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Edited Transcript of YI.OQ earnings conference call or presentation 15-Aug-19 11:30am GMT

Q2 2019 111 Inc Earnings Call

Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of 111 Inc earnings conference call or presentation Thursday, August 15, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Junling Liu

111, Inc. - Co-Founder, Chairman & CEO

* Yang Chen

111, Inc. - CFO

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Conference Call Participants

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* Huang Junjie;UBS

* Xipeng Feng;CICC

* Yun Yin

JP Morgan Chase & Co, Research Division - Research Analyst

* Tip Fleming

Christensen & Associates - MD

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Presentation

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Operator [1]

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Hello, ladies and gentlemen. Thank you for standing by for 111, Inc.'s Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the meeting over to your host for today's call, Mr. Tip Fleming from Christensen. Please proceed, Tip.

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Tip Fleming, Christensen & Associates - MD [2]

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Thank you, operator. Hello, everyone, and thank you for joining us today for 111's Second Quarter 2019 Earnings Conference Call. The company's results were released earlier today and are available on the company's IR website at ir. 111.com.cn as well as via the Newswire services.

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, Chief Financial Officer; Mr. Harvey Wang, Co-COO; Mr. Barry Zhu, Co-COO; and Ms. Monica Mu, Investor Relations; and Mr. Alex Liu, Finance Director. Junling will give an overview of the company's performance and operations followed by Luke who will discuss financials and guidance. They will be available to answer questions during the Q&A session that follows.

I have to 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 related events that involve known and unknown risks, uncertainties and other factors, all of which could cause actual results to differ materially. For more information on these risks, please refer to the company's filings with the SEC. 111 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.

With that, it is now my pleasure to introduce Mr. Junling Liu. Junling, please go ahead.

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [3]

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Thank you, Tip, and thanks, everyone, for joining our second quarter 2019 results discussion. My comments will correspond to the slides which we posted with our press release earlier today under the Investor Relations section of our website. If you have not already done so, I would encourage you to download the slides at ir. 111.com.cn.

Let me begin by sharing our key financial and operating metrics for the second quarter.

Our net revenue was up 109.2% year-over-year and 27.8% quarter-over-quarter to RMB 838.2 million, which exceeded the high end of our guidance for the third consecutive quarter. The overall growth rates hit a record high since our IPO last September, and we have actually been seeing an acceleration in our growth. Gross profit was RMB 42 million, which was an all-time high for us and an increase of 72% year-over-year and 26.5% quarter-over-quarter.

Turning to Slide 6.

Our overall revenue growth was mainly attributable to the robust performance of our B2B segment. Since our IPO, due to the rapid growth in revenues from both existing and newly added pharmacies, our B2B revenue has been expanding at approximately 40% for 3 consecutive quarters. It was up 263.4% year-over-year and 41.4% quarter-over-quarter to RMB 649.9 million this past quarter.

This accelerated revenue growth is underpinned by 3 factors, plus they are rapidly expanding our pharmacy client base. As shown on Slide 6 and 7, during the quarter, we added 20,000 pharmacies into our virtual pharmacy network, generating RMB 76 million of additional income and increasing revenue by 16.5% for the quarter. At the end of June, we were serving more than 190,000 pharmacies, a number consistent with our goal of reaching 230,000 pharmacies by the end of 2019.

Second, we enhanced customer stickiness. During the quarter, we processed 193,000 orders, which was 52,000 more than last quarter and a new high. Furthermore, we noticed that our existing pharmacy customers placed orders more frequently. This contributed an additional RMB 114 million to revenue, representing 24.9% revenue growth compared with Q1.

And third, on Slide 8, we further deepened and widened our cooperation with upstream pharmaceutical companies by strengthening and increasing efficiency and transparency through our advanced proprietary technology. We believe that the 4+7 pilot scheme of the centralized urban pharmaceutical procurement policy will be rolled out across the board, and many pharmaceutical companies will be facing a series of challenges, including lower pricing restrictions on traditional distribution channels and so on. They will have a genuine need to develop new distribution strategies and channels.

To help them succeed in their diversification efforts, we have developed a highly effective suite of services that will help us grow our client base. I will describe this more a little later.

As of June 30, 2019, we've been sourcing directly from 124 domestic and international pharmaceutical companies, which was up 100% year-over-year. Specific examples are our recent strategic partnership with the Tong Ren Tang Technologies, which is listed in Hong Kong under the ticker 1666; and with Harbin Pharmaceutical Group Holding Co. Limited, which is listed in Shanghai under the ticker 600664. The partnership with Harbin Pharmaceutical for exclusive online sales of its OTC products is placed on a new supply chain service model, which delivers effective channel and price management.

Now let's take a look at our B2C business, starting with Slide 9.

In the recent past, we have deliberately decided to move away from the traditional way of B2C by burning marketing dollars to acquire online traffic and grow the business. Instead, we have decided to focus on building a sustainable business. For instance, we started to focus on medical-type users rather than consumer-type users, and we shifted money-losing categories to the marketplace, replacing them with high-margin selections. Further, we're spending more on enhancing our professional medical services to build a better customer experience and have deployed more precision marketing tools. As a result, while revenue decreased by 13.7% to RMB 183 million, gross profit hit an all-time high at RMB 31 million. Gross margin significantly improved to 16.8%, up from 9.5% a year ago and 13.2% last quarter. We're pleased with our progress so far and we will continue to explore growth on a sustainable basis.

I will now take you through our T2B2C strategy that underpins our long-stated aim of building the largest, integrated online and off-line health care platform. As you can see on Slide 11, we leveraged our advanced and proprietary technologies to enable pharmacies, pharmaceutical companies, insurance companies and doctors to better service end users.

First and foremost, on Slide 12, our T2B2C business model enables pharmacies. As mentioned previously, we are aiming to include 230,000 pharmacies into our virtual network by the end of 2019. In addition to selling products to them, we'll help them solve their critical pain points by providing a series of applications and solutions, including cloud doctors, e-prescriptions, software management, CRM and so on. For example, we provide a just-in-time inventory management to reduce their turnover days and improve efficiency. Because there are 100,000 transactions occurring on our network every day on both the business and the consumer side, we collect abundant customer and prescription data so that we can tell our pharmacy customers what are the bestsellers in their geography and provide them with a one-click solution to order those popular product from us.

Second, on Slide 13, to fully leverage this data for the benefit of pharmaceutical companies, we have developed an integrated platform for all our sales by providing Smart Supply Chain services, channel and price management, data services, customer insight, marketing and retail management. For example, the PRS system helps us track prices across the country, which not only helps us form a better price strategy but also can be a data service to pharmaceutical companies.

Third, our T2B2C business model also enables insurance companies.

Now let's turn to Slide 14.

In the second quarter, we have set up an insurance business unit that integrates resources with insurance companies to provide insurance users with online consultation, drug purchase, prescription refill management, insurance payment, health monitoring and patient management services, while we have also strengthened our PBM model. On May 24, we entered into a strategic partnership with MSH, a world leader in the design and the management of international health care solutions.

Last but not least, on Slide 15, we enable doctors to provide better and a more effective care to their patients with a suite of services. For example, we provide multisite practice opportunities to doctors so that they can serve more patients and build a prescription outflow platform to facilitate patient medication purchases. We also offer e-medical record and CRM solutions to enable effective patient management which helps strengthen patient relationships with their doctors.

By bringing together patients, insurance companies, doctors, pharmacies and pharmaceutical companies, we are building a powerful, mutually beneficial and self-reinforcing ecosystem that benefit all parties, and it will help us build a stronger and more profitable business that delivers growing shareholder value. With the continued growth of the business, our core capabilities in Smart Supply Chain, cloud-based solutions, big data and medical expertise are getting stronger all the time. With a strong conviction of our mission and the foundation we have laid, we're well on our way to build a robust online and off-line healthcare platform in China.

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

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Yang Chen, 111, Inc. - CFO [4]

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Thank you, Junling.

Moving to the financials. You can see the details for the second quarter in Section 3 of our presentation on Slides 18 to 20. I would like to highlight a few key business in the financial matrix and I will focus on year-over-year comparisons. All numbers are in RMB unless otherwise stated.

Let's start with our top line performance.

Net revenues increased 109.2% to RMB 838.2 million. Our revenue from our B2B segment were up 253.4% to RMB 649.9 million from RMB 183.9 million. And our revenue from our B2C segments decreased 13.7% to RMB 183 million from RMB 212.1 million.

Turning to Slide 19.

Gross margin in our B2C segment was 16.8%, up from 9.5% in the same quarter last year and 13.2% last quarter. Gross margin in our B2B segment was 1% compared with negative 0.2% in the same quarter last year and 0.9% last quarter. The improvement in both the B2B and the B2C segments were partly due to our improving cost structure and pricing strategy.

Overall gross profit increased by 72% to RMB 42 million, and the gross margin was 5% compared with 6.1% in the same quarter last year and 5.1% last quarter. Decrease was mainly due to the higher proportion of B2B segment revenue, which had a lower gross margin to total revenue.

Please turn to Slide 20 for a detailed breakdown of operating expenses.

Total operating expenses were up 18.5% to RMB 142.9 million. As a percentage of net revenue, total operating expenses were 17.1%, down from 30.1% in the same quarter last year and down by (inaudible) EPS quarter-over-quarter.

Procurement expenses increased 62.1% to RMB 27.4 million, primarily as a result of growth in our B2B business and investment in new fulfillment centers. Procurement expenses as a percentage of net revenue was 3.3%, down from 4.2%. Selling and marketing expenses increased 20% to RMB 75 million, mainly due to an increase in the number of sales staff and expenses associated with the expansion of our B2B business. Sales and marketing expenses as a percentage of net revenue was 8.9%, down from 15.6%.

G&A expenses increased 18.8% to RMB 28.5 million, mainly due to the increase in managerial staff and share-based compensation expenses. G&A expenses as a percentage of net revenue was 3.4%, down from 6%. Technology expenses decreased 29.7% to RMB 12.3 million, primarily due to improvement of our system development efficiency and implementation of automation tools. Technology expenses accounted for 1.5% of net revenue, down from 4.4%.

Net loss attributable to ordinary shareholder was RMB 100.2 million compared with RMB 86.4 million in the same quarter last year. Non-GAAP net loss attributable to ordinary shareholders were RMB 84.7 million, up from RMB 74.8 million in the same quarter last year, though an improvement from RMB 96.3 million last quarter. Non-GAAP net loss attributable to ordinary shareholders accounted for 10.1% of net revenue, down 860 bps from 18.7% in the same period last year and down by 460 bps from 14.7% last quarter.

As of June 30, 2019, we had cash, and cash equivalent, restricted cash and restructured investment totaled RMB 987.2 million compare with RMB 1.1 billion as of December 31, 2018.

For the third quarter of 2019, we expect total net revenues to be between RMB 1 billion and RMB 1.05 billion, representing year-over-year growth of approximately 101% to 111%. This forecast is based on current market conditions and reflects our current and preliminary estimate of market and operating conditions and customer demand, which are all subject to change.

The company's Board of Directors has authorized a share repurchase program under which the company may repurchase its own Class A ordinary shares in the form of American depository shares, ADS, with aggregate value of up to USD 10 million within next 12 months. The company expects to fund the repurchase from its existing cash balance. The share repurchase program may be limited or terminated at any time without prior notice. Under the share repurchase program, the company may repurchase its ADS through open market transactions and the prevailing market price and/or in privately negotiated transactions depending on a number of factors, including, but are not limited to, price, trading volume and general market conditions, along with the company's working capital requirements, general business conditions and other factors, as well as subject to applicable rules of Rule 10b5-1 and all Rule 10B18 under the Securities Exchange Act of 1934 as amended.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from the line of Sherry Yin from JPMorgan.

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Yun Yin, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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Congratulations on the good second quarter result. This is Sherry from JPMorgan. I have 3 questions.

The first question is about our B2B business. We are encouraged to see the strong same-store growth or the ARPU growth of 25% sequentially. Could you share your outlook for the second half? Can we maintain this above 20% Q-on-Q growth for ARPU? Or could you share some guidance about our target ARPU in next 1 to 2 years?

My second question is about the restructuring of our B2C business. So we mentioned in previous quarter that we are now targeting the medical users, especially those high-value chronical disease users. Could you share about your latest actions on targeting this kind? And we also understand a lot of other online health care competitors are also having some initiatives to target chronic disease patients. How do we differentiate our service versus other competitors?

And my third question is about our collaboration with the insurance companies like MSH. So do we expect the PBM type of service to become a key revenue contributor in next few years? That's all of my question.

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [3]

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Thank you, Sherry, for the questions. I think what I would do is I'll answer the questions 1 and 2. I'll get Luke to answer your third question on insurance partnerships.

With regards to the B2B business, we're very pleased to see the momentum. And as a practice, we don't provide precise guidance for too long on the future. But I can share with you here is that the business is growing and the momentum is very strong. And it is our anticipation that for the second half, we will remain a pretty strong growth rate.

With regards to the B2C business, that's a great question. As a matter of fact, I think the management is very pleased with where things are because we underwent a huge effort to restructure that business. We moved away from the traditional ways of doing B2C, i.e., to burn very expensive marketing dollars to chase traffic. As you can understand today, the online traffic is getting more and more expensive. And if you're looking to this business, it has its own characteristics. We don't believe that a traditional way of e-commerce is the right way to do business here because in the traditional way of e-commerce, the consumer is the decision-maker and also the payer, whereas in our situation, the patient is the consumer, but he or she may not be the decision-maker. The doctor is likely to be the decision-maker. And also, he or she may not be the payer because the social insurance or medical insurance will play a role there. So therefore, we moved away from that traditional B2C model. We don't want to grow the business for the sake of growing. And many companies can actually via revenue. So we moved away from some of the categories, and we stopped serving some of the money-losing customers, and instead, we focused on more of the, let's say, lifetime value high customers.

So your question about the model, the chronical patients, we have made a number of initiatives. For instance, we built a doctor's platform where we can create a private traffic management tool for doctors. So over the years, the doctor can accumulate a lot of those patients, and those patients can be operated and managed by us on the social media tools and so on. And this way, we can actually service the doctors and to enable them to better service the end users. And we also built partnerships with insurance companies, which Luke is going to talk a little in a minute. And also, we have built many partnerships with pharmaceutical companies, especially those affected by the 4+7 policy, and that policy is likely expected to be implemented within this year. And obviously, there are still many customers who are looking for the original manufacturer of drugs and so on.

So if you look at the difference between our model and all the rest of the players do, the real differentiation will be that we are not purely a e-commerce play anymore. What we do is we focus on the customer's lifetime value management because, I'll give you an example, if somebody is buying a cardiovascular medicine, and immediately, we'll know this customer is going to have a likelihood of getting into other diseases in future stages of his or her life, and let's say, it can get into diabetes. And even when you get into diabetes, there are many stage you have to go through before you can use insulin. And we can actively intervene the customer's chronical condition management. We have applications out with our technology on patient education on the automatic refill of their drugs and so on. So with a good compliance management, we can better service the consumers.

So if you look at this health care market, we're talking about a multi-trillion yuan market. And we just [got] things to stop here. Obviously, we believe in our model, which is an integrated online and off-line. And not only do we acquire customers and service consumers directly, but also, we're working in partnerships with, let's say, the pharmaceutical companies, the doctors, the pharmacies and so on. So obviously, that will be our key differentiation from other players in the market.

So Luke, you may want to address the third question.

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Yang Chen, 111, Inc. - CFO [4]

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Yes. The partnership with insurance company is part of our T2B2C model because when you think about insurance company, they have thousands, even millions of patient. And it is our belief that the commercial medical insurance will prevail in China if you think about the shortage of government-sponsored medical insurance. So for the commercial network insurance to succeed in this country, claim control on drug usage is extremely important. And we are ideally positioned because we deal with pharmaceutical companies, we deal with pharmacies. In the project, we're currently working with Manulife, Sinochem, MSH. What we -- the service we provide to them is we are their designated drug purchase platform, especially for their chronic disease patient, they need to refill their drugs from time to time, and we help them. And then we also help them to control the drug costs. And we are working to design the new insurance products in terms of the drug adherence, effectiveness as well as health management for those chronic disease patient. Of course, we think that the PBM model will work, but we cannot make it happen ourself. That is why I think we are -- line up pharmacies, line up users, patients, line up insurance companies. We are very positive. Actually, we're in talk with other insurance companies as well because we have the online consultation diagnosis capability. We have the drug prescription, e-prescription and deliver capability. We have health management capability. So I think we can help the patient to get the right drug at affordable price, and we can also help insurance companies to control their costs and help them to manage their chronic disease patient. I think it will be a win-win-win situation for all the parties. But we are not able to make it happen by ourself alone, but we will make it happen all together with all the players in the ecosystem.

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [5]

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Let me add a one point. The partnership with insurance companies is to design new insurance product based on big data. In that way, we can -- we know precisely the customer profile and the behavior. And we have statistical data of our customers and we can design specific product for insurance customers.

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Operator [6]

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The next question comes from the line of [Yazu Li] from [The Hedge Capital].

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Unidentified Analyst, [7]

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Yes. My question is what progress have you been done regarding your business model of improving service through technology?

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [8]

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We have done quite a lot. We fulfilled a T2B2C model, use technology to enable businesses to serve customers. And certainly, at this point of time, we are not in a hurry to monetize our services. But instead, we use all those technology services to have a deeper engagement with the pharmaceutical companies, with insurance companies and have a more stickiness with our pharmacy clients. For example, the pharmaceutical companies use our supply chain service to have a deeper coverage, to have a broader coverage, deeper penetration, use our marketing service to launch new products, through our data service to understand the customer profile and behavior and also use our cloud inventory service to help our pharmacy clients to selection expansion, to serve -- better serve their customers, to speed up their unit return. We also -- I just mentioned that the service provide to insurance companies, the data service, with collaborated design, new insurance policies for our clients. Those are all based on data service, supply chain service and our technology services. I can give you a few example. Eli Lilly use our supply chain service to distribute insulin pains to all the diabetes patients.

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Operator [9]

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The next question comes from the line of Xipeng Feng from CICC.

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Xipeng Feng;CICC, [10]

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This is Xipeng Feng, CICC. Well, on the slide, Page 15, you mentioned that T2B2C model will enable doctors. And I have one little question on this. Well, as I noticed, Ping An Healthcare and Technology has recently launched a new program named Private Doctor, which focuses on providing private doctors for the family, (inaudible) many western countries. So I wonder what's our strength or advantages with T2B2C model to enable doctors when compared to Ping An's Private Doctor program?

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [11]

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Yes. We noticed on Ping An launching that service, and good for them. Obviously, we take an approach that is very different from other players in the market. So we have repeatedly stated, our model is not pure B2C model. And nobody in the market has built out a network of -- or the footprint of 190,000 pharmacies across the country. And obviously, we have built out as good a practice and technology in servicing consumers directly. And obviously, our objective is to enable all those pharmacies with our B2C capabilities so that they can better service their consumers right. So obviously, there will be many models out there in the market, and it's early days. We have conviction to our mission and strategy, and we're going to stick to our own policies. Thank you.

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Yang Chen, 111, Inc. - CFO [12]

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Let me also give a specific example. You [wait] for the technology based on our data, based our systems, for example, our CRM system help doctors to refill. The refill -- with our CRM system, the refill rate, [on client] new refill rate reached 50% to 70%. That's a tremendous progress by using our systems.

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Operator [13]

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(Operator Instructions) Next question comes from the line of Junjie Huang from UBS.

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Huang Junjie;UBS, [14]

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This is Junjie Huang from UBS. And first of all, congratulations on the very good results. And I have a question on behalf of Rachel Yang. And could you please briefly talk about the progress of the online sales of the prescription drugs? And how do you see that progress in the future?

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [15]

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Yes. Good question. So I think first of all, let me state that we are one of the very few companies out there in China with a full compliant practices in the space. And secondly, we have seen the State Council issued many, many policies, including delivering drugs through online channel (inaudible) on the most frequently used drugs and so on. So as a company, we are very attracted to be invited to participate in the policymaking by CSDA, especially with regards to the online sales drugs. And it is our anticipation that even most variable policies will be made available to online players like ourselves in the near future. Thank you.

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Operator [16]

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(Operator Instructions) As there are no further questions, I would like to hand the conference back to Mr. Tip.

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Tip Fleming, Christensen & Associates - MD [17]

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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 China, please do let us know. Thank you again for joining us today. This concludes the call.

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [18]

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Thank you.

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Yang Chen, 111, Inc. - CFO [19]

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Thank you.

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Tip Fleming, Christensen & Associates - MD [20]

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Thank you.

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Operator [21]

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Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect now. Thank you.