MOGU Inc. (MOGU) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the MOGU Second Quarter Fiscal Year 2020 Unaudited Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]. Thank you. I would now like to hand the conference over to your speaker today [René Vagenštajn]. Please go ahead.

Thank you, Melisa. 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 three 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, beliefs, 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.

Hello, everyone. And thank you for joining our second quarter earnings call today. China’s Internet space has evolved deeply over the years with verticals that once stood apart from each other, such as social media, e-commerce, entertainment, and lifestyle services, now merging with one another. A constant stream of new breeds of business models are being created every day. This trend has picked up in recent years, something which we are acutely aware of. MOGU was built with a mission to make fashion accessible to everyone. It has been a challenging journey. But like the new breed of companies, we have evolved with times; overcome many challenges in the past nine years while remaining fully committed to our mission. 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. 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 is more suitable than the traditional storefront and merchandise-based marketplace models. Individuals, to be precise, KOLs plays a central role in here with their exceptional ability to understand, influence and serve our users, at the same time significantly improve 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 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 three strategies that will drive the next phase of our growth. I want to share some of these exciting highlights. First, we expanded the 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 talents and through our deep experience from the different backgrounds outside e-commerce, including personal stylists, fitness and yoga instructors, make-up artists, cooking teachers, painting and singing instructors et cetera. We also launched designated content channels for new KOLs in recent version of mobile app. Second, we are investing more in building a catalog of KOL-generated short video content. We are expanding KOL’s ability to capture user attention and interest outside their 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 result this quarter with LVB MAU up 76% year-on-year and acceleration in LVB active buyers in the last 12 months up 64% year-on-year. Thirdly, we strengthened the infrastructure we have built to empower KOLs by rapidly expanding the pool of premium suppliers we work with, both in terms of total number and product categories. 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 hosts’ product selection and enhance user experience for Live Video Broadcast. 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 synergies between the two businesses as they grow, 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. 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 contributed to GMV jumped to 39% of total GMV, doubling that from of last year and up 7.6 percentage points for 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. Yes, we understand the challenge ahead of us both internally and externally. Internally, we are working to increase the monetization of our rapidly growing Live Video Broadcast business as it increasingly contributes 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 two to three quarters accordingly. We’re 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. Externally, we continue to innovate and stay ahead of other players who are trying to enter the space. While this validates the enormous market opportunity that live 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 online strategy and the results 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. On that note, I will hand the call over to our CFO, Helen, who will walk you through our financial results for the quarter in more details. Thank you.

Thank you, Shark. Thanks again everybody for joining the call today. 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. F or the overall platform, we generated pretty steady GMV growth over the past 12 months with GMV increasing nearly 10% when compare to the same period last year, while our Live Video Broadcasting business continued to grow strongly with the associated GMV for the second quarter of fiscal year 2020 increased 115.2% a year-over-year to RMB1.6 billion and an average APP MAUs who clicked on a 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 our -- the total revenue came in at RMB197.9 million, a decrease of 15.3% year-over-year primarily due to the decrease in marketing service revenues and the other revenue that was partially offset by an increase in the commission revenue. The commission revenue increased by 3.3% to RMB101.3 million, mainly driven by the increase in the LVB-associated GMV. Marketing service revenues decreased by 30.8% to RMB63.1 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 in merchant structure upgrade, that to a certain extent led to the -- to a lower number of long-tail merchants spending on marketing service in our marketplace. Other revenue decreased by 24.3% to RMB33.5 million, mainly due to a decrease in the online direct sales and also the technology supporting services the 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 function. And next I will walk you through the major cost and expenses line. First of all, the cost of revenue, cost of revenue decreased by 3.8% to RMB76 million from RMB79 million in the same period last year, primarily due to the decrease in the payment handling costs and the costs associated with decreased online direct sales, which was also partially offset by an increase in 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 RMB180.8 million from RMB194.7 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 RMB50.3 million, primarily due to a decrease in payroll costs 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 RMB39.5 million, roughly RMB2 million over the period, primarily due to an increase in payroll costs. Amortization of intangible assets increased by nearly 40% to RMB76.8 million from RMB55.2 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 the business cooperation agreement that we entered into with Tencent which became effective from April last year -- sorry April this year of 2019. Loss from operations was RMB223.6 million, and net loss attributable to MOGU's ordinary shareholders were RMB326.6 million, compared to a net loss RMB453.7 million in the same period of fiscal year 2019. The adjusted EBITDA was negative RMB124.6 million compared to negative RMB113.1 million in the same period last fiscal year and the adjusted net loss was RMB196.9 million. And going forward, we continue to focus on the Live Video Broadcast business. And while we are exploring more of various revenue streams from our Live Video Broadcast, we do expect that 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 floor for the Q&A.

Thank you. [Operator instructions]. We do have a question from the line of Ashley Xu from Credit Suisse. Your line is open.

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

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 two 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, less than 40%. So, our priority is to grow this high ARPU user for our Live Video Broadcast business. 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 user 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. Yes. Externally, we acknowledged that the user acquisition cost has been -- due to competition has -- going -- has been going up and it’s a challenge for us. So, we are trying to innovate our user growth strategy. So, from 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. So, I expect we will have some encouraging results in terms of user acquisition costs and cost structure. Okay. Do you have any more questions?

[Operator Instructions]. You next question comes from the line of Charlie Chen from China Renaissance. Your line is open.

[Foreign Language].

Okay. Let me briefly translate for the benefit of other audience. So basically, Charlie asked a question. He has seen the number of Live Video Broadcast hosts and KOLs 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 large number of KOL hosts? Second is, we have seen many other platform or other verticals are also adopting KOL-driven e-commerce model. He wants to understand how to MOGU differentiate ourselves from other players?

Okay. The answer to your first question is, we have been building our Live Video Broadcast for more than three years. So we already have very established organizational structure and actually 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. Okay. We are seeing, yes, more other players from other vertical entering the space. While 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 two strong attribute a company to have in order to establish a live streaming e-commerce. Number one, the platform need to have established infrastructure with capacity to empower KOL. MOGU has established capacity in the field. We have been accumulating KOL ever since our day one. We know how to operate people. Number two, the platform needs 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 costs will skyrocket. So, both operating people and supply chain, I think we have established advantage. And for the KOL, for the people who are live streaming hosts, MOGU provides a very comprehensive solution, include more than live streaming technology but also software, hardware, 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 these capacities in-house. So, this is where MOGU will stand out. Okay. Next question please.

[Operator Instructions]. There are no further questions at this time. Mr. [Vagenštajn], I’ll turn the call back over to you.

Thank you, Melisa. 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.

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