111 Inc (YI) 2020 Q3 法說會逐字稿

Please go ahead, Ms. Monica.

Thank you, operator.

Hello, everyone, and thank you for joining us today for 111 Third Quarter 2020 Conference Call.

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, Co-COO; Mr. Barry Zhu, Co-COO; Ms. Monica Mu, Investor Relations Director; and Mr. Alex Liu, Finance 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 best account management's current expectations and the current market and operating conditions, and it relates to events that involve known and unknown risks, uncertainties and other factors, all of which could cause actual results to differ materially.

For more information about these risks, please refer to the company's filings with 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.

Good morning, and good evening, everyone.

Thank you for joining our 2020 third quarter earnings call.

As the COVID-19 pandemic continues to make headlines globally, I'd like to start on this topic to provide some context to this call.

As much of the world see the resurgence of coronavirus cases and the continued economic downturn as a result, China has been one of the few bright spots, with the pandemic successfully under control and the economy is starting to pick up.

In addition to being something to be celebrated in its own right, the economic recoveries in China has also created a positive environment for our operations.

However, as a company and a country, we continue to stay vigilant for any new wave of infections.

I want to thank the staff of 111 for their diligent dedication to meeting the needs of our customers and the consumers, and all health care workers and the scientists for their unwavering determination in this long fight against the pandemic.

And before diving into the numbers, a couple of corporate news I'd like to update you on.

Firstly, Mr. Luke Chen, until recently CFO of 111, has been appointed CFO of Yao Fang Information Technology in Shanghai, the 111 subsidiary preparing for listing on Shanghai Stock Exchange STAR Board.

We thank Luke for his work setting a strong financial foundation for 111 and the belief that in his new position, he will guide Yao Fang to a strong growth trajectory and a successful IPO.

In the meantime, in addition to my role as CEO, I will step in as acting CFO alongside Luke during the transition until a new CFO is appointed.

Secondly, on September 24, 111 hosted our third annual China Online Healthcare Summit and the partner conference, which attracted around 600 guests globally, including the executives from leading pharmaceutical and health care companies, medical experts, government leaders and investment institutions.

This conference gave participants the opportunity to discuss the various challenges facing the health care industry in China as well as the innovations being developed to tackle these challenges.

111 was able to take this opportunity to showcase our omni-channel platform that is transforming the health care industry by digitally connecting patients with medicine and health care services.

During the conference, we also announced several strategic partnership agreements, including the pharmaceutical companies Bayer Healthcare, Novartis China, Xiangxue Pharmaceutical and Huluwa Pharmaceutical as well as with insurance company Shanghai Uniondrug.

These partnerships will leverage each company's expertise to launch innovation through partnerships.

These partnerships will leverage each company's expertise to advance innovation.

And through 111's omni-channel platform, consumers will be able to conveniently access high-quality health care products at a time and in a manner that fits into their busy schedules.

I will provide more detail shortly.

Moving on to our Q3 earnings results.

The agenda today will cover an overview of the company's business and operational performance, which you can find in section one of the deck.

We will then review the company's financial performance in section two.

We will end with guidance for Q4 before opening the call for Q&A.

Let's begin.

We're pleased to report that we have delivered another quarter of stellar growth.

As you can see from Slide 4, this is the eighth consecutive quarter of revenue growth since our IPO, where we have been consistently delivering near or above 3 digit -- triple-digit growth.

Non-GAAP net loss as a percentage of net revenue continued to narrow from approximately 10% in Q3 2019 to 4% this quarter, showing momentum towards profitability.

Net revenue increased 113% to reach RMB 2.36 billion, while gross profit rose 90% to RMB 90 million.

We believe the robust performance is a strong elevation of the successful execution of our multifaceted growth strategy to accomplish our mission.

We have made solid progress in enhancing our digital capabilities.

Our cloud-based solutions in the areas of patient management, doctor-patient interaction, education for doctors, patients and the pharmacists and other related services received excellent response from our customers.

Our smart supply chain management is making our operation more efficient.

The omni-channel drug commercialization platform is laying solid foundation for our future growth in one of China's fastest-growing industries.

Over the last few quarters, we made significant progress in strengthening the infrastructure of our digital health care platform that brings together key stakeholders in the health care ecosystem, retail pharmacies, online platform partners, doctors, insurance companies and the pharmaceutical companies, to the benefit of all.

For our retail pharmacy customers, part of our 300,000 strong network and the largest in China, our smart sourcing system, machine learning and cloud-based solutions translate into effective sourcing, that's inventory management, optimal product assortment and a broader market reach, resulting in greater cost efficiency, higher earnings potential and enhanced ability to serve our end consumers.

For doctors, our smart technology puts the power of the latest medical innovations in their hands to achieve better health outcomes for their patients.

For patients, our holistic disease management platform gives them access to the best doctors across the country, follow-up consultations, disease education materials, medication guides and the benefits of obtaining medication at home through our e-prescription service.

The other important part of the infrastructure is the virtual pharmacy network we have been working hard to build over the last 3 years.

This segment of the business is showing particularly strong growth.

The retail pharmacy sector continues to be highly fragmented and dominated by family-run storefronts.

We've seen a vast opportunity to enable these business owners with better supply chain and technology solutions.

We have aggressively grown this network over the last 3 years, which surpassed the 300,000 retail pharmacies as of reporting date, representing a 43% increase from third quarter 2019 and over half of all retail pharmacies in China.

Having achieved our goal of building the largest virtual pharmacy network in China, we will not be providing the number of retail pharmacies in our future earnings reports.

Another validation of our strategy is to increase the strategic partnerships based on the value we've demonstrated.

For pharmaceutical companies, 111's smart supply chain management and the cloud-enabled digital tools, together with the marketing and the patient support services we provide, help them gain access to a wider customer base and at a lower cost.

In return, not only do we earn fees for our services, but also gain something much more valuable.

Our pharmaceutical company customers are choosing us as their commercialization partner to gain more reach and better efficiency.

For our network of retail pharmacy and other health care business customers, this means that they gain a broader portfolio of both innovative and generic pharmaceutical products at better pricing, which in turn translate into a higher demand for their products, more sticky end consumers, enhance the ARPU and improved margin.

For 111, it goes without saying that when our customers do well, we do well.

As performance for the retail pharmacies in our network improves, we at 111 see the corresponding increase in product sales, revenues, fees and the customer loyalty.

Earlier, I provided a preview of good news around strategic partnerships.

In this quarter, we made excellent progress in expanding the number of strategic partners to over 300, up 100% over the same period last year.

Beyond pharmaceutical companies, we have developed partnerships with insurance companies, enabling us to further enhance the digital health care value chain.

In the quarter, we added another insurance partner, Shanghai Uniondrug.

This partnership will give us the power to offer to consumers better access to health care and pharmaceutical products at lower prices.

In addition, consumers will also gain tools and supporting services that are personalized to their needs and that emphasize preventative rather than curative care.

All these partnerships taken together allow us to leverage our omni-channel digital platform to better integrate all key stakeholders of the health care ecosystem: drug manufacturers, retailers, insurance companies and end consumers.

The end result is an ecosystem where stakeholders depend on and benefit from each other, creating a virtuous circle of high-value services, sticky customers and greater profitability for all, including us at 111.

And the winner of all this at the end, consumers, who benefit from enhanced care at lower cost and ultimately better health.

Now let's spend a few minutes on business performance.

This is borne out by our latest results.

For our B2B segment, the greatest area of strength was the increase of almost 300% in a number of orders as well as the revenues from our base of existing customers versus incremental sales from new customers who recently joined the network in the third quarter.

Revenue this quarter grew by 134% to RMB 2.2 billion, and the gross profit grew by 344% to RMB 58 million.

Revenue from existing customers were up 38.9% quarter-over-quarter and newly added customers contributed 12.5% of the growth quarter-over-quarter.

For our B2C segment, this quarter saw a slight decline.

Revenue and gross profit down by 5.2% and 6.3% year-over-year to RMB 161 million and RMB 32 million, respectively.

The decrease here is driven primarily by our decision to focus our assets on initiatives that will deliver the most value to the company and our shareholders.

And these efforts are already yielding early encouraging results.

We're confident that we will soon be back on the growth track again, before we -- because we are in a unique position to deliver superior health care to our end consumers at competitive prices.

One example is our patient management platform, which provides consumers access to the best doctors around the country for outpatient care, regardless of where they live.

Combined with our retail pharmacy network, patients can have their prescriptions filled and delivered to them conveniently and efficiently, along with the tens of thousands of other health and wellness products available on 111's platform

Against the background of favorable government policies towards digitalization, we believe we are in an enviable position to take advantage of the immense health care needs of the country.

As we strengthen our infrastructure to help pharmaceutical companies market their products, we're enhancing our smart supply chain and its efficiency, improving our doctor-patient digital platform and providing better care and the tools for patients to achieve more favourable health outcomes.

Looking towards to the last quarter of the year, we will stay focused on narrowing net loss and furthering what we've done well, increasing sales from our existing base of customers while gaining new ones, enhancing stickiness and expanding and deepening strategic partnerships.

With the recovery of the Chinese economy, we believe that the strategy and execution that have enabled us to build a leading digital health care platform in this country will also allow us to take advantage of the immense opportunities presented by the Chinese market.

We have proven the power of our ecosystem.

And we will work tirelessly in the next quarter and beyond to increase its value and drive growth, continuing the ascent to delivering sustainable and long-term profitability to our shareholders.

With that, I will hand the call to Luke to walk through our financial results.

Thanks, Luke.

Thank you, Junling.

Moving to the financial section.

On Slide 12, you can see the details of the third quarter 2020 results on Slide 13 to 15 of our presentation.

I would like to highlight a few key business and financial metrics and our focus on year-over-year comparisons.

All numbers are in RMB unless otherwise stated.

Our total net revenue for the quarter grew 113% to RMB 2.36 billion, which exceeded top end of our guidance range.

Our B2B segment revenue grew 134% to RMB 2.2 billion.

Revenue contribution from E-Channel, which previously disclosed as a separate segment, was now incorporated in B2B segment this quarter.

The strong growth in B2B segment was attributed to strong growth from existing customers as well as the newly added customers in our network.

Our B2C segment revenue was down 5.2% to RMB 161 million, mainly due to a restructure of our B2C business as we reduce our investment in third-party platform.

Our B2B gross margin was 2.6%, up from 1.4%.

Our B2C gross margin remained stable, around 20%.

The improvement in gross margin in our B2B business reflected our ability to continuously improve the margins while maintaining triple-digit top line growth.

Overall, our gross profit amount grew by 90% to RMB 90 million, and the combined gross margin was 3.8% compared to 4.3% a year ago, which is mainly due to the dilution set from the rapid expansion of our B2B business with lower margins.

Total operating expenses for the quarter were up 28.2% to RMB 212 million.

As a percentage of net revenue, total operating expenses for the quarter were down to 9% from 14.9% as we continued to improve our operating leverage and optimize our operations efficiency.

Procurement expenses as a percentage of net revenue for the quarter was 2.5%, down from 2.8% in the same quarter last year.

Sales and marketing expenses as a percentage of net revenue for the quarter was 4.4%, down from 7.9% in the same quarter of last year.

G&A expenses decreased 10.8% compared to the same quarter last year, and as the percentage of net revenue for the quarter was 1.2% and down from 2.9% in the same quarter last year.

Technology expenses amount increased 49.4% this quarter as compared to same quarter last year, which accounted for 0.9% of net revenue, down from 1.3% in the same quarter last year.

As a result, non-GAAP net loss attributable to ordinary shareholders for the quarter narrows to RMB 94 million as compared to RMB 110 million in the same quarter last year, which accounted for 4% of net revenue, down from 9.9%.

As to the guidance for the fourth quarter 2020, on Slide 17, the company expects total net revenue to be between RMB 2.44 billion and RMB 2.56 billion, representing a year-over-year growth of approximately 81% to 90%.

The above outlook is based on the current market conditions and in respect to company's current and preliminary estimates of the market and operating conditions as well as customer demand, which are subject to change.

Please refer to Slide 19 to 21 of the appendix section for selected financial statements.

A quick note on our cash position.

As of September 30, 2020, we had cash and cash equivalents, restricted cash and short-term investments totaled RMB 1.2 billion compared to RMB 697 million as of December 31, 2019.

And we achieved positive cash flow from operating activities which amounted to RMB 25 million for the quarter.

And also, we achieved positive cash flows from operating activities for the period year-to-date.

This concludes our prepared remarks.

Thank you.

Operator, we are now ready to begin the Q&A session.

(Operator Instructions) We have the first question from the line of Sherry Yin.

This is Sherry from JP Morgan.

Congratulations on strong third quarter results.

I have a few questions today.

My first question is about the business strategy updates.

We saw many encouraging partnerships that 111 has established over the past few months.

Could you give us a business strategy revisit if any major changes?

And my second question is specifically for Dr. Yu.

We know that Dr. Yu was key management in Amazon, so worldwide supply chain operation.

As the market is recently turning a lot of attention to Amazon's big move, marching into online pharmacy industry, could you help us understand the major difference between China and U.S. online pharmacy market?

And my last question is about the last week's NMPA announcement of the online drug seller regulation change.

Could you share more color about this regulatory update's implication to 111's business operation and the competition landscape?

That's all my questions.

Thank you, Sherry.

I'll take on the first question, and I'll let Dr. Yu to continue.

About the future strategy, first of all, so this year, I believe we will deliver well over USD 1 billion in revenue, and will be very close to profitability.

However, we still want to run this business as a start-up.

We have laid out a mission, which is to digitally connect medicine with patients and health care services.

To accomplish that mission, I'd like to use 3 key words.

The first key word I want to use is digitization.

I think everybody would agree that this industry is relatively backward in China when it comes to digitization.

We at 111 are investing very heavily on doctor-patient interaction platform, so we can move doctors and patients to the digital world.

We're also digitally tracking the whole value chain from the point when the drug leaves the factory all the way to the patients.

It's also amazing to realize how much enthusiasm on digital marketing, including patient education, doctor education, pharmacist education, et cetera.

And I could not have imagined that the live cast from 2 internal staff on our app can generate over RMB 10 million in sales within 2 hours.

And the next keyword I want to use is infrastructure.

Essentially, we're laying the infrastructure for the next generation of health care delivery in China.

We are able to reach consumers directly through our 1 Drug Store, through our 300,000-plus pharmacy network and through doctors.

One can understand this as the B2C, the B2B2C and the B2D2C.

You see our supply chain, our cloud-based solutions, our big data are all part of this infrastructure.

And the third key word I'd like to use is commercialization.

Our view of the future is that the pharmaceutical and the biotech companies are going to face pretty tough competition.

With the VBP implementation, majority, of the pharmaceutical companies are going to focus on innovative drugs.

As we all know, recently, in the Hong Kong and Shanghai STAR Exchanges, there are many new biotech companies that got listed.

And I think that before long, all -- well, not all, maybe most of those newly-listed companies are going to face challenges in commercialization once their drugs get approved.

So this is the area where we have been investing in pretty heavily.

Our omni-channel commercialization platform will be in a great position to help them.

So let me recap the 3 key words: digitization, infrastructure and the commercialization.

So this is really the strategy we're implementing, and those are the areas we're investing.

So I'll pass on the next questions to Dr. Yu.

Thanks, Sherry, for asking your questions.

So let me answer the second one that you mentioned about Amazon's recent launch of their online drugstore sales.

I think that started even in early 2003 and 2004, when I was serving as the executive for Amazon, they acquired company for drugstore.com.

But for these many years, that category has not been developing as fast as other categories.

I think China is more aggressive in terms of acceptance, online doctor consultation, online drug purchase.

I think due to several reasons, why is that the vast penetration of mobile devices and more online e-commerce customers, I think we are certainly in a great market, and also the policy by the Chinese government's more -- also more open.

Just as you know, that recent policy allowing online prescription drug sales and allowing online consultation --- doctor consultation being covered by medical insurance and more encouragement of online health care.

I think this all really facilitated the growth of China's online health industry.

And the second question, you mentioned about the last week's new -- the third question, right.

It's mainly a facilitation of feedback.

In fact, we participated in the whole discussion with the Chinese government, and we gave them our feedback.

I feel this is really a very positive to the whole industry and also very positive to us.

The whole tone of the policy is that it will be more open to online health care, and certainly, we have more rigorous, more scientific monitoring, management and control of the quality.

So certainly, these policies will allow the companies that are more compliant, that are more transparent and have a higher efficiency to surface.

I think it's great.

I think we are certainly in a great industry to be in.

And this is -- so definitely, we feel that all these new policies or the trends are all very positive to us.

We have the next question from the line of Bingyu Chen.

Congratulations on your results.

I have several questions.

First of all, we have seen that the B2B segment is developing rapidly and want to see what's the reason behind.

And how will you keep the growth momentum?

And second is about the profit side because we see there is a gross margin increase in B2B segment and decreased fulfillment costs.

And would you please let us how you managed to achieve that?

And the third question is about maybe please share more color on the increased numbers of orders.

Okay.

This is Harvey.

I will take this 3 questions regarding the B2B growth and B2B margin as well as the order volume increase.

So first of all, for the B2B growth.

On one hand, our B2B customer size is increasing, which has exceeded 300,000, representing about 60% of our China total market.

And on the other hand, the revenue of our existing customers is also increasing rapidly.

The growth is mainly coming from our strength and capability on digital marketing.

For example, we offer a total solution to pharmaceutical companies to commercialize their drugs' 111 digital marketing tools.

We also enable our B2B customers with cloud-based digital services such as cloud pharmacy services, cloud clinic, cloud inventory as well as cloud CRM.

Internally, we also developed 2 tools, one called Hawkeye and the other called Turbo, to use big data Internet technology to build up a mechanism for our sales force to acquire more customers, activate existing customers and improve DAU, improved revenue, especially in the lower-tier cities, which contribute to a major part of our B2B business.

These digital marketing technology and tools help us to improve our sales force efficiency.

And on the margin side, I think there are 3 reasons, how can we keep good margin improving trend.

Meanwhile, we also keep a 3-digit growth rate.

First of all, as just now Junling mentioned, we are more and more direct sourcing from pharmaceutical companies.

Secondly, we launched our PIS, that is a price intelligence system, to build up a smart pricing mechanism to improve profit while without any negative impact to our sales growth and expansion.

Third reason, we also bring in more higher-margin SKU in the past quarter, which helps pharmaceutical companies promote the sales of this SKU through our digital marketing platform, and meanwhile bringing in more margin.

And I hope I answered your question.

I think the third question regarding the B2B order volume, yes, it's a good capture on -- it's a big increase in our B2B order volume.

I think firstly, in the past quarter, we have increased our SKU selection through our new supply chain model, and SKU selection has increased several times.

We believe that selection is the most important element of customer experience.

And secondly, through continuous innovation on our supply chain technology and supply chain network, we have managed to improve our operational efficiency and lower our fulfillment cost to 2.5%, as Luke just highlighted.

We have returned our saving on fulfillment cost to our customers by lower the free shipping threshold, and which improves our customer buying frequency and also improve our order volume and improve their ARPU and revenue.

Okay?

Is it clear or any other follow-up questions?

We have the next question in the line of Rachel Yang.

First, congratulations for such a strong third quarter results.

This is Rachel from HSBC.

I actually have 4 questions.

The first one is on your digital healthcare platform.

So could you please share with us the recent progress and achievement for that platform?

And what's the plan for next year?

And because the online medication market is quite competitive nowadays with many Internet giants jumping to that, so how do you think our technology or a facility behind could differentiate us from those Internet giants?

This is the first question, on the digital platform.

The second one is on your cloud e-service.

So what is that?

And do you charge the standalone pharmacies for the cloud e-service you are providing them?

This is #2.

The third question is on your logistic system.

We read from the PPT that you have a logistics system that are covering all the provinces and you have with the capability to reach to -- you have the capability for 24-hour delivery for in over 300 cities.

So how that capability is compared to other online medication players?

Last one is on your financial front.

So we noticed that we already turned cash flow positive, and I guess next year, we were evenly reaching the total top line of RMB 10 billion.

So how far do you think we are from the financially achievements?

So these are the 4 questions.

Thank you.

I'll take the first question.

If I understood you correctly, it's about our digital solutions, right.

So really, as a part of our digital platform is the doctor- patient interaction platform.

And in addition to that, we also digitally track the drug flow from factory to patients.

In the past, a lot of those transactions actually happening in offline.

And the other capability we have built out over the last few years is really digital marketing, which we have seen tremendous progress.

And of course, our smart sourcing are greatly helping those pharmacies when they place orders.

In the past, they use a sheet of paper and they will figure out what SKUs they need to replenish, and then they will spend half a day to call different suppliers.

With our digital tool, which is called the digital Smart Sourcing, they can complete their procurement within, let's say, 5 minutes instead of half a day.

And of course, I think one thing we've done the best in the industry is really the patient care program.

I'll just give you some examples, right?

So with the patient care program, we have a D+1, D+7, T -7 and T- 10.

Let me just quickly go through that.

For instance what is D, let's say, diagnosis, I mean on the first day when the patient got diagnosed, and I'm assuming this is a chronic patient.

And obviously, a drug is prescribed and delivered and of course, our platform will be able to use different algorithms based on different disease types.

And on D+1, after the diagnosis, we're going to send out a material related to the disease, the education material.

And the D+7, we're going to send out the importance of following the compliance of the doctor's prescription and so on.

And T means the time they should be refilling.

So T minus, our system is going to automatically calculate.

We're going to send out a note to the patient to remind he or her -- him or her that it's about time to refill.

And by T - 0, on the actual day, if it is still not happening, obviously, our pharmacists can follow up with a call and try to find out what's going on.

And the other thing we are very proud of is really the digital marketing we are conducting for pharmaceutical companies, and especially when it comes to patient education, the doctors' education, the pharmacist education, and essentially, we have built out a matrix of different high-traffic media.

For instance, in China, the biggest traffic came from Douyin, from Toutiao, from WeChat and so on.

So we as a company set up accounts in all those big traffic sites.

And when we run a patient education program, we can actually reach a much, much broader audiences compared to a single pharmaceutical company can do.

I will give you an example, we conducted the diabetic education sponsored by Eli Lilly.

And during the live session, we had more than 5 million users participate.

And then we actually recorded that session.

Overall, over 10 million people actually viewed that session.

That is a clear advantage over the traditional ways with the digital solution we have.

And obviously, we're going to really exploit that capability we have.

I don't know who should follow up the next question.

Yes.

The question about cloud services.

So we basically provide cloud services to all the participants in our ecosystem, including the doctors, pharmacies, pharmaceutical companies, insurance companies, etc.

So let me just use pharmacies as an example, so we'll provide cloud pharmacy.

We can move their pharmacy online, so really increase the coverage.

Also provide online clinic, so transform a pharmacy into a clinical pharmacy.

So we got any patients who comes to pharmacy can scan a QR code and [have online consultation] (corrected by company after the call) and get a digital prescription in order to buy the drug from the drug store.

Also provide online inventory so that strong inventory to actually larger selection by almost 100-fold.

Also provides cloud CRMs to help the pharmacy to manage your customers.

Through this way, they gain a more sticky loyalty of the customers.

Also, let me answer the question about the coverage.

We mentioned that we cover 300 cities within 24 hours.

In fact, we cover more than 80% of our customers within 24 hours.

So as you mentioned that -- you asked us how does that compare with other services.

We feel that we -- the thing we care most is about customer experience.

So our customer satisfaction right now is 99%.

And we feel that we're very proud of that we can provide that customer satisfaction.

So that certainly includes on-time delivery, selection, price and other customer services will be the best metrics create focus around.

Yes.

This is Luke.

Let me answer the question about the financial performance as well, cash position and operating on site.

We are very excited about our achievements in third quarter, especially on the cash position.

As of September 30, 2020, we have total cash at hand amounting to RMB 1.2 billion.

And we have achieved positive cash flow from operating activities for the quarter as well as for period year-to-date.

We believe that we will continue that trend and continue to generate positive cash flow from our operating activities in the future quarters.

In terms of breakeven point, we will not give any guidance at this stage.

As we are still in the investment and expansion mood, we do not want to lose growth opportunity because of our ending investment.

Having said that, we truly believe that with the strong top line growth, improved the margin profile as well as operating efficiency, we will be able to further lower the net loss as a percentage of net revenue and which will lead to profitability in the foreseeable quarters.

We hope that we will surprising ourselves as well as investors in the next year or so.

Rachel, I hope we answered your questions.

Just a small follow-up on the delivery system, so can you share with us how your capability is compared with other online medication players?

I thought I answered that question.

We see it as very efficient.

We cover more than 80% of our customers within 24 hours as we have a very efficient fulfillment cost, probably the lowest -- one of the lowest in the industry.

And we are still optimizing our entire supply chain.

And all focus is on customer experience.

We have the next question from the line of Xipeng Feng.

Congratulations on the company progress.

Well, actually, I have -- I just have one little question.

And I have seen that many well-known pharmaceutical companies have entered into collaborations.

Any of the strategic partnerships with 111 this quarter?

Also, I heard that such collaboration goes beyond drug procurement activities and extends to more aspects including big data, digital marketing and even brand building.

So my question is, what are the advantages of 111 collaboration?

And what you could offer when other pharmaceutical companies choose to make collaboration with a company?

Okay.

Let me take that question.

That's a great question.

So certainly, we have enjoyed more and more solid strategic partnerships with global first tier top pharmaceutical companies.

We feel that the main reasons abound.

First is that we are a U.S. public company, and we have high compliance and the transparency.

And we have also a very high-efficient supply chain and broad coverage and deep penetration.

And we have the capability of going omni-channel drug commercialization.

Also, we enjoyed our scale and our corporate great customer experience and our reputation in the industry.

And also the past years have demonstrated our true ability of innovation and digital service activities.

I think these are the main reasons that are a lot of pharmaceutical companies are -- we are their preferred partner.

We have the next question from the line of Horace Cheng.

Congratulations on the great results.

This is Horace from Ideate Investments.

I have 3 questions for the team.

The first question is the key difference between 111 and JD Health and AliHealth, especially JD Health on the B2B side?

That's the first question.

Second question is, your non-GAAP net loss has continued to narrow.

Is this trend sustainable?

Can you shed some more light on gross margin going forward?

And also the last question is perhaps you can share a little bit more progress on the listing on the STAR board.

I'll take the first question, the difference between 111 and JD Health and AliHealth.

I think our position is very different from AliHealth and JD Health.

First of all, if you look at the naming of the company, it's quite interesting because JD is calling that business JD Health and Ali is calling that AliHealth.

Obviously, our brand of the company is actually 1 Drug Store, right?

So we more focused on drugs, whereas they are more focused on the consumers' health.

So we are very envious of their traffic they can gather.

But we won't have to position ourselves very rather differently from them because our site can never compete against those big sites on traffic, so we focus much more on drug commercialization.

And if you look at our business model, our digital products and the digital solutions are much more geared towards delivering value to pharmaceutic companies.

And next point I want to make it that no one in the industry has the B2C, the B2B2C, the B2D2C infrastructure like we have.

You mentioned about JD's B2B.

We haven't seen much.

But as we understand, they are more focused on using the marketplace to deliver value to the pharmacies.

But we actually run that as a first-party business, and that's much better when it comes to personal experience.

And obviously, the infrastructure we have built out, this is rather unique and this is our advantage, and we want to exploit that to the fullest.

I'll pass on the gross margin question to Luke.

Yes.

We are confident that we will continue to narrow the loss to profitability.

And we believe that's sustainable.

So in the next coming quarters, we will continue to triple-digit grow our business and to build a scale because the scale does matter.

With that, we will build a direct partnership with pharm companies.

We would love to see we're not only making revenue from product sales, but also making revenue from the service.

And on the 2B business, you already see that we improved our margin profile from 1.4% to 2.6%.

And we see recently, actually, that the gross margin for the 2B business continued to improve.

And we believe that could be up to 5%, even to 8%, so with improving the product mix and focus on those high-margin products.

So we believe that there's some room for us to continue to improve the gross margin profile.

Plus, we continue to improve our operating leverage and now operating efficiency.

So we will, as I just shared with investors, that we are very confident that we will continue to make investments on opportunities.

But with the scale of building up the margin profile improvement that we will see that the net loss as percentage of net revenue continue to narrow, and we will see the breakeven point coming.

On the -- our listing plan of the subsidiary in China, we are making progress according to the schedule, and we will disclose it according to SEC rules.

So I would encourage you to monitor the press release, that we will issue in the due course according to SEC rules.

I hope we answered your questions.

We have the next question from the line of Chen Gu.

Can you explain why on the B2C side, there's a slight decrease both on revenue and on the margin.

So is the margin correlate with -- is like the volume very important as you decrease it, your profit margin will decline?

Yes.

As I explained in my remarks, really it is a conscious decision for us to invest in better infrastructure to deliver longer-term value from our business.

We're pretty confident that we're going to be back on the growth track very soon.

And it's a great question about the margin.

Obviously, it shows a decline in margins.

But if you look at the percentage, it is still above 20%, and that is we've been well within the range if you compare it to the other B2C platforms.

And we are fairly okay with that margin percentage.

But moving forward, we should expect improvements in both the top line and also the gross margin.

Can you elaborate on your investing for growth in infrastructure?

Is this due to more competition, especially from the giant JD.

I mean why did you decide to invest for growth, and what you did not have before?

Yes.

Obviously, it's pretty clear out there.

We're not going to compete against the big traffic players.

And we need to play in a different space, right?

So right now, we're investing in infrastructures like the patient-doctor interaction platform.

That is going to help us acquire customers in a much more efficient way.

And also, we're building the virtual clinics for doctors.

And we're working with pharmaceutical companies on products where they traditionally could not launch in the offline manner.

For instance, when a new drug is approved and then the pharmaceutical company want to introduce that to the hospitals, it's going to take them 1 year or more to get into the hospitals' procurement list.

And we are working with a number of pharmaceutical companies to actually use our digital platform for the drugs to be delivered to patients if the doctor can issue a prescription, even the drug is new.

And we're partnering with pharmaceutical companies, even with their sales reps, the medical reps as well.

So those are the infrastructures that we'll be using in the future, and we believe this is going to generate a much more sustainable business, both top line and the bottom line moving forward.

Yes.

I probably be very ignorant, but I'm just thinking if I were a pharmaceutical company, and I want to do patient education, think interact with patients, wouldn't I choose like a JD or Ali, where I know there's significant traffic and those companies are planning or doing the same thing you're doing right now?

Let me take that question quickly.

I think as you can see that more than 70% our sales are for prescription drug sales.

So clearly, we are very dedicated to more professional and prescription drugs instead of health awareness products.

So I think this is really another reason that pharmaceutical companies really like to work with us, strategically to a lot of the new, innovative business models like we recently launched press release.

We launched specialized hospitals for diabetes, for skin disease, et cetera.

So those are great examples that we're working on.

We have the next question from the line of Chang Qiu.

It's great you reached like almost 60% of the -- all pharmacies in China.

But on the other hand, it looks like sales to each of the pharmacies under like RMB 8,000.

My question for you is how big you can -- you think you can go in terms of sales to an average pharmacy?

Okay.

I will take the question.

I think although we are covering 60%, I think we still have -- the market is still very big.

We can see it every year, the market size of this pharmacy business is several hundred times of our current volumes.

So I fully believe that in future, we still have a very big room to further growth our business.

And meanwhile, we also have a big opportunity to further improve our gross profit.

I think it's just the start.

And the ARPU of our -- ARPU means average revenue per user, of our customers, no matter if it is a individual pharmacy or it's a chain store pharmacy, has both increased quarter-over-quarter significantly.

And I think it's great news for us.

We've only just started.

As you can tell, our penetration is still fairly low when it comes to wallet share.

And we can absolutely sustain a pretty high growth for a much longer time.

(Operator Instructions) I'd like to hand the call back to Monica for any closing.

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, please e-mail us, and thank you for joining us today.

This concludes the call.

Thank you, ma'am.

Ladies and gentlemen, that does conclude the conference for today.

Thank you for participating.

You may all disconnect.