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Edited Transcript of MOGU.N earnings conference call or presentation 29-Nov-19 11:30am GMT

Q2 2020 Mogu Inc Earnings Call

Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Mogu Inc earnings conference call or presentation Friday, November 29, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Qi Chen

MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO

* Sean Zhang

MOGU Inc. - Head of IR

* Ting Wu

MOGU Inc. - CFO & Compliance Officer

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Conference Call Participants

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* Ashley Xu

Crédit Suisse AG, Research Division - Associate

* Charlie Chen

China Renaissance Securities (US) Inc., Research Division - Analyst

* Rene Vanguestaine

Christensen & Associates - Chairman & CEO

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the MOGU Second Quarter Fiscal Year 2020 Unaudited Financial Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Rene Vanguestaine. Please go ahead.

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Rene Vanguestaine, Christensen & Associates - Chairman & CEO [2]

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Thank you, Melissa. 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. Sean Zhang, IR Director. Mr. Chen will review business operations and company highlights, followed by Ms. Wu, who will discuss financials. All 3 will be available to take your questions during the Q&A session that follows.

Before we begin, I'd like to remind you that this conference call 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, believes, estimates, targets, going forward, outlook and similar statements. Such statements are based upon management's current expectation 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 is now my pleasure to introduce Mr. Chen. Mr. Chen, please go ahead.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [3]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [4]

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[Interpreted] Hello, everyone, and thank you for joining our second quarter earnings call today.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [5]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [6]

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[Interpreted] China's Internet base has evolved deeply over the years with verticals that at once drew the power from each other such as social media, e-commerce, entertainment and lifestyle services, now merging with one another. A constant stream of new breed of business models are being created every day.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [7]

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(foreign language) To make fashion accessible to everyone.

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Sean Zhang, MOGU Inc. - Head of IR [8]

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[Interpreted] The trend has picked up in recent years, something which we are acutely aware of. MOGU was filled with a mission to make fashion accessible to everyone and has been a challenging journey. But like the new breed of companies, we have evolved with times, overcome many challenges in the past 9 years, while remaining fully committed to our mission.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [9]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [10]

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[Interpreted] To swiftly adapt our business to a changing market and capitalize the growth trend, we strategically began building an innovative KOL-driven social shopping destination model equipped with an integrated supply chain.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [11]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [12]

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[Interpreted] We believe this model offers a unique value to our consumers and is more in line with the future direction of the fashion industry in China. And it's more suitable than the traditional storefront and merchandise-based marketplace models. Individuals, to be precise, KOLs, played a central role here with their exceptional ability to understand, influence and serve our users. At the same time, their exceptional -- at the same time, they meaningfully improved overall industry efficiency by consolidating the existing fashion supply chain in China. Building on this KOL-driven model will allow us to evolve and remain focused on our mission while driving long-term growth.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [13]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [14]

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[Interpreted] Empowering KOLs is the key for MOGU to creating an engaging and comprehensive social shopping experience for our users. In our last earnings call, we outlined 3 strategies that will drive the next phase of our growth. I want to share some of these exciting highlights.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [15]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [16]

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[Interpreted] First, we expanded a talent pool of our Live Video Broadcast, i.e., LVB hosts, and recruited nearly 2,000 new hosts in the quarter to increase the diversity of fashion- and lifestyle-related content. We now have over 64,000 KOLs and over 24,000 LVB hosts on our platform, who create more than 3,400 hours of highly engaging live streaming content on a daily basis. Many of these new hosts feature a wide range of talent and draw deep experience from their different background all through e-commerce, including personal stylists, fitness yoga instructors, make-up artists, cooking teachers, painting and singing instructors, et cetera. We also launched designated content channels for new KOLs in a recent version of MOGU app.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [17]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [18]

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[Interpreted] Secondly, we are investing more in building a catalog of KOL-generated short video content. We are expanding a KOL's ability to capture user attention and interest. In our site, there's 3,400 broadcasting per day. This is crucial for improving user conversion to higher-value LVB users and driving consumption on our platform. We can already see some initial results this quarter with LVB MAU up 76% year-on-year, an acceleration, and LVB active buyer in the last 12 months, up 64% year-on-year.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [19]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [20]

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[Interpreted] Thirdly, we strengthened the new infrastructure we have viewed to empower KOLs by rapidly expanding the pool of premium suppliers we work with, both in terms of total number and product category. This will be crucial for cultivating a rich community of new KOLs and Live Video Broadcast hosts. The integrated supply chain capacity is also important for us to differentiate ourselves within the sector. We also continued to develop new live streaming technology, mini programs to diversify our host product collection and enhance user experience for Live Video Broadcast.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [21]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [22]

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[Interpreted] In order to create a more seamless and efficient platform and capitalize on the momentum of LVB business, we started to integrate the back-end system of Live Video Broadcast and marketplace business. This will significantly enhance the synergy between the 2 business as they grow. We expect we'll not only -- we expect this will not only expand the shelf time of live streaming merchandise but also improve the quantity and quality of merchandise on our marketplace business.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [23]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [24]

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[Interpreted] The execution of our strategy continues to yield results. We are encouraged to see triple-digit growth of our live streaming business accelerated from last quarter. Live Video Broadcast contribution to GMV jumped to 39% of total GMV, doubling that from -- of last year and up 7.6 percentage points from the previous quarter. Live Video Broadcast hours per day has also increased to 3,400 hours, as mentioned before, up 10% from the previous quarter. We expect this trend will continue in the quarters ahead and will drive long-term growth of both GMV and revenue.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [25]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [26]

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[Interpreted] Yes, we understand the challenge ahead of us, both internally and externally. Internally, while working to increase the monetization of our rapidly growing Live Video Broadcast business. As they increasingly contribute to a large portion of GMV, we plan to introduce more innovative monetization tools tailored to the Live Video Broadcast model and adjust our cost structure over the next 2 to 3 quarters, accordingly. We are also transitioning ourselves very importantly here. We're also transitioning ourselves from a user traffic operating model to a high-value customer operating model to adapt to the new trend in China Internet space and improve our operating efficiency.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [27]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [28]

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[Interpreted] Yes. Externally, we continue to innovate and stay ahead of other players who are trying to enter this space. While this validates the enormous market opportunity that large streaming e-commerce is creating, it will also create more competition. We believe live streaming is merely a technology or a method, which needs a suitable environment and infrastructure to thrive where we have already established advantages. Not any platform with traffic can establish a KOL-driven live streaming e-commerce model. So we are confident that with our continuous innovation, execution of our line strategy and the result towards our mission will successfully create a new breed company, a next-generation KOL-driven shopping -- social shopping destination, which will generate long-term and sustainable user and business growth.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [29]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [30]

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[Interpreted] On that note, I'll hand the call over to our CFO, Helen, who will walk you through our financial results for the quarter in more details.

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Ting Wu, MOGU Inc. - CFO & Compliance Officer [31]

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Thank you, Shark. Thanks, again, everybody, for joining the call tonight. I will walk you through our second quarter fiscal year 2020 financials, and we believe that year-over-year comparison is the best way to review our performance. So unless otherwise stated, all percentage changes I'm going to give will be on that basis.

So let's review the financials. For the overall platform, we generated a pretty steady GMV growth over the past 12 months, with GMV increasing nearly 10% when we compare to the same period last year, while our Live Video Broadcasting business continued to grow strongly, with the associate GMV for the second quarter of fiscal year 2020 increased 115.2% year-over-year to RMB 1.6 billion and an average app MAU, who clicked on the Live Video Broadcast in the quarter, increasing 76% -- 76.2% year-over-year. And the LVB-associated GMV contributed roughly 40% of total GMV during the quarter. And active buyers of the LVB business in the 12-month period ended September 30, 2019, grew 64%. And now the total revenue came in at RMB 197.9 million, a decrease of 15.3% year-over-year, primarily due to the decrease in marketing service revenue. And the other revenue, that was partially offset by an increase in commission revenue. The commission revenue increased by 3.3% to RMB 101.3 million, mainly driven by the increase in the LVB-associated GMV.

Marketing service revenue decreased by 30.8% to RMB 63.1 million, which is primarily due to our decision to strategically increase our focus on the LVB and allocate more of our resources towards it and as well as the initiatives that in the merchant structure upgrade, that, to some extent, led to the -- to a lower number of the long-term merchant spending on the marketing service in our marketplace. Other revenue decreased by 24.3% to RMB 33.5 million, mainly due to the decrease in the online direct sales and also the technology supporting services that we provided to our -- one of the investee company, which was newly established in March 2018, but later developed its own back-office technology supporting functions.

And next, I will walk you through the major cost and expenses line. First of all, the revenue, cost of revenue decreased by 3.8% to RMB 76 million from RMB 79 million in the same period last year, primarily due to the decrease in the payment handling costs and in the costs associated with decreased online direct sales, but which was also partially offset by an increase in the IT-related expenses due to the increase in the -- or the growth in the LVB business.

Sales and marketing expenses decreased by 7.1% to CNY 180.8 million from CNY 194.7 million in the same period last year. This is due to the -- primarily due to the lower spending on the user acquisition expenses and also the user incentive program, which was partially offset by an increase in the branding and marketing expenses. Research and development expenses decreased by 17.5% to RMB 50.3 million, primarily due to a decrease in the payroll cost, which were in line with the decrease in headcount as a result of our headcount optimization exercise.

General and administrative expenses increased by 6.5% to RMB 39.5 million, roughly RMB 2 million over the period, primarily due to an increase in the payroll costs.

Amortization of intangible assets increased by nearly 40% to RMB 76.8 million from RMB 55.2 million in the same period last year. That's mainly due to the increase in the amortization of intangible assets recorded as a result of a business cooperation agreement that we entered into with Tencent, which became effective from April last year -- sorry, April this year, 2019.

Loss from operations was RMB 223.6 million and net loss attributable to MOGU's ordinary shareholders were RMB 326.6 million compared to a net loss of RMB 453.7 million in the same period of fiscal year 2019.

The adjusted EBITDA was negative RMB 124.6 million compared to negative RMB 113.1 million in the same period last fiscal year. And the adjusted net loss were RMB 196.9 million.

And going forward, we continue to focus on the Live Video Broadcast business. And in the -- while we are exploring more or various revenue streams from our Live Video Broadcast, we do expect that actually the commission revenue will continue to drive the total revenue for the foreseeable future and our Live Video Broadcast business growth to account for a more significant portion of our business.

So with that, we'd like to open the call for the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we do have a question from the line of Ashley Xu from Crédit Suisse.

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Ashley Xu, Crédit Suisse AG, Research Division - Associate [2]

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I have a quick one. Just want to get an idea about our future marketing strategy and the way to -- for new user acquisition, any thinking on that? And would there be any changes in the budgeting for marketing?

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Sean Zhang, MOGU Inc. - Head of IR [3]

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Please pause for a translation.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [4]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [5]

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[Interpreted] I briefly mentioned in our opening remark that we're shifting our strategy or model from user traffic operating model to high-value customer operating model. I have 2 points to share with you here. First of all, look at our Live Video Broadcast business. The ARPU and repeat purchase rate of our Live Video Broadcast user are multiple times of those of non-Live Video Broadcast users. And the model has proven to be more suitable than the traditional merchandise-based models. Right now, the live streaming broadcast contribution to GMV is still not big. It's less than 40%. So our priority is to grow this high ARPU user for our Live Video Broadcast business.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [6]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [7]

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[Interpreted] Okay. Right now, within our own active user base, the live streaming active user, actually contribution is very little, although GMV is almost 40%, but the user contribution is much smaller. So our priority is to convert more of our users to Live Video Broadcast users. In this way, we can improve the ROI. We have already launched live -- short video content channel. This actually will help to convert user from non-Live Video Broadcast to Live Video Broadcast.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [8]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [9]

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[Interpreted] Yes. Externally, we acknowledge that the user acquisition cost has been -- due to competition, has been going up and is a challenge for us. So we are trying to innovate our user growth strategy. So from the very simple acquire-and-convert model to a more deep operating kind of maintenance model, we want to have repeat user and we want to have high ARPU user. So we'll invest more in the user loyalty program.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [10]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [11]

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[Interpreted] So I expect we will have some encouraging results in terms of user acquisition cost and cost structure.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [12]

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Okay.

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Sean Zhang, MOGU Inc. - Head of IR [13]

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Do you have any more questions?

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Operator [14]

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(Operator Instructions) Your next question comes from the line of Charlie Chen from China Renaissance.

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Charlie Chen, China Renaissance Securities (US) Inc., Research Division - Analyst [15]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [16]

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[Interpreted] Okay. Let me briefly translate for the benefit of other audience. So basically, Charlie asked a question, he has seen that the number of Live Video Broadcast hosts and KOL increasing rapidly on our platform. The first question is, how do you handle the management issue? Would that impact kind of efficiency in terms of how to better manage a large number of KOL hosts?

Second is, he has seen many other platforms or other verticals are also adopting a KOL-driven e-commerce model. He wants to understand how MOGU differentiate ourselves from other players.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [17]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [18]

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[Interpreted] Okay. The answer to your first question is we have been building our Live Video Broadcast for more than 3 years. So we already have a very established organization structure and active technology in place. So it's easy for us to leverage on our infrastructure to recruit more hosts and KOLs. So we are seeing very stable cost structure, and we expect our cost structure to remain stable in the future.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [19]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [20]

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[Interpreted] Okay. We are seeing, yes, more other players for other vertical entering the space. Well, this is a typical attribute of China Internet space. When there is a higher efficient business model, everybody will chase it. But in my view, there are 2 strong attribute a platform need to have in order to establish a live streaming e-commerce. Number one, the platform need to have established infrastructure or capacity to empower KOL. MOGU has established capacity in the field. We have been accumulating KOL ever since our day 1. We know how to operate people. Number two, the platform need to have established supply chain capacity. In order to provide a smooth e-commerce live streaming experience, it's more than setting up a software or setting up a tool. You have to provide a full-service e-commerce -- full e-commerce services, otherwise, the service cost will skyrocket. So on both operating people and supply chain, I think we have [established] an advantage.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [21]

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(foreign language)

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Sean Zhang, MOGU Inc. - Head of IR [22]

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[Interpreted] And for the KOL, for the people, for the live streaming hosts, MOGU provide a very comprehensive solution, include more than live streaming technology, but also software, customer service, e-commerce solution, payment and, of course, supply chain. So these are -- this is very -- I think in the sector, not many other players, if any, have all this capacity in-house. So this is where MOGU will stand out.

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Qi Chen, MOGU Inc. - CO-Founder, Chairman of the Board of Directors & CEO [23]

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Okay.

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Operator [24]

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(Operator Instructions) There are no further questions at this time. Mr. Vanguestaine, I turn the call back over to you.

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Rene Vanguestaine, Christensen & Associates - Chairman & CEO [25]

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Thank you, Melissa. Thank you, everyone, for joining the call tonight. If you have any questions or comments, please don't hesitate to reach out to anyone here at MOGU. This concludes the call. Have a good night.

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Operator [26]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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