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Secoo Holding Limited (SECO) Q2 2019 Earnings Call Transcript

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Secoo Holding Limited (NASDAQ: SECO)
Q2 2019 Earnings Call
Aug 29, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for Secoo Holding Limited's Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded.

I will now turn the call over to your host, Ms. Jingbo Ma, Board Secretary of the Company. Please go ahead, Jingbo.

Jingbo Ma -- Board Secretary

Hello, everyone, and welcome to the second quarter 2019 earnings conference call of Secoo Holding Limited. The Company's results were issued via newswire services earlier today and have been posted online. You can download the earnings press release and sign up to the Company's distribution list by visiting the IR section of our website at ir.secoo.com. Mr. Richard Li, our Founder, Chairman and Chief Executive Officer; and Mr. Shaojun Chen, our Chief Financial Officer, will start the call with their prepared remarks, followed by a question-and-answer session.

Before we continue, please note that today's discussion will contain forward-looking statement made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the Company's registration statement on Form F-1 and Form 20-F as filed with the US Securities and Exchange Commission.

The Company does not assume any obligation to update any forward-looking statement except as required under applicable law. Please also note that Secoo's earning press release and this conference call include discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Secoo's earning press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to our Chairman and CEO, Mr. Richard Li. Please go ahead.

Richard Rixue Li -- Chairman of the Board and Chief Executive Officer

[Foreign Speech]

Hello everyone, and thank you for joining us today.

[Foreign Speech]

We're pleased to deliver another quarter of robust operational and financial results, highlighted by GMV of approximately RMB3.24 billion, up 95.9% year-over-year while achieving total revenue of RMB1.71 billion, a 40.3% increase from the year ago period. It is encouraging to see the number of our active customers in the second quarter increase by approximately 67.7% year-over-year to 428,000, of which 59.3% are paid membership. Benefiting from our diversified growth strategy, global road map across upscale supply chain and increase in the enhanced brand recognition, our product and service offering are integrated online and offline platform continues its robust expansion.

Along with our strengthened technology capability and customer service quality, effectively boosting our customer shopping experience on Secoo's integrated platform. Our consistent rapid growth of GMV and sustained expansion of active customer base, coupled with strong sales performance during this quarter underscore both the effectiveness and efficiency of our strategies, while solidifying our leading position in the luxury lifestyle industry.

[Foreign Speech]

During the second quarter, June 18 mid-year promotion activities, industry marketing campaigns and Secoo premium membership initiative were the primary drivers of the robust performance. Our pre-eminent big data technology and supply chain system have been effectively supporting the execution of our diversified and multi-facet promotional activities.

During the June 18 shopping festival of this year, our shopping based caused over promotion as well as membership marketing activities have underpinned promising results, especially in the achievement of outstanding performance, and attracting new customers and infusing the free-to-paid conversion rate.

In the second quarter, we established a wide range of cross-over membership cooperation. There's multiple leading digital platform, including JD.com. Tencent Video and iQiyi. We also launched joint membership program with business partners such as KEEP app. We are pleased to see our paid membership delivering excellent results to illustrate the purchasing latency and average spending of Secoo's paid membership customers. 38% and 43.5% higher than that of regular active customers respectively.

In this quarter, we also hosted our first Secoo Home Electronic Appliance Festival in collaboration with premium digital product brands, targeting the Generation Z customers with various promotional activities that yielded encouraging results.

[Foreign Speech]

In the quarter, we drove to extend our platform strength through curating product portfolios and deepening brands relationships. Since the beginning of the second quarter to date, we have established a new direct collaboration with 190 brands, including sought-after footwear brand UGG, luxury fashion brand from Paris-Balmain. In addition, Prada, Miumiu, Rene Caovilla, and Michael Kors have all successfully launched their official stores on the Secoo's platform, bringing superior high end shopping experience to customers on our platform.

In the second quarter, we also added more than 24 direct brand partnerships to our beauty product category, appealing to female shoppers, including Herborist and famous beauty apparatus brand, REFA.

[Foreign Speech]

These are consistent efforts to create more cross over marketing and branding campaigns, they not only empower domestic and international high-end fashion brands with new retail features to expand the customer base in China, but also substantially elevate the Secoo's brand influence. As a major sell influencer, Secoo's unique omni-channel results have been recognized by more and more high-end fashion brands, who are increasingly choosing to launch exclusive sales of Secoo's platform. This has been exemplified by the initial launch of observation limited addition action, which is co-designed by Shang Xia brand under Hermes and contemporary artist, Chen Man.

In addition, DVF's Barbie series co-branded product by Saint James and Picasso art piece as well as Albion handbag collection co-edited by famous digital influencer, Mr. Bags and British designer brand, Sophie Hulme all made debut launch on Secoo's platform. Also most recently, Secoo has partnered with seven luxurious brand Balmain, Roger Vivier, Aspinal of London, Hogan, Versace, ENZO and Circle to create the Chinese Valentine's Day season of love collection. This limited edition product exclusively for Secoo's customers.

[Foreign Speech]

In addition, starting from mid-June, more and more global luxurious products under LVR, Italy's top most luxury retailer offering more than 500 most prestigious designer brands have gradually become available on our platforms great to the reaching the shopping experience of 31 million of Secoo's high end registered customers with a broad selection of fashion from around the globe. In this quarter, Secoo's partnership with El Corte Ingles, the biggest department store in Europe and the numbers we won't like also moved forward. There's a collaboration to launch three childrenswear brands under El Corte Ingles in China. There's exclusive sales on Secoo app. In addition to a collaboration in the children's brand, El Corte Ingles will team up with designers on Secoo platform for potential co-branded collections.

[Foreign Speech]

Recently, Seeco has also attracted the world's top lifestyle designer brand WallpaperSTORE* is the first batch of over a thousand products made available on the Secoo platform, immensely broadening Seeco's original design product offerings Secoo Ming. Secoo Ming is committed to exhibiting novel, premium boutique lifestyle to rural consumers across the globe. In this spirit, we also brought forward efforts in researching and developing Seeco branded original products, which underpin the positive progress in offering the culture and creative product of Secoo platform.

For instance, the jointly designed jewelry by Secoo and Xian Museum was successfully launched. And a collector's addition of gold buoying designed in collaboration with the Shaanxi History Museum are also well received by the customers in the form of brisk sales.

[Foreign Speech]

As Asia's largest high end luxury lifestyle platform, Secoo is dedicated to building up a global supply chain system that brings together high quality products to our high end customers. This May, we signed a collaboration agreement with a well-known Japanese logistic company, Successors Group Co. LTD to carry out cooperation based on second-hand luxurious goods. In the early stage of this cooperation, we are focusing on second-hand watches, bags and jewelry.

[Foreign Speech]

As I mentioned, during Secoo's first Supply Chain Upgrade Conference held in the second quarter. Secoo is upgrading its platform to better empower merchants with the aim to deliver the most, high quality service for our high end customers. By leveraging our advanced big data technology, we're intensifying our platform based services and operational management support to comprehensively improve merchants' operational capacity and customer service quality in order to ultimately ensure a superior customer experience.

Furthermore, as we tend to adapt new cutting edge technologies to upgrade Secoo platform and infrastructure, they will develop more AI-based applications such as a AI photography, AI authentication, intelligent advertisement placement system for a merchant in the future. It is worth mentioning that Secoo and Computing Technology Institute of Chinese Academy of Sciences established the Computing Institute of the Chinese Academy of Sciences-Secoo AI Joint Laboratory in June to develop AI authentication system and intelligent content distribution system utilizing big data and AI technology.

[Foreign Speech]

Moreover, the Secoo continued to sharpen our content strategy, attaching importance to the content operations on the fast emerging shop review social platform such as Douyin. Currently, Secoo's official Douyin account has attracted over 760,000 followers, with accumulated likes of over 6.78 million daily new viewership reaching over 7 million.

According to Caasdata, a third-party data research institution among the Douyin certified e-commerce brand list, Secoo has ranked among the top three of the most comprehensive influential account for consecutive weeks. Furthermore, we upgraded the video content on the Secoo app in order to increase the user time spend and improve free-to-paid conversion rate on Secoo platform. Additionally, we deployed the live streaming function in the app, which enable merchants to showcase and sell our products simultaneously through the live streaming form. This function and format not only escalates the conversion rate from product description page for each product and lower launch cost related to non-standard products, but also increase the efficiency of new product launch.

Recently, we successfully implemented crossover application between Tencent live streaming and WeChat mini program, which equipped KOLs with live streaming function embedded in their WeChat official account. Followers on WeChat can then directly participate in the interaction with KOLs through the live broadcasting and make orders through mini program. Such arrangement simplifies the shopping process and boosts the free-to-paid conversion rate. At the same time, we have developed and launched the mini program on Baidu and Douyin platform, appealing to broader user base besides app users, while bringing various high-end shopping experience to our consumers.

[Foreign Speech]

We continued to deploy our unique new retail model, utilizing our offline retail experience to drive new online sales. For example, the boutique bar brand 24/7 by Secoo has opened a new store in Chongqing. The store promotes sales of liquor, arts and luxury goods immersing customers in atmosphere of fashion, art and leisure lifestyle. Also, Secoo Xiamen pop-up store was officially opened in this quarter. We would love to expand our presence in additional second-tier and third-tier cities with high-end products, while penetrating into offline segments.

[Foreign Speech]

As an important segment of Secoo's diversified growth strategy, our advertising business, Enabling Eco Cloud, continue to grow fast. In the second quarter, Enabling Eco Cloud not only attracted luxurious advertisers such as Rolls-Royce, Mercedes-Benz, Piaget and TOD's, but also expanded cooperation with advertisers across broader industry, includes; travel lifestyle brand, the Royal Caribbean Cruise; sports health brand, Lululemon Athletica; 3C digital brand, Samsung; and maternal and baby brand, Pampers.

Notably, nearly half of our advertisers who engaged in our Enabling Eco Cloud service in this quarter have collaborated with us at least once before, which underscore the high market recognition of advertising on our platform. In May, we released another white paper on high-profile beauty trends at the China Beauty Exhibition, showcasing Secoo's capability to comprehensively enable brands by leveraging its marketing solution, big data technology and supply chain resources.

[Foreign Speech]

Heading into the second half of this year, we will remain dedicated to serving upscale consumers with our boutique platform, providing increasingly broadened selection and offerings of upscale products and services to enhance customer engagement and optimize the shopping experiences. We will continue to fortify the integration with upscale offline consumption scenes, including the deployment of pop-up stores in high-end shopping mall, and opening stores on Secoo platform and extending joint membership system, so as to access to a broader user base as a high-end shopping platform.

[Foreign Speech]

In the meanwhile, we will continue our efforts in expanding crossover partnership with top international brand, launching exclusive products and marketing activities that address the unique demand of consumers on Secoo platform, therefore, further elevating our brand image and offering exclusive supplied products. For instance, we recently deployed this crossover partnership model and organized the trendsetting luxury festival in collaboration with Mazda, well-known automaker brand.

[Foreign Speech]

On the technology front, leveraging our accumulated data assets and in alliance with renowned institutions such as Chinese Academy of Sciences, Tencent and ByteDance, we are developing smart recommendation technology for online shopping and AI-based authentication technology. This technology will better support our customer retention rate, conversion rate and traffic growth so as to deliver better performance.

[Foreign Speech]

We're firmly committed to our business model and growth strategy, which are well aligned with our value proposition, providing a richer and more diversified product portfolio, deepening the brand relationship across the globe and domestically, expanding worldwide supply chain system and improving the technology capacity. We have solid conviction in both Secoo's future prospect and our growth momentum as we are confident that Chinese consumers' desire and capability to pursue upmarket goods and services that reflect on the consumers' upward mobility. Thank you.

[Foreign Speech]

With that, I will now turn the call over to our CFO Mr. Shaojun Chen, who will discuss our key operating metrics and financial results.

Shaojun Chen -- Chief Financial Officer

Thank you, Richard, and hello, everyone.

[Foreign Speech]

During the quarter, we achieved the robust total revenue of RMB1,712.1 million, up 40.3% year-over-year, exceeding the high end of our guidance range. Driven by the increasing contribution from our marketplace business and the expansion of our platform as illustrated by strong GMV and revenue growth, we reported impressive 44.7% year-over-year increase in gross profit with gross margin of 18.9%, up 60 basis points compared with 18.3% in the same period of last year.

Moreover, we carry forward our positive momentum on the bottom line, delivering a net profit of RMB40.1 million for the quarter. We are dedicated to serving both our growing merchants and customers with superior experience and elevated efficiency, looking forward to further strengthening the fundamentals to seize the opportunities ahead.

[Foreign Speech]

Now I'd like to walk you through our detailed financial results in the second quarter of 2019.

[Foreign Speech]

GMV increased by 95.9% to RMB3.24 billion for the second quarter of 2019 from RMB1.65 billion for the second quarter of 2018.

[Foreign Speech]

Total number of orders increased by 109.4% to 955,000 for the second quarter of 2019 from 456,000 for the second quarter of 2018.

[Foreign Speech]

Total revenues for the second quarter of 2019 increased by 40.3% to approximately RMB1.71 billion from RMB1.22 billion in the second quarter of 2018, primarily attributable to the continuous expansion of our operation, [Indecipherable] offering of merchandise and services combined with our creative and effective marketing activities driving the rapid growth in our total active customers and total number of orders served during the period.

[Foreign Speech]

Cost of revenues increased by 39.3%, to RMB1,388 million for the second quarter of 2019 from RMB996 million for the second quarter of 2018, which was in line with the increase of total net revenues.

[Foreign Speech]

Gross profit increased by 44.7% to RMB324 million for the second quarter of 2019 from RMB224 million for the second quarter of 2018. Gross margin was 18.9% for the second quarter of 2019, increased by 60 basis point from 18.3% for the second quarter of 2018.

[Foreign Speech]

Operating expense increased by 63.8% to RMB274 million for the second quarter of 2019 from RMB167 million for the second quarter of 2018. Now I'd like to walk you through the Company's expense items in detail.

[Foreign Speech]

Our fulfillment expense increased by 49.8% to RMB45.2 million for the second quarter of 2019 from RMB30.2 million for the second quarter of 2018. The increase was primarily attributable to the increase of sales volume, including the third-party payment commission as well as the increased staff compensation and benefits during the period.

[Foreign Speech]

Our marketing expense increased by 70.2% to RMB152 million for the second quarter of 2019 from RMB89 million for the second quarter of 2018. The increase was primarily due to the increase in marketing promotions both online and offline, including the June 18 promotion activities as well as the increase in staff compensation and benefits expense.

[Foreign Speech]

Technology and content development expense increased by 23.7% to RMB25.1 million for the second quarter of 2019 from RMB20.3 million for the second quarter of 2018. The increase was primarily due to the continuous investment in our technology department with an increase in staff compensation and the benefits expense.

[Foreign Speech]

Our general and administrative expense increased by 87.6% to RMB51.9 million for the second quarter of 2019 from RMB27.6 million for the second quarter of 2018. The increase was primarily attributable to the increase in staff compensation and benefits during the period and the rising professional fee and office expense charged during the period.

[Foreign Speech]

Our income from operations was RMB50.2 million for the second quarter of 2019. Operating profit for the quarter was due to the combined impact of revenue growth, rapidly growing the gross margin and the Company's continued investment in branding and marketing, the product category expansion and the staff in the business segment.

[Foreign Speech]

We recorded a net income of RMB40.1 million for the second quarter of 2019, representing an increase of 10.2% compared with RMB36.4 million for the second quarter of 2018.

[Foreign Speech]

Now for our third quarter of 2019 outlook.

[Foreign Speech]

The Company currently expects total net revenue for the third quarter of 2019 to be in the range of RMB1.9 billion and RMB2 billion, which would represent an increase of approximately 20.8% to 27.2% on a year-over-year basis.

[Foreign Speech]

The above guidance is based on current market conditions and reflects the Company's current and preliminary estimate of market and operating conditions and customer demand, which are all subject to change.

This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

Questions and Answers:

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Ken Chong from Jefferies. Please ask your question.

Ken Chong -- Jefferies -- Analyst

[Foreign Speech]

Let me translate myself. So first, congratulation on the solid result. I have two questions. The first question is on the competitive landscape. As we can see now for a lot of platforms like Alibaba and Baidu, they have been looking on online luxury like [Indecipherable] and also on the other hand JD are cooperating with Farfetch. What do we see the impact to us?

And my second question is on the sales and marketing expense. As we can see in the quarter, we have a strong GMV and annual customer growth, but at the same time, the sales and marketing is supposedly higher than what we have expected. So what should the trend be? And how should we see this expand going forward in the subsequent quarters? Thank you.

Richard Rixue Li -- Chairman of the Board and Chief Executive Officer

[Foreign Speech]

According to our CEO, as over 90% of high-end shopping will take place offline. We adhere to our differentiation strategy of online and offline integration and the building of partnership with normal high-end retail brands to drive a rapid growth. On the one hand, we collaborate with high-end online and offline shopping malls and platform to increase the customer engagement through initiatives, including the pop-up store and co-branded membership cards. On the other hand, we have collaborated with numerous brands to develop the crossover products and branding campaigns such as the trendsetting the luxury festival we recently organized in corporation with Mazda to differentiate our supply chain.

We are also leveraging our accumulated data assets in alliance with renowned institutions such as the Chinese Academy of Sciences, Tencent and ByteDance. We are developing the smart recommendation technology for online shopping and AI-based authentication technology. This technology will provide better support also for our business and customer and enhance our competitive differentiation.

Shaojun Chen -- Chief Financial Officer

[Foreign Speech]

According to our CFO, in this quarter, our GMV increased by 95.9% from the year ago quarter to RMB3.2 billion and our revenue increased by 40.3% to RMB1.7 billion, while gross margin reached 18.9%, an increase of 60 basis point year-over-year. Our operating expense in this quarter was RMB273.6 million, showing an increase of 63.8% year-over-year, which is higher than the revenue growth but lower than our GMV growth rate. This increase is driven by the continuous and strategic investment in Secoo's branding, market expansion, the marketing and supply chain in line with the Company's business and operation strategy.

This continuous expansion of our operation and improvement in the operational efficiency, we are confident to enhance the scale effect and profitability of the business. Thank you.

Ken Chong -- Jefferies -- Analyst

Thank you very much.

Operator

[Operator Instructions] As there are no further questions, now I'd like to turn the call back over to the Company for closing remarks.

Jingbo Ma -- Board Secretary

Thank you once again for joining us today. If you have further questions, please feel free to contact Secoo's Investor Relations through the contact information provided on our website or The Piacente Group Investor Relations, whose information is also on our website.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Jingbo Ma -- Board Secretary

Richard Rixue Li -- Chairman of the Board and Chief Executive Officer

Shaojun Chen -- Chief Financial Officer

Ken Chong -- Jefferies -- Analyst

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