111 Inc (YI) 2022 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the First Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised today's conference is being recorded. (Operator Instructions)

Now I'd like to hand the conference over to your first speaker today, Monica Mu, Investor Relations Director. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. On the call today from 111 are Dr. Gang Yu, Co-Founder and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman and CEO; Mr. Luke Chen, CFO of our major subsidiary; Mr. Harvey Wang, COO; and Ms. Monica Mu, Investor Relations Director.

As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. The company's earnings press release was distributed earlier today and together with our earnings presentation are available on the company's IR website at ir.111.com.cn.

Before we get started, let me remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which would cause actual results to differ materially. For more information about these risks, please refer to the company's filings with the SEC. 111 does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. Please note that all numbers are in RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year-over-year basis.

With that, I will turn the call over to our CEO, Mr. Junling Liu.

Thank you for joining our first quarter 2022 earnings call. The information that we'll be discussing here is also provided in the slides that have been posted earlier today on the company's website. I would encourage you to download the presentation along with the earnings report at ir.111.com.cn.

I will first speak briefly about the macro environment before covering our recent operational performance. And I will also provide some color on how we will continue to deliver revenue and margin growth, strengthen upstream supply capabilities and improve operational efficiency as well as our future strategies. Then Mr. Luke Chen will walk you through our financial results.

As many of you are aware, the Chinese government instituted shutdowns of numerous cities to curb the spread of the COVID Omicron variant. Among those cities impacted, Shanghai was hit the most where the majority of our staff is located. This has had a severe impact on China's economy. I'm pleased to report that despite these challenges, 111, nevertheless, achieved growth and while improving all of our operating metrics. Q1 2022 will mark our 15th consecutive quarter of year-over-year growth since our IPO.

Although majority of the residents of Shanghai can move freely with right color code now, the aftermath of the COVID pandemic is still lingering. During this challenging period, 111 put on a tremendous fight as the number of cases rose in several cities in China, local lockdowns were imposed. As a result, 111 had to shut down our East China fulfillment center, which is one of our key hubs. In addition, transportation and other logistics were strictly regulated in pandemic hit areas. Many of our orders were stuck in transit due to various local policies in many cities, which significantly increased our fulfillment costs in the quarter. Because the overall supply chain was disrupted, we also experienced a severe shortage of medicine supplies as we were not able to replenish inventory.

At the same time, pharmacies in many cities have suspended the sale of 4 type of drugs, i.e. antipyretic's, antitoxic drugs, antiviral drugs, and antibiotics. In the face of these challenges, 111 quickly set up a pandemic-relief program with virtual command center providing instructions on a constant basis. Our company and staff worked diligently and leveraged the stance of 111's online and off-line platform and smart supply chain to aid Shanghai and other pandemic-hit regions in the battle against COVID-19 and continuously provided medicine and medical services for patients nationwide.

Despite the severe impact with the pandemic, the company rose to the challenge and achieved RMB 2.98 billion in revenues, an increase of 14.9% year-over-year, marking the 15th consecutive quarter of year-over-year growth since our IPO. I'm also pleased to report that our gross profit reached RMB 192 million, representing a margin growth rate of 66.3% year-over-year, which was over 4x of our revenue growth rate.

Our B2B business remains the key driver of revenue growth. In Q1, B2B revenue reached RMB 2.87 billion, representing a year-over-year increase of 17%. And gross profit increased to RMB 168 million, an increase of 90.7% year-over-year, over 5x the revenue growth rate.

The hard-earned margin growth is the result of our consistent adherence to 111s customer-centric philosophy and our strong determination to create value for our customers. Faced with the lingering COVID pandemic and the remote work arrangements, we established an all-new SOP and business continuity plan, which fully showcases our resilience and flexibility as well as the emergency backup capability of our national intelligent supply chain.

I'd like to take a few minutes to elaborate on our plans to continue to grow our margins. One, reduce procurement cost. Direct sourcing from pharmaceutical companies has been highly effective in lowering the cost of products. We now source from over 550 globally renowned and domestic pharmaceutical companies, and we will continue to deepen our strategic relationship with our existing partners as well as securing new partnerships. This will provide us with a wide range of drug selection at lower cost.

2, optimize our product assortment and structure. With an annual sales revenue of over RMB 10 billion, we are serving a vast market. We're in a position to balance our portfolio of products with very healthy margin. For example, we have increased the proportion of high profit products and private label products. With the majority of retail pharmacies already in our network, we're very confident that we will be able to help our pharmaceutical partners in commercializing their products with high efficiency and gross margin. 3, enhance industrial Internet capabilities. Our digital platform provides a comprehensive solution for pharmaceutical companies by integrating doctors, pharmacists, medical assistants, patients, and medical representatives onto our Internet hospital.

The service module also provides online remote consultation, e-prescription, patient education, patient support and the refill services. These features enable us to provide customized omnichannel digital marketing solutions for pharmaceutical companies.

The market continues to show strong demand for our diverse portfolio of service solutions. Our service revenue achieved RMB 29 million, increased approximately 70% year-over-year. As a result, non-GAAP loss from operations as a percentage of net revenues decreased to 2.4% from 5.2% in the same quarter of last year.

Although the current environment, including having to operate on the COVID restrictions has brought quite a few challenges for our business, we're still committed to executing our strategy to continue to grow our revenue and gross margin. Our goal remains firm to reach quarterly breakeven at non-GAAP operating income level in 2022.

Now let me spend a moment to talk about our achievements on the supply side. Through continuous optimization of product assortment, gross profit improvement, supply chain efficiency enhancement and a comprehensive digital capability boosting, 11 has deepened the partnership with upstream pharmaceutical partners as well as strengthened the relationship with downstream pharmacy customers. In addition, as our business continues to expand and as we position ourselves as an effective commercialization partner, we will continue to offer value-added services to pharmacies and other business partners.

At present, we assist hundreds of pharmaceutical companies and thousands of distributors in drug commercialization, digital marketing, and marketing side. For example, our 1 Health virtual franchise model enables over 10,000 small- to medium-sized pharmacies, provide superior products and services to their customers. All the participating pharmacies can use our platform to better manage their product selection, procurement and inventory management as well as accessing our distribution tools through our digital SaaS services, including smart sourcing, digital marketing, O2O and the CRM. This CRM initiative has assisted over 10,000 pharmacies in delivering improved medical services and personalized marketing to over 6.5 million consumers.

Operating efficiency remains a continuous focus in our strategic imperatives. With growing scale of business and enhanced technological capabilities, 111's operational efficiency continues to improve. During our weekly business reviews, we go through many metrics to ensure that as an organization, we must deliver improved operating efficiency on a continuous basis. Each metric has a team as the owner who will be responsible for the goals we set. As a result, we're glad to see that revenue and gross margin have both increased, whereas as a percentage of net revenue, the sales and marketing expenses in Q1 was down to 3.9% from 4.7%. General and administrative expense was down to 1.6% from 2%. And technology expenses was down to 1.3% from 1.9% in the same quarter last year. The total amount of sales and marketing expense, general and administrative expense and technology expense year-over-year has been reduced by 6.2%, 7.9% and 21.5%, respectively.

111 has been certified by the Chinese Ministry of Science and Technology as a national high-tech enterprise and designated as a specialized high-end and a new technology enterprise in Shanghai by the Shanghai Municipal Commission of economy and information in 2021. We're very proud that our efforts have earned such distinction, and we are committed to continuous innovation and improvement.

To further reduce G&A cost, we focus on implementing our strategy, strengthening our organizational structure and improving the network efficiency of our employees through multiple operational tools. It is also worth noticing that we have developed several innovative marketing schemes, which have yielded positive results. These include: one, building standard promotional network workflows where differentiated resources are earmarked for different levels of marketing activities, thus improving efficiency and increasing ROI to over 40% year-over-year. Two, establishing tiered user-specific operational mechanisms. We use targeted operational strategies for users at different levels to boost customer retention, customer activity and ATV, which stands for average transaction value. Three, developing innovative social-based marketing, including group buy promotion, game-based coupon grabbing, lotteries, et cetera.

I would also like to brief you on 111's ESG efforts during the pandemic. As a PPE and everyday health care product provider in Shanghai, we have played a key role in ongoing COVID fight. We were appointed by the Shanghai government as supply guarantee enterprise. Many pharmacies and medical institutions struggled with supply chain issues over the past few months. And we have stepped in and filled the supply gap. We have over 100,000 different type of medicine available for sale on our platform.

During the shutdown period, we collected purchase orders via proprietary 111 purchase channel and special personnel were assigned to process them through the company's pandemic relief program, thus accelerating the handling process and ensuring the fastest delivery possible. In addition, patients with chronic diseases often find it time consuming and inconvenient to fill their prescriptions. So we again step in to help solve this problem by offering medication registration and other services and ensuring that specialized personnel are available to follow up with any urgent request for medicine.

I'm very proud of the work that our government relations team did during the challenging time. Through their effort, we managed to open a special green channel, which enables our vehicle shipping supplies to Shanghai from our Qianshan fulfillment center on a daily basis, which proves to be so essential for many chronic ill patients.

We received so many letters from customers, praising our services, which further proves the social value we deliver to our communities.

Our 1 Clinic online hospital platform has launched a free virtual clinical services program, where doctors can provide online consultation, prescription renewal and other services to the public. By offering a free and a convenient place for doctors and patients to connect, our online prescription orders have increased by 20%. 111 has also proactively organized donation initiatives for Shanghai nursing homes and other organizations. We have provided pharmacies free access to our O2O platform and have recruited volunteer careers to deliver drugs in hard hit areas. Finally, we offer PPEs and other related supplies for companies where employees have returned to the office.

111 is an enterprise committed to the health of Shanghai residents and our ESG efforts are vested with our core values. We will firmly fulfill our social responsibilities as we have always done in the past.

Under China's 14th 5-year plan for national economic and social development, digital economy has been elevated to a vital position and expected to enter a period of rapid expansion through 2025. Digitizing the health care industry has been our goal since our inception. We see this as a tremendous opportunity to leverage digital technology and reconstruct the value chain in the health care industry. To achieve this, we have built a world-class technology platform that is already transforming China's health care industry. We have built an industry-leading smart supply chain platform that is uniquely tailored to optimize our S2B2C business model and on arrival of national sales network providing comprehensive coverage and a sophisticated multichannel digital platform that serves numerous unmet needs in this massive market. This has made us an attractive commercialization partner, as evidenced by our growing number of partnerships with pharmaceutical companies.

Our infrastructure was designed to serve many players in the health care industry, pharmaceutical companies, pharmacies, doctors, and consumers. We have created the largest virtual pharmacy network in China with about 400,000 pharmacies and have strategic partnerships with over 550 globally renowned and domestic pharmaceutical companies. We feel very proud of the ecosystem we have built to date as it will enable us to scale our business to the next level.

Looking forward, we will continue our efforts to improve and expand our business and further consolidate and enhance our leading position and the competitiveness in this medical service industry. We already play a key role in digitizing and transforming the health care industry and provide the public access to convenience and high-quality medical products and services.

We strive to deliver high-quality and sustainable growth and to create market value for our shareholders while recognizing our responsibility to our community and to the environment. By consolidating our strength in supply chain and technology, we will help our upstream and downstream partners press ahead with digital transformation that will improve their businesses as well as enhance the interaction with their customers. Our goal is to ultimately achieve profitability as soon as possible and to create value for our shareholders and society at large.

We wish to thank all the investors who have supported us. Now I will hand the call to Mr. Luke Chen, to walk through our financial results. Thank you.

Thank you, Junling, and good morning or evening, everyone. Moving to the financials. My prepared remarks will focus on a few key business and financial highlights. You can refer to the details of the first quarter 2022 results from Slide 16 to 18 in Section 2 of our presentation. Again, our comparisons are year-over-year, and our numbers are in RMB, unless otherwise stated.

Despite all the challenges from pandemic lockdown in many cities across the country during the quarter, we have continued to grow our top line and gross profit. Total net revenues for the quarter grew 15% to RMB 2.98 billion. We are pleased to report that our gross segment profit for the quarter grew at 66%, which is over 4x the growth rate of the revenue.

Top line growth for the quarter was mainly attributable to our B2B segment revenue growth at 17% to RMB 2.87 billion. The gross segment profit for B2B segment has increased by 91% with gross segment margin, up from 3.6% to 5.9%, which reflected our ability to steadily expand our business scale while rapidly improving our margins.

Our B2C segment revenue decreased 21% to RMB 130 million, with gross segment margin improved from 19.4% to 21.6%. The Total operating expenses for the quarter were up 2% to RMB 295 million. As a percentage of net revenues, total operating expenses for the quarter was down to 9.9% from 11.1% as we continue to enhance our operating leverage and optimize our operational efficiency.

Fulfillment expenses as a percentage of net revenue for the quarter was 3.2%, up from 2.6% in the same quarter of last year. The increase was mainly attributable to our investment to expand the capacity of our fulfillment centers to support the future growth. The pandemic lockdown in various parts of the country also temporarily caused increase in delivery costs.

Sales and marketing expenses as a percentage of net revenue for the quarter was 3.9%, down from 4.7% in the same quarter of last year. General and administrative expenses as a percentage of net revenue accounted for 1.6%, down from 2% in the same quarter of last year. Technology expenses accounted for 1.3% of net revenue, down from 1.9% in the same quarter of last year. As a result, non-GAAP loss from operations narrowed to RMB 72.4 million compared to RMB 135.9 million in the same quarter of last year.

As a percentage of net revenues, non-GAAP loss from operations decreased to 2.4% in the quarter from 5.2% in the same quarter of last year. Non-GAAP net loss attributable to ordinary shareholders was RMB 80.6 million compared to RMB 109.3 million in the same quarter of last year. As a percentage of net revenues, non-GAAP net loss attributable to ordinary shareholders decreased to 2.7% in the quarter from 4.2% in the same quarter of last year.

As you can see, we are improving our financial performance quarter-by-quarter, and we are very close to profitability. We have strong confidence that we'll be reaching breakeven point at a quarterly non-GAAP operating level this year.

Please refer to Slide 19 to 23 of the appendix section for selected financial statements. A quick note, our cash position as of March 31, 2022, we had cash and cash equivalents, restricted cash and short-term investment of RMB 901.4 million.

This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

(Operator Instructions) Your first question comes from the line of Xipeng Feng from CICC.

Congratulations on the company programs. Well, I have 3 questions. And the first one is, what is the impact of China's recent policies regarding Internet health care on your company? And my second question is, I see B2B segment is developing rapidly. What's the reason? And how will you maintain the growth momentum? And the last question is, could you please elaborate on the company's strategies going forward?

Thank you, Xipeng. Let me take your first question. I think I have 2 points to make. So first of all, if you look at the Healthy China 2030 and the 14th 5-year plan, where the government has elevated the health of the country, of its citizens to a level of the national strategy, and there are lots of tailwind for us, and we feel very excited about. We spoke about this in the previous few quarters, and I didn't elaborate in so much of the detail on today's call, but we see digitization and the investment in the health care industry will provide a lot of tailwinds for us.

And I guess your question is more geared towards the recent consultation paper, where the regulatory bodies are coming out with detailed measures to make sure the industry is going to be compliant to many new rules I'm assuming, right? We believe this is good for the development of the industry. And some companies might be impacted negatively, but the measures like no AI involvement in adopters consultation, users will have to upload their health record and the previous diagnosis, et cetera. I would say that 111 has always been very strict with our own compliance. And the majority of our business is actually from B2B side, which is not impacted. And even for the B2C business, we want to make sure that we set a very high standard for compliance. And overall, we see a lot more positives than negatives. And the policies of late are very good for us, and we really should take advantage and leverage the tailwind to grow our business.

For your second question regarding B2B, I think B2B has been on a more and more healthy growth path. Despite the pandemic impact, we delivered a 91% year-over-year growth on B2B gross margin. And our next step going forward, firstly, we will continue to upgrade our supply chain, that is to establish the direct and strategic partnership with more and more international and domestic pharmaceutical partners to bring in more and more selection with lower and lower cost to our downstream pharmacy or clinic customers.

Secondly, we will enhance our digital marketing platform to help those pharmaceutical companies to commercialize their new products to pharmacies, clinic and eventually to the patients and consumers. So our B2B business is becoming a platform to effectively link pharmaceutical companies, link layer products with pharmacies and clinics and with the end customers. According to IQVIA latest report, the volume of China pharmacy retail exceeds RMB 200 billion in the past 12 months. So it's a big, big market. We believe we have enough room to further expand our business volume with a much healthy margin.

And your third question, I think...

Let me speak to the first question about strategy. I think we spoke about our 3-step strategy in the past. I may refresh the memories of some of the friends on the call or some of the new friends who have joined in the call for the first time. So the first step, we wanted to build the infrastructure and the ecosystem. That's why we built the B2C module, the Internet hospital module and the B2B module. And the second step, with the infrastructure and the ecosystem, we wanted to build scale, which we achieved in a very short period of time. We kept on growing the business in 3 digits. And the last year, we achieved over RMB 12 billion in sales. With the scale, of course, naturally, the third step is to grow margin and become profitable.

So in the immediate future, we will continue to focus on growing our revenue and margin and strengthen our capabilities on the supply side and improve our operational efficiency. With that, we will get into profitability. In a multi-trillion yuan industry, our overall goal is, of course, leverage technology to transform this industry and become a key player in this industry. Of course, in order to get there, we want to be laser focused in getting the business profitable in the near term.

Thank you, Xipeng. I hope we answered your questions.

Okay. That's very clear. And congratulations again on the company programs.

Your next question is from the line of Jessie Lu from HSBC.

Congratulations on the great results despite the challenging environment. 2 questions, if I may. The first one is that I think as the industry is growing, we do notice more players in the space for both B2B and B2C. Can you help us understand more about the competitive landscape for now and your competitive advantages? The second question is regarding the financials. It's very encouraging to see the narrowing net loss. And you mentioned the company will continue to work on margin to achieve quarterly breakeven. Can you elaborate a bit more on how do you propose to achieve this, and in which OpEx line we will be expecting more cost savings?

Thank you, Jessie. I'll take your first question. If you look at our competition, it mainly comes from the following categories, the traditional distributors, the state-owned Big 3 and Joy Town and some of the newcomers who are copying our model. And of course, the big vertical health care B2C players. We position ourselves very differently from the traditional players. Our strength is in the fact that we want to use technology to drive efficiency. And we believe that digitization is the future.

So as far as the traditional, we have 14,000 distributors in our space, and we have some of the giant state-owned distributors. We very much doubt that those traditional players can match our capabilities. Even for the newcomers who are copying our model, I think we have something very, very unique. Looking over all players in this space, no one is attempting to get through to the consumers for the B2B players. And no one has the full capability of servicing the pretty much all the key stakeholders in this industry, if you look at the pharmaceutical companies, if you look at to the doctors, if you look at to the pharmacies, you look at the pharmacists, medical reps and the consumers. So our ecosystem is built to really service all those key stakeholders. And obviously, this is where we see our biggest differentiation.

You may have heard of some of the new B2B players and obviously, their focus is still doing a better distribution. But our positioning is from the very beginning is to really use our supply chain network to get to the pharmacies and then through the pharmacies to get to the consumers. So in other words, we enable the businesses to better service the consumers. And this was never done before. And we have made very exciting progress and I'm looking forward to share the future progress in future earnings calls. So I would say that we have built out the best ecosystem to position 111 for the future.

I'll leave your question at that, and maybe Luke you want to take the second question for Jessie.

Sure. Yes, there are 2 major reasons that led to a significant narrowing of the non-GAAP loss in this quarter. First, we have rapidly grown gross profit and margin. Our gross profit increased 66% and gross margin improved from 4.5% to 6.5%. Second, our continuous efforts to improve operation efficiency. So while we grew our top line at 15%, our spending on sales and marketing expenses, general and administrative expenses as well as technology expenses have been reduced by 6.2%, 7.9% and 21.5%, respectively.

Now Junling has mentioned in his CEO script just now that we will keep that momentum to continue to grow a healthy and profitable business while invest smartly in our spending. In short, we will focus on 3 key areas: reduce procurement cost so that we can continue to improve our margin profile, optimize our product assortment and structure so that we will be able to sell those high-margin and highly needed drugs to the customers. Third, to enhance our industry Internet capabilities to further improve our operating efficiency. So with all that, we were very confident that we'll continue the momentum and to reach the breakeven point at quarterly non-GAAP operating income level this year.

Very clear. Congratulations again.

Your next question is from the line of Zoe Bian from Citi.

This is Zoe from Citi. I have 2 questions. First is, what's the impact of pandemic on your business operation in the second quarter this year, especially on your top line? And will the pandemic affect your quarterly operating profit breakeven target this year? My second question is, what's your current cash balance? And how long can support your business if there is no new financing?

Yes. Thank you, Zoe. The impact of the pandemic is still lingering. I have to go in and get my PCR test pretty much every second day because wherever we go, we need to produce those new codes and many restaurants are still not open and some of the pharmacies are still having a tremendous time, tremendous hard time selling the necessary drugs, which are quintessential for their business, like they're not able to sell the 4 types of drugs that have to be off the shelf, which I spoke earlier on, those antibiotics, those anti fever and so on.

The lockdowns and the logistic restrictions will disrupt the supply chain and it will raise fulfillment cost. Some of the compounds are still -- once you find a positive case, the employees still cannot come to work that whole compound will have to be locked down. And also even today, getting into the final months of this quarter, majority of our staff located in Shanghai, we still cannot travel because wherever we travel, we need to be quarantined for 7 to 14 days. Local cities will have different policies to impose all those very strict travel policies. That's going to impact the business as well. But we as a company proved to be able to excel on the extremely difficult times as we did in Q1, and we helped many chronic ill patients with critical drug supply. And mind you, during the lockdown, there is only one disease that is COVID. Every other disease is all discounted as healthy and -- which is really bad news for some of the chronic ill patients. And it proved to be true.

But we did it, we managed to work through extremely difficult situations to really get the drug supply to many of these chronic ill patients. And in addition to that, we also delivered both revenue and margin growth for our business. And I think the best thing out of this lockdown for us is that we established a fairly robust system to deal with future situations of this nature. And a whole set of SOP is in place. Not only this, we also have a standard package, which we are ready to take it to any city with potential lockdowns, so their citizens can easily deal with the drug supply under similar situations.

And we're pretty confident that in Q2, although the business was impacted negatively, we can still deliver both the top line and the margin growth. And as of now, we are pretty firm. We want to stick to our plan to break even at an operating level this year. Thank you, Zoe.

Yes. On the cash position, at March end, we have cash and cash equivalents, restricted cash and short-term investment over RMB 900 million. We only incurred RMB 10 million cash outflow in the first quarter if you look at our abbreviated cash flow statement. Our accounts payable days is about 45 days, and our inventory days average at 25 days, which gives us around 20 days cash -- operating cash inflow. In addition, we have secured working capital financing from several major bankers. We believe that our cash reserve is sufficient to support our business expansion. Zoe, hope we answered your question.

Yes, yes. That's very clear.

Your next question is from the line of [Fergus Macpherson] (inaudible).

Congratulations on your performance, the COVID situation notwithstanding. I have 3 questions, if I might. The first question is that given the gross profit growth having outpaced revenue growth by over fourfold, what are the key factors behind your continued increase in revenue and gross profit and query whether this is sustainable? So that's my first question. The second question is what are the key factors behind increase in delivery costs this quarter? And lastly, in light of the company's relatively large investment in technology and the continued emphasis by your management team on improving efficiency through technology, I noticed that Q1 saw a declining investment ratio in technology. Could you elaborate on the reason behind this? And what your plans are for technology investments down the line?

Okay. Fergus, I will take your first question regarding the margin. And second question regarding the fulfillment logistics costs. And for the first question, our strategy towards a healthy business model has been working very well. And we are seeing significant improvement on both our product margin as well as services margin. And there are a couple of initiatives are going on in these 2 areas.

Firstly, as Junling just mentioned, we are reducing our procurement cost. We direct source from pharmaceutical companies has been highly effective in lowering our product costs. Currently, we direct source from over 550 global and domestic pharmaceutical companies, and we will continue to deepen our strategic relationship with these partners as well as we will secure new partnerships. Such relationships provide us with a wide range of products at a much lower cost.

And the second level, we can prudently improve the margin is through optimization of product assortment and structure. Currently, we are at annual sales revenue of over RMB 10 billion and. With our over 400,000 pharmacies in our B2B platform, we are in a position to balance our portfolio of products and bundle those high-velocity by low-margin products, which drive traffic together with very healthy margin products.

We have now about 5,000 SKUs with very good margin, including our private label products and those new products of pharmaceutical companies. And we are very confident that we will be able to help our pharmaceutical partners in commercializing their products with high efficiency and high margin.

On the services revenue and services margin part, our digital platform provides a comprehensive solution for pharmaceutical companies by integrating doctors, pharmacies, medical assistants, patient and medical representatives on to our Internet hospital. The service model also provides online remote consultation and provides e-prescription, patient education and also patient support and refill, yes, refill services. And these features enable us to provide customized omnichannel digital marketing solutions for our pharmaceutical partners. The market continues to show strong demand for our diverse portfolio of services solutions. We are seeing a 70% year-over-year growth on our services revenue, which helped 111 to improve our overall profit.

And for your second question regarding the logistics cost, yes, yes, it's a very good catch. Yes, there is a minor increase on our fulfillment cost in this quarter to 3.2% of total revenue. And in last year, we have increased our budget on logistics network to better serve our customers, including -- we expand our warehouse space to support the business volume growth. But as we just mentioned during the pandemic, our business growth slowed down because of the lockdown, et cetera, so percentage of revenue for the fixed fulfillment costs like warehouse increased. On the other hand, because of the lockdown and traffic control in Shanghai and many other cities in China, traditional logistics network was sometimes suspended and some of the network even is even suspended here to-date. So we have to use much more expensive way as an interim solution, which also creates additional costs on our inbound and outbound logistics.

Okay. Fergus, let me take the third question. You asked about technology, our investment. And so certainly, we are true believers of technology. And in the past, I've seen that technology has created value from several major aspects. It helped us improve our sales and operational efficiency. It helped us make sound business decisions based on more accurate data, accurate and real-time data as well as based on those optimization models and the systems, help us make better decisions on mixtures of our selection, pricing, supplier choice of various products. Yes, it also helped us improve our customer experience through precision marketing and customer services.

So these are values that technology help us create for us, and we are going to continuously invest in technology. But at the same time, we know that we have to improve the efficiency for technology development. Our total investment percentage in technology investment is much higher than industry average. So at the same time, we started to improve our development efficiency, and this helped us reduce our technology total investment percentage.

Okay. I hope that answers your question, Fergus.

Yes. And again, congrats on your performance this quarter.

Your next question is from the line of [Marcus Sui from Fitz Power].

This is Marcus from Fitz Power. Congratulations on the strong performance in the first quarter of this year. Actually I have 3 questions. The first one actually was a little bit covered by previously, Mr. Harvey's answer, is how has the company continued to grow its service-related income? And if you have anything to add? And do you have plans to roll those more monetizable products? That's my first question. And I will wait for your first answer before I ask you second one.

Thank you, Marcus. Let me take that question. So we are so happy to see that our service revenue started -- continues to grow. And as you can see from all the different types of services we provide, it can be classified into several categories based on the user type. For example, we have a marketplace, market vendor services. So those are for our partners for the marketplace vendors or sellers. We have online medication consultation service, those are for patients or direct for consumers and also provide e-prescription service, supply chain service, et cetera. Those are for the pharmacies. And we also have like digital marketing, patient education, drug commercialization tools, those are for the pharmaceutical companies.

As you can see that we are providing many types of services and all these types are growing steadily. And so we continuously improve or increase our service revenue. For example, we are going to recruit more marketplace sellers and the service providers to our marketplace. We are going to develop more digital technology and database services to serve both pharmaceutical companies and the pharmacies. We, at the same time, we have built a lot of systems internally for our own internal use, but many of them are very valuable and really liked by our customers. So we are transforming more of our internal build tools into SaaS services to enable our partners. And some of them are in the development process. Okay. I hope that answers your question.

It's pretty clear. My second question is what value is 1 Health program intended to generate, and what progress has been made?

Yes. Regarding 1 Health. 1 Health is becoming the first in the industry with S2B2C model. And our virtual franchise model enables over 10,000 small pharmacies or medium-sized pharmacy chains to provide superior products and services to their customers. All participating pharmacies can use our platform to better manage their product selection and manage their procurement and inventory management as well as accessing our distribution tools through our digital staff services, including smart sourcing, digital marketing, and O2O and online stores and [CIMs]. In this year, we expect more and more pharmacies to join our 1 Health program. Thank you.

Well, that's very remarkable. And my last question is, what is the status of your domestic public listing?

Yes. We are still in the process of preparing for the domestic listing for our key subsidiaries in China. And we're also evaluating options for both Shanghai Stock Exchange and Shenzhen Stock Exchange. Of course, we will update the market when it's appropriate according to SEC rules. Thank you, Marcus.

I'm looking forward to that. Congratulations again for the strong performance.

Thank you. And there are no further questions at this time. I hand back to management for closing remarks.

Thank you, operator. In closing, on behalf of the entire 111 management team, we'd like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting us in Shanghai, China, please let us know. Thank you for joining us today. This concludes the call.

Thank you. This does conclude the conference for today. Thank you for participating, and you may now disconnect.