U.S. Markets closed

Edited Transcript of YJ.OQ earnings conference call or presentation 22-Aug-19 11:30am GMT

Q2 2019 Yunji Inc Earnings Call

Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Yunji Inc earnings conference call or presentation Thursday, August 22, 2019 at 11:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Kaye Liu

Yunji Inc. - Investor Relations Director

* Shanglue Xiao

Yunji Inc. - Founder, Chairman & CEO

* Chen Chen

Yunji Inc. - CFO & Compliance Officer

================================================================================

Conference Call Participants

================================================================================

* Ivy Liu

Crédit Suisse AG, Research Division - Analyst

* Eddy Wang

Morgan Stanley, Research Division - Research Analyst

* Andre Chang

JP Morgan Chase & Co, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and good evening, ladies and gentlemen. Thank you, and welcome to Yunji Second Quarter Earnings Conference Call. (Operator Instructions)

With us today are Mr. Shanglue Xiao, Chairman and Chief Executive Officer; Mr. Chen Chen, Chief Financial Officer; Mr. Hui Ma, Chief Strategy Officer and Chief People Officer; and Ms. Kaye Liu, Investor Relations Director of the company.

I'll now turn the call over to the first speaker today, Ms. Kaye Liu, IRD of Yunji.

--------------------------------------------------------------------------------

Kaye Liu, Yunji Inc. - Investor Relations Director [2]

--------------------------------------------------------------------------------

Hello, everyone. Welcome to our second quarter 2019 earnings call. Before we start, please note that this call will contain forward-looking statements. These forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussion of these risks and uncertainties, please refer to our latest documents filed with U.S. SEC.

Any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update these statements, except as required under applicable laws.

These forward-looking statements are based on management's current expectations, observations that involve known and unknown risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievement of the company to be materially different from the results, performance or expectations implied by these forward-looking statements.

All forward-looking statement are expressly qualified in their entirety by the cautionary statements, risk factors and details of the company's filings with the SEC. Yunji undertakes no duty to revise or update any forward-looking statements for selected events or [circumstances] after the date of this conference call.

With that, I would now turn over to Shanglue Xiao, Chairman and CEO of Yunji.

--------------------------------------------------------------------------------

Shanglue Xiao, Yunji Inc. - Founder, Chairman & CEO [3]

--------------------------------------------------------------------------------

[Interpreted] Hello, everyone, and welcome to Yunji's Second Quarter 2019 Earnings Call. We have made meaningful progress in expanding our closed-loop social e-commerce network while bolstering the social connections among our members, service managers and brand suppliers. At the same time, we have struck a balance between quality and speed of scale expansion, maintained a disciplined approach in the sales and marketing and constructed a solid foundation for sustainable growth.

During the second quarter, our GMV increased by 46.4% year-over-year to RMB 8.2 billion while our total revenue reached RMB 3.07 billion. As of June 30, 2019, cumulative members increased by 19.5% to 10.8 million from 9.0 million as of March 31, 2019. In the 12 months ended June 30, [2019] (corrected by company after the call), our transacting members increased by 125.1% year-over-year further demonstrating the vitality of our platform.

We achieved such healthy user and GMV growth rates mainly through executing our 3 strategies. First, allocate resources prudently and refrain from excessive promotions. Second, refine product curation and enhance supply chain capabilities. And third, leverage social features and improve member benefits as well as service manager income.

First, in pursuit of a healthy and steady growth for the long haul, we refrained from being pulled into a blind battle among e-commerce titans during the June '18 online shopping campaign. Not only were such mid-year industry-wide promotions extremely costly, they would also have flooded our platform with low-quality users who did not meet our criteria and may end up wasting our precious resources in Marketing & Services.

Instead, we focus our resource on higher ROI activities so that we can maximize our member benefits, promote our member engagement, strengthen our supplier-member-user connections, and deepen our brand influence, all in the most cost-[efficient] (corrected by company after the call) manner. For example, Yunji's fourth anniversary promotions on May 16 proved to be highly effective, as evidenced by the significant GMV growth in the beauty aids and fashion segments and the substantial outperformance in innovative brands and private labels. Also, our logistics services performed well under the pressure of shipping volume surge, as our peak daily shipping orders reached 3.87 million. 90% of which were delivered to our end user within 3 days of shipping.

Secondly, consistent with our core strategy, we provide our members with more high-quality and carefully curated products, while further enhancing our supply chain management. We firmly uphold the belief that at our current stage of development, high user engagement and reasonable profit margin are more valuable than sheer scale expansion. Consequently, we optimized our marketing initiatives to refine our product offerings and drive higher user traffic. During the second quarter of 2019, we boosted both user engagement through better product curation and merchant engagement through more effective user traffic.

Our first growth initiative is to improve product curation. We refined our selection of brands and partner suppliers to the level that each product vertical category [now include only 3 to 5 suppliers] (corrected by company after the call) such as Mendale, Suning, and Miniso. As a result, we were able to foster a healthy competition among suppliers while deepening their collaboration with Yunji.

Meanwhile, we provided more operational support to Yunji-exclusive suppliers and private labels and incubated some well-regarded brands in our "Quality 500" and private label categories. Because supplier and product refinement and supply chain upgrades are long-term processes and because it takes time to monitor supplier performance, refine supplier selection, conduct supplier evaluation, and effect supplier replacement, the benefits of our product curation initiatives won't be obvious till the third and fourth quarter this year.

Our second growth initiative is to promote the development of our private labels and Yunji-exclusive products that meet 3 criteria. First, higher quality and more price competitive than traditional well-known brands. [Second] (corrected by company after the call), higher gross profit and more rooms for sharing ROI with our service managers. Third, more suitable for mainstream young users' requirements. We plan to produce those product of high profit margin and high purchase frequency through both internal development and equity investment in outstanding manufacturers and innovative brands. In addition, we will prioritize our resources allocation towards cultivating those high-quality products into million-dollar or even billion-dollar categories.

Thirdly, we leverage our social advantages to guarantee member benefits and increase service manager income. As we improved our value proposition to members, we were able to grow our business volumes while increasing our service managers' income. Although an influx of member-based social e-commerce providers have entered the markets, because we are committed to protecting our members' and service managers' interest, we have been able to maintain a very high service manager retention rate and forge win-win relationships. As we share with our service managers the increasing economic benefits reaped from our supply chain upgrade initiative, we're unleashing their inspiration and motivation while protecting our member's economic wellbeing.

In summary, we will continue executing our growth strategy [to form a] (corrected by company after the call) membership-based e-commerce platform to ensure the steady formation of our mutually beneficial [ecosystem] for members, service managers, and brand suppliers. We shall push forward the implementation of those aforementioned initiatives throughout the remainder of this year. We are convinced that in the long run, our stable and growing revenue should help sustain our financial outperformance and generate superior shareholder returns.

With that, I will now turn the call over to our CFO, Chen Chen, for a closer review of our financials.

--------------------------------------------------------------------------------

Chen Chen, Yunji Inc. - CFO & Compliance Officer [4]

--------------------------------------------------------------------------------

Thank you, Shanglue. Hello, everyone. Before I go through our financial results with you, please note that all numbers stated in the following remarks are in RMB terms unless otherwise noted.

Our GMV increased by 46.4% year-over-year in the second quarter of 2019 to CNY 8.2 billion from CNY 5.6 billion in the same period of 2018. Our revenues in the second quarter of 2019 were CNY 3 billion compared with CNY 3.26 billion in the same period of 2018. Revenues from the net sales of merchandise was CNY 2.73 billion, accounting for 89.1% of our total revenues, and decreasing by 8.7% in the same period of 2018. The year-over-year decrease in our quarterly revenues was due to the increasing popularity of our marketplace business among merchants.

Our marketplace business was launched in the first quarter of 2019, and in the second quarter generated a total of CNY 53 million in revenues, representing 1.9% of our total revenues. During the second quarter, we introduced more sales formats and that developed our marketplace business to meet the evolving demands of our members and users. Consequently, a portion of the revenues, which was previously generated from merchandise sales and recognized on gross basis, shifted to being generated from marketplace model and recognized on a net basis. In the meantime, improvements to our product catalog and the value proposition, creating a more user engagement and help to convert users into members.

Importantly, this led to an increase in revenues from membership program, which partially offsets the decrease in revenue contribution from our merchandise sales. At the same time, the decrease in merchandise sales reduced the cost related to activities such as inventory write-down and the merchandise procurement. As we continued to implement our product mix upgrade strategy through improvements to our sales formats and the marketplace model, in the second quarter of 2019, our gross profit margin increased by 2.5% year-over-year.

During the second quarter, we continued to explore additional product offerings through our marketplace business to better satisfy the evolving needs of our users. As part of the efforts to improve the user shopping experience, we also invested more to strengthen our data and technology capabilities. As a result, the total operating expense increased to [CNY 792.9 million] (corrected by company after the call) in the second quarter of 2019 from CNY 590.3 million in the prior year period. The increase was also due to increased branding and business promotional activities. Some of them are onetime promotion activities, due to our successful IPO on May 3, and also due to improved service and manager compensation, we want to keep good service managers with us and heightened broadband and requirements caused by higher traffic -- user traffic.

So going forward, we are confident that our operating efficiency will resume its previous quarter levels as we continue to optimize our product mix, engage prudent resource planning and to refine our resource allocation process for both our direct sales model and the marketplace model.

For second quarter of 2019, our loss from operation was CNY 111.9 million compared with an income of CNY 50.6 million in the second quarter of 2018. Our net loss was CNY 84.5 million in the second quarter of 2019 compared with a net income of CNY 87.4 million in the second quarter of 2018.

Our adjusted net loss was CNY 39.2 million in the second quarter of 2019 compared with an adjusted net income of CNY 98.7 million in the second quarter of 2018. Basic and the diluted net loss per share attributable to ordinary shareholders were CNY 0.28 in the second quarter of 2019 compared with CNY 0.33 in the same period of 2018.

Now let's also take a look at our cash and the liquidity positions. Following our IPO on May 3, 2019, our underwriters exercised their over-allotment option to purchase an additional [217,447] (corrected by company after the call) ADSs at the initial public offer price of $11 per ADS. The total net proceeds we received from our IPO and the related over-allotment option arrangement was [USD 108.97 million] (corrected by company after the call). As of June 30, 2019, we had a total of RMB 2.2 billion in cash and cash equivalents, restricted cash and short-term investment on our balance sheet.

Heading to the second half of 2019, we plan to take advantage of our solid cash position to convert more users into members, promote member engagement, invest in brand equity improvements and to cultivate strategic partnerships with well regarded brands and to reliable suppliers.

In the long run, we will continue to differentiate our value proposition for users, members and brands by leveraging our strengths in social engagement. The continuous social engagement on our platform builds powerful network effects and platform stickiness, which cannot be replicated quickly or easily.

Moreover, as we continue to grow our member base and enhance social engagement, we shall simultaneously boost our ability to forge strategic partnership with suppliers and the service managers while refining our cost structure. This [strategic] (added by company after the call) cultivation of our value proposition will drive growth and help to increase both GMV and the revenues on the platform.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

--------------------------------------------------------------------------------

Kaye Liu, Yunji Inc. - Investor Relations Director [5]

--------------------------------------------------------------------------------

Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Tina Long from Credit Suisse.

--------------------------------------------------------------------------------

Ivy Liu, Crédit Suisse AG, Research Division - Analyst [2]

--------------------------------------------------------------------------------

(foreign language) Ivy Liu on behalf of Tina. (foreign language) I'll quickly translate myself. So I have 2 questions here. First is on GMV. Will the sequential growth rate be higher than this quarter's 21%, given the seasonality in Q4, and will there be a spike? And second is, can management share some key user metrics, such as order frequency and engagement level in this quarter and going forward?

--------------------------------------------------------------------------------

Chen Chen, Yunji Inc. - CFO & Compliance Officer [3]

--------------------------------------------------------------------------------

Thank you. So I will take this question. So GMV, our competitive GMV increased the rate. Now we are more focused on the healthy member growth, and we are also focused on the user retention and the repurchase rate. So by doing that -- so first of all, we believe our GMV increase rates in both Q3 -- in Q3 will be a little bit higher than in Q2. And then in Q4, it will be further increased. And by doing that, we will enhance -- to achieve that goal, we will enhance our user retention and repurchase rates for members through a strategy of -- as we just mentioned that by increased -- by carefully curating products with price advantage to provide to our members and also by better developing private label products and exclusive products provided by brands and the factories and also by increasing the social interaction between our service managers with our members and users.

So our goal is to increase our member values which we see is a long-term goal. And in this quarter, as you can see, the GMV increased ratio is not higher than Q1. That is because in Q2, we think, as a membership-based social e-commerce company, quality is the first priority for us. So in Q2, we eliminated around 300 brands out of Yunji in Q2 and the [1P] model. So these 300 brands, they can bring us revenue and also bring us profit. But due to the quality and the user satisfaction, it does not meet our standard. And so we eliminated them out. So this -- we believe this will benefit us in the long run because we want to insist -- our target is to increase the value of our members. I think this is to your first question.

So for your second question. So for the order, the number of orders in Q2, we -- totally, we have fulfilled our 55 million orders and the buy -- for the whole -- the first half of -- half year, the total order fulfilled is -- are close to 100 million. And as our member repurchase rate is 93%, so 93% of our members they purchased once and the second times in the first half of the year.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Your next question comes from the line of Eddy Wang from Morgan Stanley.

--------------------------------------------------------------------------------

Eddy Wang, Morgan Stanley, Research Division - Research Analyst [5]

--------------------------------------------------------------------------------

(foreign language) I have 3 questions. The first one here is related to the marketplace business. Actually, in the second quarter, we have witnessed that a proportion of the marketplace out of total GMV had increased significantly. So what should we expect is the proportion of marketplace GMV in the second half of this year?

And my second question is that the take rate of the marketplace business is around that 2.4% in the second quarter. And you mentioned in the earnings release that you are trying to increase the commission rate in the coming quarters, so what kind of the take rate we should expect in the second half. And the third question is about the incentive to the service manager. If we compare with the marketplace model versus the 1P model sales of merchandise, so what -- is there any difference in terms of the incentive to your service manager?

--------------------------------------------------------------------------------

Chen Chen, Yunji Inc. - CFO & Compliance Officer [6]

--------------------------------------------------------------------------------

Okay. Thanks. Eddy, I will take this, take your questions and a -- and so for the first question, as you can see, the marketplace GMV is around 25% of our total GMV in Q2, but it's hard for us to forecast a whole year, the GMV allocation between the [P] model and the 1P model because we will -- which model we choose to cooperate with is based on which model can bring to just both the supplier and our members more values.

So our 1P model is still growing very well in Q2 because the 1P model is suitable for selling the high-margin products, that requires communications. And this model can guarantee the quality of the products, customer service. But -- sometimes, our members still desire daily needs' products and a wide selection of the products, so -- which can be covered by the marketplace model. So we want to balance the wide selection needs from our members and also to balance the high-margin products through the 1P model. So our target is to keep the 1P at a stable increase rate and the -- but the 3P model increased faster than the 1P model.

And also for the 3P model, we will still follow product curation, so that means in each product category under the marketplace model. Unlike the Tmall, JD or Pinduoduo, they will have a lot of the competitions. We will only select 3 to 5 brands in each category, and we will replace the underperformer on a quarterly basis and eliminate them and find the new brands in our marketplace model. So we are committed to selecting and working with the best supplier as possible in the marketplace model. So that's the -- our answer for the question Wang.

So for the second question is for the take rate and our marketplace model. So the current take rate, is [2.4%] (corrected by company after the call). Our plan is to increase the take rate, but the higher take rate is not our first priority because as our CEO just mentioned in his opening remarks, at the current stage, so member value, and we want to create our ecosystem for all the suppliers, all members, service managers. All the parties can get some profit. That is our first priority. So we want to balance the quality of the suppliers and the take rate. But we will gradually increase our take rate step by step.

So for your third question. So benefits allocated to both the members and the service managers and the both the 1P model and 3P model will be similar. Because when we negotiate with our new brands, they want to cooperate with Yunji, we will first discuss their cost and their targeted selling price, sales price, so we can calculate the margin left between the cost and the sales price, then we decide. In the 1P model and 3P model, we want the brands to operate in -- if the brands, they have the more efficient logistics service and the customer service, we will ask the brand to operate in the 3P model. And through the selling price and the cost of sales, we will leave the -- our customer service cost and the logistics cost back to the brands. But the remaining parts still go to Yunji as our operating margin. Then we will allocate to the similar percentage of the price to both the service manager as their referral incentives and also allocate a part of the money to other members as a discount for purchase commission. So in both models, service manager and the members still get a similar percentage of the incentives.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from the line of Andre Chang from JPMorgan.

--------------------------------------------------------------------------------

Andre Chang, JP Morgan Chase & Co, Research Division - Analyst [8]

--------------------------------------------------------------------------------

(foreign language) So I will translate by myself. I have 2 questions for the management. First is about the supply chain restructuring. Management mentioned about the shift from the 1P model to [3P] model. I'd like to know whether most of the transition has been done or there will be more to come.

And also, management talking -- talked about the elimination of some less-good quality products. I'd like to know the process is done as well, or again, there will be some more impact in the second half. And for both issue, will that impact the margins in second half or not?

And my second question is about the private label products. How's the progress and exposure in the second quarter? And what's the outlook in the second half?

--------------------------------------------------------------------------------

Chen Chen, Yunji Inc. - CFO & Compliance Officer [9]

--------------------------------------------------------------------------------

Okay. Thank you, Andre. For your first questions, we started to shift to the 1P model, some brands under the 1P model to 3P model in Q2, and we believe we still need some time to complete the transition. And going forward, we think we will not force brands under this model to 3P model. But we will -- for the new brands, come to us and want to sell products on Yunji, we will judge if they are more suitable under the 1P model or 3P model. So we see it's a continuous improvement process.

But for the margin, because as you can see, the take rate for the 3P model is around [2.4%] (corrected by company after the call) in Q2, and this is a net margin after deducting the cost of products and the fulfillment cost and the customer service cost. So if we look at the operating margin level, we believe, going forward, the 3P model's operating margin will not be lower than the 1P model. So we think the transfer will not impact our -- will not negatively impact our operating level margin.

Going forward, we will put more high-margin products under the 1P model like the -- our own branded products and the products from the emerging brands like the several ODM or OEM manufacturers. If they can create some brands for Yunji, we will take them in the 1P model because they have higher margin, and we can negotiate the production volume with these factories. So we want to -- if the products, we can ensure we can sell them in a short time and can get to the higher margin, we will prefer to put them under the 1P model. But if the products, the brands, they sell the products not exclusively on Yunji, they sell the similar products on both Tmall or JD or Pinduoduo, normally, we'll ask them to operate under the 3P model because we will not guarantee any inventory risk for them. So that's how we will differentiate this 1P model and this 3P model.

So for your [second] (corrected by company after the call) question, the progress of our private label products. So in Q1, our high-margin private label products, the percentage to the total GMV is around 14%. But in Q2, the rate is decreased to 12%, because we will still do some product selection. As I just mentioned, we eliminated around 300 brands out of Yunji in Q2. Part of them are -- was with high margin and within the scope of the emerging brands, although they can bring us the profits. But the feedback from our members is not good, so we still eliminate them out of Yunji. So -- but as our CEO just stated, our focus in next quarters or maybe next year is still to increase the brands we cooperate with under our own brands, the emerging brands, our products. So we believe the percentage of the -- such products will increase gradually quarter-by-quarter.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions at this time. I would like to hand the conference back to today's presenters. Please continue.

--------------------------------------------------------------------------------

Kaye Liu, Yunji Inc. - Investor Relations Director [11]

--------------------------------------------------------------------------------

Thank you for joining our call. We're looking forward to speaking with everyone next quarter. Thanks.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

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