BlueCity Holdings Ltd (BLCT) 2020 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to BlueCity's Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, we are recording today's call. (Operator Instructions)

Now I'll turn the call over to Lingling Kong, Head of Investor Relations of the company. Ms. Lingling Kong, please proceed.

Thank you, operator, and hello, everyone. Welcome to BlueCity's Third Quarter 2020 Earnings Conference Call. Joining us today are Mr. Baoli Ma, Chief Executive Officer; and Mr. Ben Li, Chief Financial Officer.

We released results earlier today. The press release is available on the company's IR website at ir.blue-city.com as well as from Newswire services. A replay of this call will also be available in a few hours on our IR website.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve unknown risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. For the information regarding this and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Please note that during today's call, management will also discuss certain non-GAAP financial measures for comparison purpose only. Our GAAP results and reconciliations of GAAP to non-GAAP measures can be found in our earnings press release. Also please note that unless otherwise stated, all figures mentioned during the conference call are in Chinese renminbi.

With that, let me now turn the call over to our CEO, Mr. Baoli Ma. Mr. Ma will deliver opening remarks in Chinese. I will then translate his remarks. Our CFO, Mr. Ben Li will take over to discuss our business and financial highlights.

Mr. Ma, please go ahead.

(foreign language)

[Interpreted]

Hello, everyone. Thank you for joining our earnings conference call today. We finished the third quarter on strong note with total revenues of CNY 297.6 million, up 47.3% year-over-year and total paying users of 494,000, up 43.8%.

Notably, we generated positive adjusted net income for the first time. These results demonstrate our ability to drive steady and healthy growth through improving monetization capabilities and strong execution.

(foreign language)

In addition to solid organic growth which further strengthened our leadership position in the LGBTQ community, we have developed a portfolio strategy that provides different products and services through acquisitions and expansion to other subgroups and geographies.

Let me share with you our latest breakthroughs on those front.

(foreign language)

[Interpreted] First, acquisitions. Today, we have completed the acquisition of Finka, a leading gay social networking app in China targeting younger generations. We are excited about this strategic acquisition. Finka complements our Blued app, both in functionality, centered on dating and swipe, and in the user demographics. With this acquisition, we have further strengthened our leadership and dominance in the LGBTQ community. But more importantly, it has enabled us to enrich our product metric by injecting younger and more trending elements into our communities. We are confident in their future development and look forward to building a complementary business and strategic synergies.

(foreign language)

[Interpreted] Second, as we continue to accelerate our global expansion, we are providing more localized and diversified services in different markets. In Latin America, we introduced a simplified version of Blued app. For some Asian market, we rolled out an exclusive tailored voice chat room feature. Our goal is to build a product that closely matches the needs of the local community.

(foreign language)

[Interpreted] Third, we continue to innovate and develop new products and services. In this quarter, we introduced the community feature of the China version of Blued where users can join a variety of affinity groups and better engaged with the like-minded communities. We are also promoting effective connection on LESDO through new features, such as the so-called Catch function, which serves as an icebreaker between the newly connected friends.

This demonstrates our continued efforts in product innovation that further improves the user experience, and it deepens the bonds of our community.

(foreign language)

I would also like to highlight the performance of He Health, one of our sub-brand health platform that provides a wide variety of health-related services primarily including HIV-related services and comprehensive women's health services.

This quarter, revenue from He Health grew approximately 6x to RMB 9.6 million. Although it still represents a small fraction of our total revenue, we see a huge potential in He Health, with a strong awareness of HIV prevention and treatment in LGBTQ communities and our first-mover advantages of user acquisition and service commendabilities.

(foreign language)

[Interpreted] As we continue to advance the public interest and make relentless efforts in promoting HIV awareness and provision, we've recently pledged to donate RMB 1 million to support nonprofit HIV prevention in the lead-up towards AIDS Day. Our many years of actions towards the HIV prevention has been strongly supported and well recognized by governmental, academic and corporate partners.

Going forward, we will launch more initiatives and continue to promote LGBTQ awareness around the world by organizing and participating in a wide variety of social and public events.

(foreign language)

[Interpreted] Finally, I want to mention that November 2020 was the 20th anniversary of the founding of Danlan.org, BlueCity's predecessor. It has been a long address, yet meaningful and memorable journey for me. From [1/4] to 58 million registered users around the globe.

We'd like to thank all of those along the way who recognized, encouraged and helped us to be who we are. We are dedicated to providing the best services to our members through deeper understanding, product innovation, technology advancement and operational improvement.

(foreign language)

[Interpreted] To conclude, Q3 was a strong quarter. We made meaningful progress in many aspects of our business. We believe that our leading market position, strong execution capability and industry consolidation will benefit from the fast-growing consumer demand, and we can achieve robust growth in the near future.

(foreign language)

[Interpreted] Now let me turn the call over to our CFO, Ben, who will provide details on business and financial performance.

Thank you, Mr. Ma. And thank you, everyone, for joining our call today. As Mr. Ma just mentioned, we delivered another strong quarter with impressive business development and solid financial growth. Total revenues were RMB 297.6 million, up 47.3% year-over-year.

Gross profit was $96 million, a significant increase of 61.7% from the same period of last year. Gross margin was 32.3%, 2.9 percentage points better than 29.4% in the same period last year. Notably, we generated positive adjusted net income for the first time, which was a remarkable improvement as it demonstrated the potential of our business model and our capability to grow in a profitable manner.

We announced the Finka acquisition at the end of November. Finka is a geo-social networking app that uses the swipe feature in which users swipe left for dislike and swipe right to get matched with other nearby men. Finka complements Blued, which is focused on building the community as a whole and connecting people in a much broader sense.

Finka users are mostly millennials that are living in the first and second-tier cities and who'd like to pursue a better quality of life. As such, they are more willing to pay for high-quality services.

As of September 2020, the Finka app had approximately 3 million registered users, with average monthly active users and daily active users about 1/10 of Blued. As we integrate Finka, we will accelerate growth by providing financial support and technological and operational assistance. Specifically, with Finka's features more appealing to overseas users who share similar profiles, we see huge growth potential for Finka to expand overseas, backed by our years of experience on global expansion and operations. Likewise, Finka will add younger members and fresh ideas to the community, which will further optimize our product and service offerings, enabling us to drive further monetization opportunities.

Turning to our recent development in operations. We continue to develop resources to improving operating efficiency. We also invested in technology innovations to improve the user experience as always.

In August, we rolled out a BlueCity original short video series called, Dear Sirs. With 7 episodes, it tells same-sex love stories from 7 different angles. The series has generated over 33 million views as well as numerous interactions within Blued and other social networking apps.

We believe this new series touches the hearts and minds of our members and materially promoted the level of user engagement. Leveraging our strong data analytics capabilities and AI-driven technologies, we launched an all-new community feature on our China edition of the Blued app. Under the community feature, which is similar to Facebook groups, users can join groups based on their common interest and background and enjoy even richer sim social interaction online.

We are pleased to see that the number of talks reviewed by each user and interactions have increased significantly using this launch. Our growing user base and improving data analytics and algorithms provide a solid foundation to optimize our service and product offerings, which will build and foster a greater sense of belonging in its community.

Since our August acquisition of LESDO, a leading social networking app for the lesbian community in China, we are pleased with the results of a smooth integration and effective cooperation. We're investing in human resources, technology improvement, corporate governance and marketing activities. And we are very pleased to see that as of November, monthly active users increased by 1.2x since that acquisition.

The introduction of the new version of LESDO is just a starting point. We plan to roll out live streaming services in this December, and expect LESDO will contribute a meaningful share of revenue in 2021. We continue to build our global presence and improve brand awareness internationally. We introduced a major update to the Blued mobile app in Latin America with optional photo verification and a streamlined user interface reflecting BlueCity's support for the local LGBTQ community.

The results are encouraging so far with both MAU and DAU in some major countries increasing 40% compared to the prelaunch. We are confident in future developments through our marketing and operational efforts.

Over the past few years, we have executed on a clear expansion strategy, serving the LGBTQ community globally with payless features for local users.

Now I will go through our financial highlights for this quarter. Before I go into details about our financial results, please note that all numbers presented are in RMB and are for the third quarter of 2020, unless stated otherwise. All percentage changes are on a year-over-year basis, unless otherwise specified. Detailed analysis is contained in our earnings press release, which is available on our IR website.

Our total revenues increased by 47.3% to RMB 297.6 million. Growth was driven by better monetization of our diverse services and rich content offerings as well as geographic expansion. Revenues from overseas contributed 9.7% of total revenue, up from 5.6% from the same period last year. Revenues from live streaming services reached RMB 255.2 million, up 42.9% from the same period of last year. Quarterly paying users for live streaming services increased by 22.8% to 159,000. The ARPPU increased to 6.4% to RMB 1,609 as promotional activities during the quarter increased the wiliness of top users to pay for services.

Revenue for membership services was RMB 18.2 million, up 56.4% year-over-year. Our quarterly paying users for membership services increased to 55.9% to 378,000 while ARPPU increased 0.3% to RMB 48. Our users have adopted fee-paying membership services quickly, thanks to our rich content, customized services and unique products.

Revenues from advertising were RMB 10.1 million, up 38.8%. Other revenues were RMB 14.1 million compared with RMB 4.5 million from the third quarter of 2019. The increase was mainly attributable to the growth of our merchandise sales. Cost of revenues increased by 41% to RMB 201.6 million, growing in line with our total revenue. The increase was primarily due to the growth of revenue sharing costs, along with the continued growth of live streaming services. We also had share-based compensation expenses related to the IPO.

Gross profit was RMB 96.0 million, up 61.7%, representing gross margin of 32.3%, 2.9 percentage points higher than last year. The improvement in gross margin mainly came from lower revenue sharing as live streaming revenue was a smaller portion of total revenue. Live streaming was 57.4% of total revenue, down from 65.4% in the third quarter last year.

As we have more members using the platform, with more popular and growing attractions, we expect to further reduce the revenue sharing percentage with service providers, and this can achieve a sustainability, higher gross margin. Meanwhile, faster adoption of the membership services fee model, which is higher margins, means we can further diversify our revenue stream and shift towards subscription-based model.

Looking at operation expenses. They were RMB 240.7 million, up 255.2%. The increase was mainly due to the share-based compensation expenses related -- relating to the IPO. Furthermore, they were in line with the growth of our business. We added more employees, enhanced R&D capabilities and ramped up advertising in connection with our business expansion.

Selling and marketing expenses were RMB 58.0 million up 86.3% year-over-year. The increase in sales and marketing were mainly due to the higher advertising and promotion expenses and staff cost as well as share-based compensation expenses related to the IPO.

Technology and development expenses were RMB 50.3 million, up 49.5%. This increase was due to increased headcount in technology and development personnel as well as share-based compensation related to the IPO. G&A expenses were RMB 132.4 million, up 4,349%. The increase was mainly due to the professional service fees and share-based compensation expense related to the IPO.

Net loss was RMB 137.8 million compared with a net loss of RMB 7.1 million last year. The adjusted net income was RMB 7.1 million compared with adjusted net loss of RMB 6.5 million last year. It was a remarkable improvement.

Going forward, we will continue to advance our live streaming models and upgrade membership services to promote the consumption of paid services. We will also broaden our user base within the LGBTQ community. We have prudent global expansion and selective acquisitions. We are confident in our long-term growth prospects.

With that, let me offer guidance. We reiterate our revenue outlook of RMB 1,030 to RMB 1,070 million for full year 2020. Therefore, for the fourth quarter of 2020, we expect the net revenues in a range of RMB 277 million to RMB 297 million, representing year-over-year growth of 24% to 33%.

That concludes my prepared remarks. Let's now open the call for questions. Operator, please go ahead.

(Operator Instructions) Our first question comes from the line of Laura Champine of Loop.

It seems in this quarter that live streaming posted very strong growth. But your guidance for the fourth quarter seems to indicate a slight slowdown. Can you give more color around the dynamics on live streaming revenues in both Q3 and heading into Q4 on -- specifically on the growth trajectory?

Thanks, Laura. This is Ben. Do you mind that I just do a quickly -- quick translation to -- of your question to Mr. Ma? Okay.

(foreign language)

(foreign language)

Okay. Thanks, Laura. Yes, we do have a very strong quarter of live streaming revenue contribution in the third quarter as opposed to last year. But we do see -- the management also have a very clear additional vision that with the COVID-19 impact here in China gets less negative and everything is back to normal right now. So people would like to spend -- consume less time online, in general. So we do see, in the fourth quarter, that might be impacted to some extent. And that is one of the critical reasons we would like to just held the same guidance for the whole year, Laura.

Another interesting dynamic for me anyway was that MAUs use declined, but you're paying sequentially -- but your paying customers grow -- grew very rapidly. How did you drive the migration towards paying users? And what drove the slowdown in MAU growth?

Sure, Laura. I will do the translation to Mr. Ma first.

(foreign language)

(foreign language)

Okay. (foreign language) Laura, actually, Mr. Geng made some quick brief answers, and I will add more colors based on his statements.

So Mr. Ma -- Mr. Geng actually just explained that one of the -- your statements as to why the MAU this quarter seems to slow down, the main attribution is just because we do have some challenging for marketing online or off-line in India due to the geopolitical issue well-known globally.

And given that part was not even being monetized in history, so it does not actually affect our revenue contributions globally. But it does impact the MAU, but no impact to the revenue side. That's one quick background for the detailed answers before we go into details.

And then number two that Mr. Geng mentioned, that given we are right now the #1 market share player, we do have our competence to have the strong engagement based on the sense of strong belongings of our users. So our users could be [addicated] from time-to-time over time, quarter-over-quarter based on our interesting and attractive features that -- kept introduced in this platform.

Number three is that our team, the management team actually keep developing new features on this membership model, that we keep improving the users' interface and feelings enjoy on this platform in general. So that's a quick brief to your question, Laura.

I'll move on to the next questions from the line of (inaudible) from U.S. Tiger Securities.

(foreign language)

So I have 2 questions. First, about live streaming business. In this quarter, we have seen that the live streaming app were up previously both Q-on-Q and Y-o-Y. With this recently high, how will be -- the future stand? Meanwhile, live streaming revenue streaming parts (inaudible) both Q-on-Q and Y-o-Y? So what is the reason behind and how will the future stand?

Secondarily, on Finka acquisition. So if we have completed the acquisition, how will Finka impact our financials in terms of revenue or profit the next quarter or next year? What is the potential of [agreement] monetization factor for Finka?

(foreign language)

(foreign language) Should I do the translation? Okay. To anyone online that -- regarding the 2 questions just mentioned by (inaudible) from Tiger Securities and answered by Mr. Geng earlier -- at earlier stage. The question #1 regards to the ARPPU growth and revenue growth in the region and also the live streaming revenue streaming slowdown -- sorry, have been decreasing over time and the reason and the target. Okay.

The key reason for ARPPU grow and also live streaming revenue, in total, high growing, it's just because the investment actually keep enhancing our operation for live streaming by developing more features to attract more attention from the online platform users in general. And we also do see that with this enhanced operation methodology applied over time, we are getting more and more attractive rate from the live streaming through the DAU and MAU in general. And that's the key driver for the ARPPU and also the total revenue from live streaming.

And the target of the management is definitely that given we are in line now already in the market the #1 player of this LGBTQ community platform globally, we do have the strong negotiation power to the live streamers from time to time. And at this time last year, we still have around something between 66% to 70% revenues share with live streamers. And right now, based on the management's efforts over the 4 quarters, just to specify, that we have successfully achieved to make it down around, I think, below 60%.

And we are still trying every effort trying to bring that down to somewhere in between 50% to 55% in next several quarters. So that is our tactics to enhance our gross margin by lowering down the live streaming sharing with the live streamers.

The second question regards to the Finka's general financial performance through the next quarter and for the quarter in 2021 and also the business model, diversity of this Finka's products. Speaking of that, currently, everything just complete from the paper -- from the paper acquisition-wise and that we are right now in the merging sector of the CEO. And everything has been audited right now according to the GAAP requirements, and we are going to share with detailed information as requested sometime later.

That said, still, the total revenue annually is on the level of RMB 100 million something, in general, for sharing information purpose only. And the monetization pie retrofits from Finka were mainly also by live streaming but with very stronger Blued app that the membership services in general. Yes. I think that's a quick brief of the questions and the answers.

Next question comes from the line of Brian Li of AMTD Group.

Yes. It's a strong quarter as you -- as your company turned profit this quarter. So my question on the expenses side. So if we deducted SBC, and your adjusted OpEx ratio was 30% and declining substantially -- sequentially and also on a yearly base. So can this trend continue?

And when can we achieve the operating leverage on the sales of the marketing? As we can see, the sales and marketing still accounted for nearly 20% of your total revenue. So -- and in particular, you just acquired Finka. So when can you realize the synergy with the acquisition?

(foreign language)

Okay. Great. Now just for efficiency of translation, do you mind, Brian, that I just conduct in English the answer to all questions?

Sure. No problem.

Okay. In general, our share-based compensation cost for this quarter actually touched base on -- touch base on the P&L in total is around USD 20 million or something. So that was huge, but that was just a noncash accounting treatment in general. And most of them actually just in G&A.

So excluding them, you will conclude a very promising OpEx as a percentage of total revenue growth. What I can tell you that this is very promising, but we do not see it going to just keep decreasing in this kind of pace. Just because during the IPO process, I think we're conducting over a year or so, that we do enhance a lot by building up -- strengthening our corporate governance, procurement process, election, selection, tender process, et cetera.

There was actually the legacy of our enhancing our corporate governance from the periods passed by. And this is just starting to impact from the quarter recent -- the recent -- in recent quarters. But we do not see that it will just be [in order] in next quarters onwards.

So yes, the result was promising, but we do not see it was going to be as aggressive at this pace in future sales. Still, we are going to optimize our operation cost aspect of total revenue in general.

Yes. It is going to decrease, but not in that aggressive pace. That's the answer to this question.

And regarding the S&M, as a percent of total revenue, you mentioned 20%. The management holds strong confidence that if we are going to grow bigger, we have to spend more. So the percentage as -- in my last quarter earnings statement that I mentioned, that 20% is just as healthy and as acceptable by management for S&M as a percent of total revenue.

So we are going to -- especially we are going to be a global company. So we are going to keep that level of a percentage of the revenue for marketing and sales in general, yes, in future quarters onwards.

For the synergy, I assumed you were asking about for the cost and G&A, OpEX, et cetera, for that synergy. Certainly, yes. We -- according to the agreed terms, we are going to merge our functional departments post the IPO, but we'll keep operating the Finka brand business separately or independently for next several quarters definitely. And we are going to optimize our human resource to optimize our finance department and also the legal procurement, et cetera.

Yes. Of course, we are looking at a very significant opportunity that if we just combine the 2 procurement process together, that we definitely have a very stronger negotiation addition to deal with the vendors in general, especially for these IT-related like the cloud, like the content modulation machine, et cetera, et cetera. Brian?

Yes. Very detailed answer.

Ladies and gentlemen, in the interest of time, we will now take the last question from Bo Pei from Oppenheimer.

(foreign language)

And then I'm going to translate for myself. So I have 2 questions. First one is about LESDO and Finka. And we acquired LESDO in August. So I'm just curious about our overseas expansion plan like we mentioned for -- in our prepared remarks for Finka, we're going to promote this app in the overseas markets. So I'm just wondering if we have similar strategy for LESDO?

And then the second question is our overseas M&A strategy. I mean, since our IPO, 2 MAUs in China, so I'm just curious about our M&A strategy in the overseas market? And then is the global pandemic kind of slowing down our efforts in overseas market in general?

(foreign language)

(foreign language) Okay. I'll do the translation for the first questions regarding LESDO pay after the -- in general, the status quo of LESDO which we acquired in this summer, and also any overseas expansion plans for LESDO in general.

So Mr. Geng answered that post-acquisition, the management has making great efforts to make the user growth of LESDO. And as earlier mentioned during the prepared remarks, that we have -- the MAU of LESDO has actually increased by 1.2x over those several months post-acquisition.

Based on the product enhancement and also the -- some limited marketing activities, we achieved this kind of results. Thus, with a half year marketing activities conducted later, we -- the management has a strong confidence that LESDO is going to be even stronger for -- in general.

Specifically, starting this December, we are going to introduce the live streaming features in Danlan and LESDO.

Regarding the overseas strategies for LESDO, according to Mr. Geng's statement, that, yes, we are going to go overseas to service the underserved global live stream markets. That said, still, our first priority is trying to win the market #1 share player in China. So our tactic is trying to do China first as #1 then move to overseas.

We see that is not in the long-term future. So that is our general plan. And my own add up to you, Pei Bo, regarding our general geography overseas succession plan under such COVID situation is not -- again, our mission is trying to be international LGBTQ community lifetime demand service provider. So we will never stop expanding internationally globally overseas-wise. So that is our -- like our strategy, likely law of our general plan.

That said, under such current situation, not just the COVID, but also the geopolitical issues raised recently this year, that you can see from our earlier prepared remarks that we actually are trying to compensate alternative options through Latin America market. It's also a very attractive market. We just recently introduced our new products into those markets.

So we -- let's wait 1 or 2 quarters to see how that performs, which the management do have a strong confidence in that regard. That's the question -- that's the answer to your question number one, Pei Bo.

(foreign language)

Pei Bo and everyone else on the line, again, I would like to highlight before I go into the detailed answer translation to -- Mr. Geng just announced statement that our mission of this company, this platform, is trying to present ourselves as an international global success service provider to serve the global LGBTQ community in general.

So the second question from Pei Bo regarding M&A strategy overseas-wise, actually, it does have some interconnection with our global expansion plan in general. So Mr. Geng answered this question from 2 aspects.

Number one, pleased to say, happy to happily answer that if there is an existing strong market-dominant player that we would like to explore any acquisition opportunities with them first in order to save efforts and save time to acquire the customers in general in the Finka market. If that new territory market does not have a presentable good-looking target, our strategy for that market is trying to do it by ourselves either to develop the new featured product or just the copycat -- our international version of Blued, in general. So that is pretty the statement of our global expansion.

M&A is only one of the options in general. My own add up for this aspect, Pei Bo, is that it's not just a restriction for our rates from the COVID, but also from many other aspects like geopolitical issue. We view exactly China-U.S. tension, even India tension, et cetera, et cetera. That's also a part of -- that's also quite challenging for a China company going abroad. I believe everyone understand that.

And also the cost. I mean, cost does not really -- just only related to the economic cost but also the effort cost that even -- maybe the data protection of like the GDPR in Europe, et cetera. That echoes Mr. Geng's just-now statement that our 3 tactics are to go abroad. That's the consideration for how we go abroad, either by acquisition or organic growth.

The second aspect stated by Mr. Geng is that we do have a clear globalization strategy in general. Number one is that we are going to see -- keep solid, expand, enhance our strong presence in APAC territories to keep dominating these markets by developing new features, by doing more sales and marketing online, off-line and to help people -- to help users get more engaged, et cetera, et cetera.

Number two is that we do find another alternative market, Latin America. And we just entered into that market proactively since this quarter. And we do see -- by this quarter, I mean, the fourth quarter this year. And we do see, to date, the data, the KPI, resulted from Latin America is quite promising.

And we will take a serious study in this market to keep developing new features and doing more operations proactively, in general, to get that market to a more promising stage.

The number three is that, as Mr. Geng mentioned that, of course, the North America and Europe, the users actually, they were very, very good users. They are willing to pay. They are more well-advocated, and they are good users. So definitely, again, back to my earlier mention on law of this company, that we are going to be a success international company. We have to face the challenging to be moving to North America and Europe sometime, in some way.

And from now on, and even 2021 or 2022, we -- management already had a serious dialogue internally and preparation to try to get conquered -- sorry, I don't know the word, it's not conquered -- trying to get some meaningful first steps in that mentioned North America and Europe markets.

Pei Bo, that's the answer to the second question. Operator?

Thank you very much. Seeing no more questions in the queue, let me turn the call back to CFO, Ben Li, for closing remarks.

Thank you, operator, and thank you all for participating on today's call and for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress. Thank you.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect your lines.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]