MOGU Inc. (MOGU) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the MOGU Third Quarter Fiscal Year 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Sean Zhang. IR Director of MOGU Inc. Thank you. Please go ahead sir.

Thank you, Chris. 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. 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 are based upon management’s current expectation and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties or 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. On the call today from MOGU are Mr. Shark Chen Qi, Chairman and CEO; and Ms. Helen Wu, CFO. Mr. Chen will review business operations and company highlights, followed by Ms. Wu, who will discuss financials. Both will be available to take your questions during the Q&A session. Now it is my pleasure to introduce our Chairman and CEO, Mr. Chen, please go ahead.

[Foreign Language] Hello, everyone, and thank you for joining us our December quarter earnings call today. We continue to execute on our live video broadcasting, or LVB, e-commerce strategy and made significant progress during the quarter, which is traditionally China’s peak shopping season. Our LVB business has increasingly become a key business driver and maintained strong growth momentum, with GMV increasing 99.5% year-over-year during the quarter. Its contribution to our overall GMV also jumped to 53% during the quarter, up 14% sequentially and more than double from the same period last year. The rapid growth of the LVB business has been driven primarily by the enhanced content being created and further bolstered by the consolidated supply chain capacity we are actively expanding. LVB broadcast hours per day increased to 3,800 hours in December 2019 from 3,400 hours per day in September. Average LVB MAUs also increased 133% from a year ago, which I believe reflect the direction we are headed as our strategy further take hold and bear more fruit. [Foreign Language] Cultivating and empowering our KOLs and LVB hosts, is a key component of our engaging and comprehensive fashion and lifestyle destination we are building for our users and will create a solid platform to drive long-term sustainable growth. During the quarter, we continued to strengthen our ability to empower KOLs and host. First, we expanded talent pool of LVB host by recruiting nearly 5,000 new hosts during the quarter to increase the diversity of fashion and lifestyle-related content and amplify engagement with a wider demographic of a user. Second, our new-KOL incubation and empowering program i.e., Double Hundred and Migrating Bird plans that were rolled out in July 2019 are already beginning to generate solid results and drive growth momentum. We are seeing performance and growth of our new and mid-tier host improve rapidly across our platform, as a result of the effective execution of this supporting program. Third, we strengthened the infrastructure we have used to empower KOLs by adding 2,000 new supply chain vendors that cater to several product categories and located across different parts of China. We believe the combination of expanding LVB host talent pool and the increase in our supply chain capacity will create enormous synergies that deepen our competitive advantage and generate sustainable growth going forward. [Foreign Language] At the same time, we continued to enrich our live streaming e-commerce business by expanding the breadth and depth of our product categories, price ranges of product we offer and the brand portfolio and the variety of innovative tools to support the KOLs. We continue to grow the catalog of fashion and lifestyle-related short video content that is both created and shared by our LVB host in order to increase the overall engagement with their followers during the off-peak hours when they are not broadcasting. It is critical for improving user conversion rates and driving consumption on our platform. [Foreign Language] We pioneered the development of the live streaming e-commerce model when we began building an interactive platform that connects consumer, KOL, suppliers, long before the live streaming technology was adopted by the wider e-commerce sector. This is captured in our unique P2K2C model. Under this model, K stands for KOLs, who play a central role in bridging the social-commerce gap through their unparalleled ability to understand, influence and aggregate diverse consumer demands. P stands for our platform as a provider of consolidated resource, including our supply chain capacity, live streaming e-commerce infrastructure and KOL-empowerment system. C stands for our customers. We are committed to empowering KOLs by leveraging their ability – the ability of our supply chain partners in order to serve the diverse demand of our users. [Foreign Language] The outbreak of COVID-19 has threatened the health and affected the lives of many families across the globe. Tens of thousands of frontline medical professional in China and around the globe are fighting the virus at the risk of their own lives. In China, a large number of civil servants and volunteers are also working tirelessly to stem the outbreak, and many citizens have voluntarily quarantined themselves at home for an extended period of time as a part of the nationwide prevention efforts. In the fight against coronavirus, the people of China and across the globe are demonstrating strong results and making significant sacrifices. I’m extremely proud of the heroic actions. And I sincerely wish everyone stay healthy and safe. [Foreign Language] The epidemic has also disrupted a wide variety of consumer-related industries. As a company that serves a majority female-oriented consumer base with a deep-rooted supply chain spread across China, we have not been immune to the impact from the outbreak. We expect our near-term performance will be impacted due to the temporary suspension of operation by factories, large wholesale markets and delivery services. In response to a rapidly changing economic environment, we implemented several measures in collaboration with our KOLs and business partners to mitigate the impact of the virus outbreak as well as position ourselves to take advantage of the opportunity that have risen from it. We capitalized on the growing realization of the importance of e-commerce, especially live streaming e-commerce play in today’s economy and expanded pool of brand partners we work with, by adding over 500 new ones to our supply chain. We made a decision to prioritize cooperation with brand partners, whose sales were mostly impacted by the outbreak, by further demonstrating the unique value proposition and differentiated solutions our platform can offer through the live video broadcast discount sales. We are also taking advantage of the opportunity to further optimize the system and processes we use to empower KOLs and suppliers and are benefiting from the enhanced streamlining of our cost structure. [Foreign Language] We believe the outbreak will eventually be contained, and the business will resume quickly. The word crisis, or weiji in Chinese, contains the characters of both danger and opportunity. Trials and tribulations create opportunity. We firmly believe that the outbreak will create an opportunity for us to strengthen the impact of our KOL-centered live video broadcast business has on the growth of the e-commerce sector in China. We remain committed to our mission and creating long-term and sustainable growth for our shareholders. [Foreign Language] With that, I’ll turn the call to Helen to go over the financial details.

Thank you, Shark. Thank you again, everyone, for joining the call tonight. I will walk you through our third quarter fiscal year 2020 financials. We believe year-over-year comparison is the best way to review our performance. So unless otherwise stated, all the percentage changes that I’m going to give you are on that basis. So let’s review the financials. Our overall [Technical Difficulty] continue to generate pretty steady GMV growth over the past quarter, with the GMV increasing 8% when we compare it to the same period last year. Our LVB business, in particular, continued to grow significantly with the associated GMV for the third quarter of fiscal year 2020, increasing by 99.5% year-over-year to RMB 3.4 billion. LVB business continues to grow as a proportion of total GMV, accounting for 53% through the quarter, up 14% sequentially, and is growing strongly as our associated commission revenues, which has increased significantly and accounting for a larger portion of our overall commission revenue. Going forward, it will continue generating strong growth momentum, driven primarily by our strategy and the continued upgrading of our merchant structure on our platform. The average APP MAU, who clicked the live video broadcast in the quarter increased by 132.7% year-over-year. Active buyers of the LVB business in the past 12-month period ending December 31, 2019, grew by 32.4%. Now let’s turn to revenues. Total revenue came in at RMB 269.5 million, a decrease of 26.6% year-over-year. This was primarily due to a 19.6% year-over-year decrease in the commission revenue and 44% – roughly 45% year-over-year decrease in the marketing revenue. The commission revenue decreased to RMB 141.2 million, mainly driven by the decrease in the GMV and also the commission revenue related to our marketplace business. While our revenue in the Live Video Broadcasting business has been – continued to grow strongly, offsetting part of the force in the revenue – the commission revenue in the marketplace business. Marketing service revenue, which is mainly generated from our marketplace business unit decreased by 45% to RMB 72.5 million, which is primarily due to the decrease in the GMV in our marketplace business, as the company focused its resources on developing the LVB business and accelerating the optimization of its merchant structure on the marketplace, which began during the second half of calendar year 2019. Other revenue decreased by 7.3% to RMB 56 million, mainly due to a decrease in the online direct sales, while the revenue from financing solution to our consumers continued to increase. Next, I will walk you through our major cost and expenses. First of all, our cost of revenue was relatively flat in comparison to the same period last year. It did decrease marginally by RMB 2.1 million to RMB 19.3 million from RMB 100.4 million in the same period last year. This was primarily due to a decrease in the payment handling costs and a decrease in the costs associated with lower online direct sales, which was offset – partially offset by an increase in the IT-related expenses associated with the LVB business. Sales and marketing expenses. This expense increased by 2.2% to RMB 209.3 million from 204.7 million in the same period last year. This was primarily due to the consistent spending on the marketing and the user acquisition channels, which was partially offset by a decrease in the payroll cost. Research and development expenses decreased by 42.3% to RMB 32 million from RMB 55 million last year. That was primarily as a result of the headcount optimization. General and administrative expenses decreased by 15% to RMB 40.7 million primarily due to a decrease in payroll costs. Amortization of intangible assets increased by 64% to RMB 103 million from RMB 67 million in the same period last year. That’s mainly due to an increase in the amortization of intangible assets recorded as a result of our business cooperation agreements that MOGU entered into with Tencent, which became effective from April 2019. Loss from operation was RMB 1.6 million – RMB 1.6 billion, and the net loss attributable to MOGU ordinary shareholders was RMB 1,634.5 million compared to a net loss of RMB 42.2 million in the same period of fiscal year 2019. This was primarily attributable to a goodwill impairment incurred as a result of a weaker-than-expected synergy created by the acquisition of Meilishuo in February 2016. The shortfall in the realized synergy was in part due to the repositioning of the company’s strategy towards building a KOL-driven interactive e-commerce model as well as an increasing competitive marketing environment and also the impact from the outbreak of the COVID-19. The adjusted EBITDA was negative RMB 84.1 million compared to a negative RMB 5.3 million in the same period last year and the adjusted net loss was RMB 92.9 million. We continue to closely monitor the evolving situation in response to the outbreak of COVID-19. As Shark mentioned earlier, this challenging market environment may impact our performance in the near term. That said, we remain confident that – in the longer-term growth prospect of our business. We firmly believe that the outbreak will create more opportunities for us to strengthen the social influence of our KOL-centered LVB business has on the growth of the e-commerce sector, where we will be strongly positioned to capitalize that. With that, we will open to Q&A.

Thank you. [Operator Instructions] Your first question comes from Charlie Chen of China Renaissance. Your line is open.

[Foreign Language] Maybe let me first translate the question for listeners’ sake. Okay. The first question is regarding the impact from the COVID-19, which – in which area you see the most impact? Is it on the supply side or the live video broadcast host available hours or the logistics? The second question is, when do you expect your business will recover to normal state? The third question is, do you see a decrease in your pool of live video broadcast host or increase due to people stay for an extended period of time at home?

[Foreign Language] Okay. For the first question, yes, there is an impact to our business. The news came out in late January, and we see the most impact in February. Initially, early February, our live streaming hosts couldn’t come back to their studio. They are required – they were required to quarantine themselves at home. Later on, when our hosts start to come back, we find there is a bottleneck at supply side, mainly due to the extended holiday has basically postponed the resumption of work of factory and large-scale offline market. As of now, in early March, most of our hosts has come back to work. And most of the factory has resumed working now, but the delivery services has become a challenge due to, first of all, some of our customers are afraid of the safety issue as package being delivered from other cities. Also, there’s a limitation on the delivery services, as most of the neighborhood are asking the delivery guy to leave their parcel outside the gate after the main gate. So – but the same situation has also impacted brand and suppliers, and many of the brands and offline supplier have basically realized the spring collection – the sales of spring collection will be heavily impacted. So they move on from producing the spring collection to produce summer and autumn collection now, so we do see a shortage of supply of spring collection at this moment. [Foreign Language] Okay. Regarding recovery, on our platform, we are seeing – the data we’re seeing shows that DAU and also active user engagement has covered pretty well, and actually, we are seeing very good data coming regarding the user engagement. So that’s on the demand side. But the challenge remains on the supply side. Basically, we are still experiencing some bottleneck on the offline suppliers and also brand partners I think in China, the situation is largely – has been largely contained, although there is – and the outbreak abroad is an evolving situation. But in China, the situation has been largely contained, and we expect business will go back to normal pretty quickly. [Foreign Language] Okay. Basically, we’re seeing pretty encouraging development on the demand and also the supply of our live video broadcast host. We are seeing pretty stable number of hosts coming back to work. So basically, our pool of live streaming host has not reduced, but we are not seeing a rapid growth in the pool of live streaming hosts, mainly due to, again, as I said, on the supply side, we are seeing limited extra supply from brands and suppliers.

Okay. Thank you.

Our next question?

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

[Foreign Language] The first question is we’re seeing live video broadcast MAU growth pretty stable. And at the same time, the overall user decreased. So I wonder where the live video broadcast user came from. Secondly, how many you see your – the user from your traditional marketplace has converted to live video broadcast users?

[Foreign Language] Okay. Basically, we have four major user acquisition channels. The first one is, obviously, the major social platforms. The second one is the main app stores. The third one, which now has been impacted, is the OTV, online entertainment, such as OTV as well as the offline marketing channels. And third is – basically is the – our user word-of-mouth referral. Those are the four main channels we will acquire our users for our LVB business. [Foreign Language] Okay. Now the LVB users’ penetration rate to our total users is about only 30%. But the – their metrics are much better than our legacy marketplace users. For example, ARPU is multiple times four, five times of our non-LVB users and also the repeat rate is much higher.

[Foreign Language] Basically, my question is, when you see a challenge or constraint on the supply side, but at the same time, your LVB hosts coming back and they are engaging with their fans, are you – do you expect to see a decrease in kind of user engagement, in longer term, if you continue to have supply side constraint?

[Foreign Language] Okay. When we are saying there’s a constraint on the supply side, we’re not saying there’s no supply, just not abundant supply, so we still have quite a lot of supply to offer to our KOL. We mainly implemented two strategy in the past 1.5 months. Number one, expand our product category, especially cosmetics, because cosmetic product has not been impacted as heavily as apparel, so we are seeing contribution from our cosmetic sale has expanded. Second, we are – we have very successfully expanded our brand portfolio. As you guys know, we are – brands were not our basic core supply in the past. Right now, the epidemic really impacted the traditional apparel brand in China when they have very limited offline sales. So they have a lot of inventory. So actually, it’s opportunity for us to kind of penetrate into the brand live streaming e-commerce sale. So our key strategy this year is, expand our brand portfolio, expand our price ranges and expand our product categories. In the past 1.5 months, we have worked with more than 500 new brand partners. So in the past LVB host, they were reluctant to work with brand due to the higher price range, but now this is the opportunity because of the limited supply from the traditional, basically, factory supplier side. They have to rely on us more in order to work with brand partner to get a sufficient supply for the shows.

[Foreign Language] Thank you.

[Operator Instructions] There are no further questions. I will now return the call to Mr. Sean Zhang for final comments.

Sure. Thank you, Chris, and thank you, everyone, for joining the call today. If you have any further questions or comments, please don’t hesitate to reach out to any one of us here at MOGU. This concludes the call today.

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