations department of iFLYTEK that an employee suddenly felt unwell at home, and his family was diagnosed with a heart attack after being sent to the hospital, and finally died after rescue efforts failed.

The same tragedy happened frequently, causing heated discussions among netizens. An iFLYTEK employee said, "iFLYTEK is very volatile, overtime is the culture, and the company said at 12 o'clock in the middle of the night that it would work overtime until the early hours of the morning." ”

In recent years, the death of employees in large factories is not an isolated incident, and it is a problem that enterprises increase task indicators and increase working hours for employees in order to enhance efficiency.

In addition to excessive overtime, there has been another hot topic in the Internet circle in recent years - layoffs.

As of the end of 2023, iFLYTEK has a total of 14,356 employees, a reduction of 690 from the end of 2022. Among them, the number of sales personnel decreased by 283, the number of technical personnel decreased by 373, the number of financial personnel decreased by 5, the number of administrative personnel decreased by 96, and the number of management personnel decreased by 9.

All accidents have an inevitability behind them. Layoffs, business cuts, and welfare cuts are to reduce costs, work overtime, increase tasks, increase indicators, and increase efficiency, and "tighten the belt to live" has become an enterprise-level consensus regardless of field and stage.

As for iFLYTEK, which is in the "Golden Cave" AI track, this phenomenon will only become more obvious, and with the continuous upgrading and replacement of its large-scale model products, the performance pressure is now highlighted.

Worst net profit performance

In 2021, iFLYTEK put forward the performance goal of "achieving 100 billion revenue by 2025". The reason for such determination is mainly due to the fact that iFLYTEK has had revenue growth of more than 25% for 10 consecutive years at that time, and this performance is also one of the best among the entire A-share listed companies.

However, after entering 2022, iFLYTEK's high growth has come to an abrupt end, and the scale of revenue has almost stood still in the past two years. In 2022, iFLYTEK's revenue will be 18.820 billion yuan, with a growth rate plummeting to 2.77%, and although it will rebound in 2023, it will still be a single-digit growth, with a year-on-year increase of 4.41% to 19.650 billion yuan, which is less than 2% away from the revenue target of 100 billion yuan.

In the first quarter of 2024, iFLYTEK regained some decency, with revenue increasing by 26.27% year-on-year. However, compared with the growth required for the revenue target of 100 billion yuan in 2025, the growth rate of 26% is obviously not enough.

In 2021, when iFLYTEK proposed a revenue target of 100 billion yuan in 2025, it also planned specific goals for its business.

Among them, the education sector is expected to achieve revenue of 30 billion yuan, the medical and pension sector is expected to achieve 20 billion yuan, the open platform and consumer sector is expected to achieve 20 billion yuan, and the automobile business, operators, and smart city are each 10 billion yuan.

However, combined with the 2023 financial report data, iFLYTEK's education sector achieved an operating income of 5.852 billion yuan, the open platform and consumer segment achieved an operating income of 6.185 billion yuan, the operator-related business achieved an operating income of 2.096 billion yuan, the smart city segment achieved an operating income of 3.933 billion yuan, the smart car segment achieved an operating income of 696 million yuan, and the smart medical segment achieved an operating income of 540 million yuan, all of which are quite different from the target value.

In addition to the "stall" of revenue, iFLYTEK's profitability is also worrying.

After the net profit attributable to the parent company in 2022 fell by 63.94% year-on-year to 561 million yuan, the net profit attributable to the parent company of iFLYTEK in 2023 increased by 17.12% year-on-year to 660 million yuan.

In 2023, the government subsidy included in the current profit and loss of iFLYTEK will be 404 million yuan, accounting for 61.21% of the current net profit. If non-recurring gains and losses are deducted, iFLYTEK's non-net profit decreased by 71.74% year-on-year to RMB118 million, the lowest level in the past decade.

This situation continued to the first quarter of 2024, and the amount of government subsidies for the current period was 40 million yuan, a decrease of 59.57% compared with the same period in 2023. The decrease in the amount of government subsidies has further expanded iFLYTEK's current expansion loss. In the first quarter of 2024, iFLYTEK will have a net loss of 300 million yuan, which is significantly higher than the loss of 57.9 million yuan in the same period, and it is also the worst quarterly performance of iFLYTEK since its listing 15 years ago.

Looking back at the previous financial reports, it can be found that iFLYTEK has relied on government subsidies to "support the façade" for a long time, and there are still doubts in the market about whether iFLYTEK is a "subsidized enterprise".

Combined with previous data, since 2016, iFLYTEK's government subsidies have accounted for a high proportion of net profit. From 2016 to 2022, the government subsidies included in the current profit and loss of iFLYTEK were 128 million yuan, 77 million yuan, 276 million yuan, 412 million yuan, 426 million yuan, 439 million yuan, and 473 million yuan, accounting for 180.28%, 104.16%, 50.83%, 50.24%, 31.23%, 28.21%, and 84.31% of the net profit in the same period, respectively.

It can be seen that even if "blood transfusion" is carried out by relying on external subsidies, with the continuous increase in R&D investment of iFLYTEK, the problem of insufficient hematopoietic capacity of the company may be difficult to cover.

iFLYTEK said in the first quarter report of 2024 that the loss is mainly due to the company's active seizure of new historical opportunities in general artificial intelligence and firm investment in general artificial intelligence cognitive models. In the first quarter of 2024, the company will invest about 300 million yuan in the research and development of large models, the independent and controllable core technologies and industrial chains, and the landing and expansion of the large model industry. In 2023, the direct R&D investment related to "Spark" will exceed 2 billion.

Liu Qingfeng said that 2023 will be the "first year of the spark", with more R&D investment and less market investment, while 2024 will be a "spark fire", and while R&D investment will increase, market investment will also be increased. Obviously, continuous capital injection is still the main theme of iFLYTEK's 2024 strategy.

"In the future, the company's investment around the basic model may account for 30% of the R&D investment, the proportion of application investment will increase, and the scale of R&D investment around the basic model will still grow with the growth of the scale of industrial landing."

What's next?

As the so-called big waves sweep the sand, they begin to see gold. After the brutal baptism of the "100 model war" in 2023, the domestic general model will enter the second half in 2024, and now those who can stay in the arena are all "high-energy players" with hard core power.

In addition to Xunfei Xinghuo, domestic large models such as Wenxin Yiyan, Tongyi Qianwen, Tencent Mixed Yuan, Kimi, and Doubao are also constantly catching up and have the ability to compete with ChatGPT.

However, when there have been significant breakthroughs in model capabilities, computing power challenges and other problems, there has always been a huge gap in the commercialization of domestic large models.

In 2024, the large model will begin to enter the first year of commercialization, and several leading domestic technology companies have begun to accelerate the application layout of the large model, taking the lead in practicing in many fields such as finance, automobiles, operators, and government affairs.

Liu Qingfeng once revealed that iFLYTEK's iFLYTEK Spark model has achieved leading landing in many industries such as automobiles, home appliances, and robots, becoming the first brand in these fields.

Liu Qingfeng planned three commercialization paths for iFLYTEK Xinghuo. The first is to empower C-end hardware, the second is to realize the application in education, medical care, automotive and other scenarios, that is, B-side service empowerment and large model customization, etc., and the third is to open the platform of iFLYTEK and sell API services.

Overall, with the iterative update of iFLYTEK Xinghuo, the results of the large model have begun to show. However, the continuous large investment has made the company's profitability difficult, and it still needs external "blood transfusion" bailout.

More urgently, iFLYTEK is short of funds.

Net cash flow from operating activities was -$1,384 million in the first quarter of 2024, compared to -$1,668 million in the same period last year. As of the end of the first quarter of 2024, the company's monetary funds were 2.678 billion yuan, while non-current liabilities due within one year reached 1.240 billion yuan. Looking back at 2021-2023, iFLYTEK's monetary funds will be 5.870 billion yuan, 4.346 billion yuan, and 3.563 billion yuan respectively, which shows the speed of burning money.

Wind data shows that iFLYTEK has made several private placements, raising about 10.48 billion yuan, and the last private placement occurred in 2021. As the entire industry enters the first year of commercialization, iFLYTEK is bound to face a "tough battle". So, what's next?

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