Mogu Inc (MOGU) 2019 Q3 法說會逐字稿

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the MOGU Third Quarter Fiscal Year 2019 Earnings Call. (Operator Instructions)

I would now like to turn the call over to Christian Arnell. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us today. MOGU's earnings release was distributed earlier today and is available on the IR website at ir.mogu-inc.com as well as on Business Wire Services. On the call today from MOGU are Mr. Shark Chen Qi, Chairman and Chief Executive Officer; Ms. Helen Wu, Chief Financial Officer; and Mr. Raymond Huang, Senior VP of Corporate Strategy. Mr. Chen will review business operations and company highlights, followed by Mrs. Wu, who will discuss financials. All 3 will be available to answer your question during the Q&A session that follows.

Before we begin, I'd like to remind you that this conference contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expect, anticipate, future, intends, plans, beliefs, estimates, targets, going forward, outlook and similar statements. Such statements are based upon management's current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other factors all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise except as required under applicable law.

It's now my pleasure to introduce Mr. Chen. Please go ahead.

Thank you, Christian. Thank you, everyone, to joining our call today for the third quarter of fiscal year 2019 earnings call and the first quarterly earnings release as a public company.

I am very pleased to report solid results and healthy growth during the quarter. Total GMV increased 21.5% over the past 12 months to RMB 17 billion, driven primarily by growth in live video broadcast.

Live video broadcast is one of our major strategic growth strategy, increasingly effective and efficient content format for the fashion industry, which improved the user experience and the user engagement and the commission. Average mobile MAU who clicked on a live video broadcast in the 12-month period ended December 31, 2018 increased 43.6% year-over-year while live video broadcast at January at GMV 177.8% year-over-year.

At MOGU, our mission is to make fashion accessible to everyone. So as our fashion destination, users not only come to MOGU for fashion content but also for fashion products. With this in mind, we have built a 3-way ecosystem that caters to users who are looking for the latest fashion trends, items and the personalized content and the fashion influencers who are building our -- who are building out the fan base by creating and generating content, sharing fashion tips and designing fashion products and the suppliers along the fashion value chain, such as merchants, brand partners and manufacturers who design fashion products.

Our ultimate goal is to serve our users with the latest fashion content and products. Our users are seeking a personalized and a curated fashion experience. With this in mind, our business and apps are active around offering our users a personalized and discovery-based fashion shopping experience.

For the near term, our strategic focus remains on 2 aspects: live video broadcast and the prime service offerings. Live video broadcasts provides users with a fun, engaging and interactive fashion discovery experience, but also gather data on fashion trends and the users preference to create a more efficient fashion industry value chain. With this data, we're empowering merchants with more precise projection estimates, which can reduce inventory risk.

In addition, we've also continued to recruit additional influencers to provide our users with more diversified fashion chart base. Our efforts here have already began to pay out during the 12 months ending December 31, 2018. We saw a 43.6% increase in our live video broadcast and Mobile MAU.

While growth has been strong over the past few quarters, there is still plenty of room to expand and further penetrate our existing user base. Right now, live video broadcasts and Mobile MAU, as a percentage of our total Mobile MAU, remains relevantly low at just under 10%. We will continue to develop and allow our product to attract new customers to our live video broadcast, where we are confident we can generate further user growth and increase retention rate.

Turning to our prime services offerings. Our main focus here is not to increasing the number of merchants on our platform, but on helping high-quality merchants who have projection capabilities, increase concentration of their builds, which will allow them to grow bigger and become more profitable. This is a primary purpose of our prime service offering.

Our platform incentivizes merchants to produce high-quality and comparative fashion product, which we are able to charge higher commission rates for. As of December 31, 2018, we have over 700 prime service merchants. GMV and the commission revenue contribution for our prime merchants also continue to increase during the quarter.

With that, I would hand the call over to our CFO, Helen, who will walk through our financial results in this quarter.

Thank you, Shark, and thanks, again, everyone, for joining this call. I will walk you through our third quarter of fiscal year 2019 financials. We believe year-on-year comparison is the best way to review our performance. Unless otherwise stated or percentage changes I'm going to give will be on that basis.

So we delivered a healthy GMV growth during the 12-month period ended December 31, 2018, which increased to 21.5% year-on-year. Our focus remains on growing the GMV from a live video broadcasting, which increased 177.8% during the same period. We will also continue to expand the addressable market, also our prime service offering by offering them to existing and prospective new merchants on our platform.

Our total revenue were RMB 367.2 million, an increase of 20.3%. This increase was primarily attributable to an increase in the commission revenue and other revenues, which were partially offset by a decrease in the revenues from marketing. The revenues from the marketing service were RMB 131.4 million, a decrease of 9.6%. The decrease was primarily due to our strategic shift towards live video broadcast, which impacted the amount of marketing service properties available on our platform and also the slight decrease of our marketing service customers.

Commission revenue were RMB 175.6 million during the quarter, increasing 34.7%, primarily due to an increase in the GMV as well as a slightly improved commission rate we charge on the GMV and given by the GMV contribution from our live video broadcast as well as the prime service offering program.

Other revenue were RMB 60.2 million, an increase of around 104.6%, primarily due to the growth in our online direct sales as well as our financing business. The total cost and expenses was RMB 467.5 million, a decrease of 7.9%, which I will go into more details with you below.

The cost of revenue were RMB 102.9 million, an increase of around 24.1%. This was primarily due to an increase in online direct sales as part of our trial direct sales operation for the beauty product. Sales and marketing expenses came at RMB 204.4 million, a decrease of roughly 8.7 -- 8.6% year-over-year, primarily due to the lowering spending on customer incentives as part of our continued optimization of sales and marketing expenses.

During the quarter, sales and marketing expenses were more redirected towards the brand building, the MOGU brand building, as well as the customer acquisition, which was largely offset by the customer incentive spending and resulting in an overall decrease in the sales and marketing expenses.

Going forward, we will continue to optimize our spending structure on the sales and marketing expense to focus more on the long-term brand building initiatives, which will also help the customer acquisition and retention.

For the R&D expenses, it was RMB 55.3 million, down 22.2% year-on-year, primarily due to a decrease in the payroll costs on the lower employee headcount as part of our continued optimization of our organizational structure.

General and administrative expenses were RMB 47.9 million, an increase of 110.2 million (sic) [110.2%], primarily due to an increase in the share-based compensation expenses.

Other income also increased by 265.4% to RMB 10 million, primarily due to a government grant we received. In the third quarter, share of results of equity investees were RMB 14.8 million.

The net loss of our operation narrow to RMB 42.2 million compared to RMB 156.1 million in the same period of fiscal year 2018. For the non-GAAP measures, our adjusted EBITDA narrow to a loss of RMB 5.3 million compared to a loss of RMB 73.1 million in the same period of fiscal year 2018.

Adjusted net profit was RMB 13.7 million, up from a net loss of RMB 81.7 million in the same period of fiscal year 2018. The basic and diluted loss of ADS were RMB 0.16 compared to RMB 0.60 in the same period of fiscal year 2018.

So with that, we will begin Q&A with all the audience on the line.

Operator, please begin the Q&A session.

(Operator Instructions) Your first question will come from Nicky Ge from China Renaissance.

Congratulations on your IPO and a strong quarter. I have 2 questions here. Number one is that we're seeing that our commission take rate has increased a lot. I just wonder what's the driver behind that and what's the outlook going forward. And secondly, on our user growth. Actually, we allowing to our, like, content initiative a few months ago. And I just wonder how is that strategy working so far? And how should we think about your growth going forward?

Okay, I think I will take the question number one about the commission rates and growth in this quarter. I think the commission revenue go up, partly because of the GMV went up during the quarter and also the improved commission rate. And I think this quarter, as we continue to grow our live video broadcast and the rollout of prime service offering business with our merchants, we are helping these merchants growing bigger. So -- and also -- so that we can charge a higher take rate. So apparently, as these -- the contributions from the live video broadcast as well as the prime service offering merchants are growing up, and then the overall take rate or the overall commission rate on the total GMV has been increasing. So going forward, we will continue to execute strategy and growing our live video broadcast, GMV contribution as well as the prime service offering, and then we will continue to see our take rate will continue to grow and improving in this regard. In terms of the second question, I think Shark or Raymond will take it.

Okay. (foreign language)

Yes, I will do a quick translation for Shark's answer. So basically, for the fashion content, we define fashion content with 3 major elements. Number one is live video broadcasting. In the live video broadcasting, trying to have a lot of fashion content. And number two is our front page of our app, which will have a lot of fashion bloggers posting fashion content on a daily basis. Number three is our content distribution. We have created a lot of fashion content and distribute them on different Internet platforms. So all these 3 major parts of the fashion content have to deliver very strong growth in the last quarter. We have seen the number of content we created -- create and it's highly correlated with the retention of our users. So the more content we have, the more sticky our users are. And going forward, we believe that we will continue to invest more in the fashion content, especially in the live video broadcasting.

(foreign language)

So in the next 2 quarters, we will work very hard to enhance and to improve the fashion influencers community with 2 major approaches. Number one is that we'll help all these fashion influencers to continue to monetize. We have seen some success in live video broadcasting channel. We will also help the fashion bloggers to monetize their influence as well. And number two, we'll continue to strengthen the relationship and the partnership between fashion influencers and supply chain partners.

You next question comes from Monica Chen from Credit Suisse.

I have 2 questions here. My first question is about our live broadcast fashion influencers acquisition strategy. Considering there is a quite intensified competition of such how fashion influencers across the other social e-commerce peers, like Taobao, like broadcasting we were doing and Kuaishou. So what is our strategy to continue to hire more high-quality fashion influencers on the platform. That's question number one. And my second question is about our user growth strategy across different channels, especially our May APP mini programs and other platforms in 2019.

(foreign language)

I'll do a quick translation for Shark's answer. So we will call more participants in this market, and this market is very big. And we believe that more participants in this market can help the -- can help to accelerate the incubation of this market. And number two, we are actually a fashion destination. We're focused on fashion category. We're now an everything store. So we'll continue to improve the consumer awareness of our strength in fashion. The way we incubate our fashion influencers on live video broadcasting hosts are all focused on the fashion category. So that's our strength and that's the track we'll take going forward. Number three, from our perspective, we want to emphasize the invest management of live video broadcasting hosts and their cooperation with supply chain partners. We want to make sure that we have the best and the most consistent user experience.

All right. And then I'll continue from there in terms of user strategies. This year, I think previously Shark mentioned that actually 2 themes over strategy or business operation this year is that to ensure to increase the quality of our merchants on a platform so that they can provide good quality product to our users. And I think the other topic for this year of the operation is that increasing the quality of our users. That -- with that on mind that means that actually, we're not really prioritized to increase the total number of the users in our platform rather the quality. That means we will provide them with consistent user experience and then making them more -- making them a more quality users to add that means they will become more active and then, for instance, more of the live video broadcast users on the platform and converting from existing platform -- existing users already on our platform. And so that they can actually, with the improvement, our merchants and product, that will actually give them better and consistent user experience so that they actually will increase the number of the purchases and also the stickiness to our user platform. This is where actually -- this is the priority of the operations in terms of our user strategy this year.

Your next question comes from Vicky Wei from Citi.

I have questions about management's view on macro trend and are there any impacts to MOGU? And also, my question, did MOGU disclose the take rate and -- or revenue share with the KOL? And my last question is when is the profitability timing and ultimate normalized operating margin that MOGU can achieve?

I think -- well -- okay, sorry, I'll take the first question and I think Shark will probably add more color in terms of the macro. So far from our business operation from last quarter, we didn't actually see any slowdown in terms of consumer spending, especially on our platform, which is targeting the mass market for fast fashion, which is a high demand for the users, especially for the young generations who are looking for beautiful stuff and make them -- their life beautiful. And then we -- but then we still need to monitor the overall macro impact. And sometimes, the macro impact flow into our business or flowing into the overall enterprise economy and economic situations that will take some time. And then second question, your second question is about the revenue share from the KOLs. Currently, we don't have -- we don't charge anything to the KOLs who are active on a platform and not the fashion bloggers who provide the content on a front page of the app or the live video broadcast host on our live video broadcast rooms. And the last question in terms of the road to -- the timing of the profitability, we're looking at making adjusted EBITDA breakeven, likely toward the end of this year, and we're expecting that happen likely in the fourth quarter of this year, which is the third quarter of our financial year 2020. And in terms of normalized margin, we -- or at this stage, we don't have any update on that one, but we will actually come back to you later maybe when we actually see more visibility in terms of a normalized number for you.

(foreign language)

Allow me to add a little bit on the macro perspective. So we don't see major impact on our business from the macro economy perspective since our platform is primarily focused on young women in China and they have very strong willingness to spend and very strong spending power as well. But we do see that on the supply chain, we are seeing increasing labor cost and also environmental protection issue is very serious in China. So that we are seeing a lot of supply chain partners have these issues. So that's why we'll continue to work with supply chain partners to help them to cope with this new environment and help them to achieve more efficient and more productive manner.

Your next question comes from Alex Poon from Morgan Stanley.

Congratulations on your IPO and the strong results. I have 2 questions. The first question is about your user metrics. Can you give us the growth number of your user time spent on an overall basis and on each of the category, like your homepage, your live streaming, your browsing page? How that has been trending since you had relaunched your app in third quarter '18? And my second question is regarding live streaming business. Can you give us some update on the signing contracts with top broadcasters? What kind of KPI have you given these broadcasters? Is it based on GMV growth? What is the incentive for them to grow even stronger from the current level, which is already very strong in third quarter?

Well, in terms of user metrics, I think as we mentioned or as I mentioned before, our user strategy and also, whether they spend -- how long -- no matter how long they spend the time on a platform, the more important is that they get an improving experience on our platform that will actually naturally increase the stickiness of our platform and more time spent on our platform. So then the strategy for user this year in terms of the business operation is really to provide them good content through live video broadcast and also a lot of the fashion feed in our front page and as well as giving them good quality product, which will naturally make them satisfied. And in terms of each category of time that the number that you asked, we do not disclose these numbers.

(foreign language)

So we have signed exclusive contracts with a lot of the influencers to ensure that they will work with MOGU platform exclusively. And -- but projects we can't disclose the number of the contracts we have signed with the influencers yet. And in the contract, the 2 major parts of our assistance to the influencers is that, number one, we match them with the supply chain partners to ensure that they have end of this supply of new arrivals and new -- latest items. Because most hosts, they always run into problem of the supply chain of the SKU supply. They need to introduce new items every single day. So that's why supply chain partnership is very important to them. And number two, we are working on the incubation of their personal brands, which we can give you more update probably in next or the quarter after. In short, we don't have a very specific KPI for our live video broadcasting hosts and it's more relying on their mix and match skills and also their fashion knowledge to achieve the sales.

(Operator Instructions) Your next question comes from Joyce Ju from Merrill Lynch.

My question is a follow-up on your company's strategic focus in optimizing and elevating the supply chain for fashion products. Could you please elaborate more details on the company's plans regarding how you would like to help the supply chain to overcome the macro challenge or even like help them to improve their productivity or efficiency? We note in the prospectus that proceeds of the IPO, there were about like 20% like kind of plans you used to deepen the collaboration with merchant and brand partners. I would like to get more colors in terms of how resources will be allocated. And there is a second follow-up question, is just a housekeeping one, want to understand the company's seasonality in terms of GMV.

(foreign language)

So supply chain partnership is number one -- a very important strategy in 2019. We'll continue to optimize the number of the merchants. So in the past, we -- the way we control the quality is mostly relied on the feedback. But going forward, we will actually have more closed partnership with other merchants to make sure that they can produce quality products. So as of now, we have roughly 10,000 number of merchants. We'll continue to optimize the number of merchants, so that we can increase the sales per SKU and help our merchants to improve the unit economics and help them to achieve greater efficiency when it comes to the production. And also, in the past, we have done multiple trade fairs for our live video broadcasting hosts and the supply chain partners because for the supply chain partners, what they really care about is the sales. And our live video broadcasting hosts, they care about the number of SKU and the number of new arrivals they can sell. So we always achieve very good results from these 3 pairs. And going forward, we'll continue to host these 3 pairs to help the hosts and the supply chain partners to work with each other.

(foreign language)

As a result, we can achieve 2 outcomes. Number one is that due to our strong control over the supply chain partners, we can make sure that the products coming from MOGU platform will have a consistent quality. So this is very different from other platforms as we have stronger control of the supply chain that we know all these -- all the products they are selling and we can make sure that their products have consistent quality. Number two is that because we provide all these services to our merchants, it will reduce the difficulty for them to operate on our platform. So that creates room for us to increase our take rate going forward.

And to your second question in terms of GMV seasonality. Yes, it's usually the December quarter is the strong season of the year in terms of retail sales on our platform, as usual as other platforms.

(Operator Instructions) Your next question comes from Jialong Shi from Nomura.

Congratulations on a very successful IPO. I joined the call a bit late, so sorry if my questions were already answered. I have 2 questions. First question is about the e-commerce law. So I just wonder if Shark can give us some colors on the impact of -- from the newly implemented e-commerce law. And in particular, we know the law requires all the online sellers to pay a tax to the authorities. So I just wonder if you guys saw any sign that the tax authority may take actions to levy such tax on the online sellers. And my second question is about the competition landscape. We saw some short video apps, like Douyin and Kuaishou are encouraging. They are popular content producers to set up shops and sell directly to their friends. So most of the items sold on those platforms seems to be fashion-related products. So I just wonder if these emerging shot video-based e-commerce may divert audience and orders from your live broadcasting-based e-commerce.

I think -- let me take the first question about the e-commerce law, and I think Shark will take the second question on the competitive landscape. Well, the government actually already promulgated the e-commerce law, which we think is a good thing. I think the purpose for the government is really to institutionalize all these small merchants on the retail platform and also make them operate more in compliance and with the law, with the legal system of the country. But I think at the same time, the government also actually released tax reforms, which is to actually to reduce the tax burdens for these micro and small business overall. So I think we actually have already started to roll out these measures. And actually, on our platform, we have mostly done the conversion of all these individual merchants who are operating on the individual basis, turn -- convert them into a small business, so the job has pretty much done. So in terms of being compliant with the law, I think there is little impact on our platform. And given our strategy is to actually reduce the number of the merchants, keep the good ones, attract the high-quality ones, and then -- and try to make them bigger and more profitable on that platform, become -- make them become a proper smaller business or micro business in the context of the overall Chinese economy. And also, given the government is really intention to add -- intend to remove more tax burden from these micro and small business from tax burden perspective, I think this will actually benefit our platform. And this is the answer to your e-commerce law question, and I think I will leave it to Shark to handle the second question.

Okay. (foreign language)

So yes, we have observed that there are many other platforms who also want to monetize their traffic with e-commerce. This is actually not new. A lot of companies in the history of China's Internet have been using e-commerce as a major approach to monetize their traffic. Some succeed and some failed. But from our perspective, we want to be a fashion destination. We want to emphasize the consumer awareness to be -- to recognize us as a fashion destination. So that's why we will stick to this, the fashion industry. That's number one. Number two, because we're a fashion industry that we are focused on this industry, so we have very strong partnership with all these supply chain partners. We welcome all the different participants to join us, to join this market, but we'll continue to very much focus on the fashion industry.

(Operator Instructions) I have no further questions in queue. I turn the call back over to Christian Arnell for closing remarks.

That concludes tonight's call. Thank you very much, everyone, for joining us. If you have any questions or comments, please don't hesitate to reach out to us. Thank you. Have a good night.

Thank you.

Thank you.

Thank you, everyone. This will conclude today's conference call. You may now disconnect.