Token Cat Limited (TC) Q3 2019 Earnings Report, Transcript and Summary

Good morning and good evening, everyone. Thank you for standing by, and welcome to TuanChe Limited's Third Quarter 2019 Earnings Call. [Operator Instructions] This call is being recorded today, 26th of November 2019. Now I will turn the call over to your speaker host today, Ms. Cynthia Tan, IR Director of the company. Please go ahead, ma'am.

Hello, everyone, and welcome to TuanChe's Third Quarter 2019 Earnings Conference Call. We have released our annual results earlier today, and it is now available on our IR website as well as on Newswire services. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provision of the U.S. Private Security (sic) [ Securities ] Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our future results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included our earning release and our registration statements filed with the SEC. TuanChe does not assume any obligation to update any forward-looking statements, expect as required by law. Today, you'll hear from Mr. Wei Wen, the company's Chief Executive Officer, who will provide an overview of our growth strategies and business developments, who'll be followed by Mr. Zhihai Mao, the company's Chief Financial Officer, who'll provide additional details on the company's financial results and discuss the financial outlook. Following management's prepared remarks, we'll open up the call to questions. With that said, I would now like to turn the call over to our CEO, Mr. Wei Wen. Please go ahead, sir.

Hello, and thank you, everyone, for joining us on our third quarter earnings call today. Since the second half of 2018, new car sales in China have plunged continuously. In September 2019, new car sales fell by 5.2% in comparison to the prior year period, marking the 15th month of declines in the past 16 months following year-over-year decreases of 4.3% in July and 6.9% in August. The contraction in September significantly dampened of with a turnaround in the second half of the year as many experts in the Chinese auto industry had previously expected. Slowing economics growth and the crippling trade war with the United States also added to the automakers' unprecedented slump. These adverse conditions have directly impacted our financial performance in the quarter, and we expect similar challenges to persist throughout the fourth quarter as well. However, despite the revenue contractions in the new term -- in the near term, we are valoring this macro headwind and making headway in the repositioning of our business for a favorable growth prospect in the long term. In fact, in light of the unprecedented industrial downturn, we have started to adjust our growth strategies proactively. During the third quarter, we were primarily focused on: one, shifting towards more prudent expansion strategy for our core auto show business to garner market share; two, accelerating the development of our new business initiatives to rejuvenate growth; and three, establishing strategic partnerships to explore additional monetization opportunities. We are confident that our progress in these areas and our industry-leading position will help us to mitigate short-term setbacks, while guiding us back into a healthy growth trajectory in turn. First, for our core auto show business, we continued to expand our coverage leadership during the third quarter in spite of the adverse market conditions. Although, we had to cancel multiple auto shows in certain cities during the quarter due to the preparation of the National Day, we still successfully organized 212 auto shows across 150 cities compared to 205 auto shows in 122 cities in the prior year period. This year-over-year improvement supports the breadth and volume of auto shows I've announced during the quarter showcases the prudence of our expansion strategy, the pervasiveness of our brand recognition and support of our market leadership. Additionally, we're also focused on the development of our special promotion events, which has become a integral component of our current growth strategy. As challenging market conditions persist throughout the auto industry, Chinese OEMs and their authorized dealers are under increasing pressure to reduce their marketing budgets, while still improving sales. To address the needs of OEMs and their dealers will leverage our in-depth automotive domain expertise and proven capabilities in transaction facilitation to help them to better monetize their customer bases through our special promotion events. As we've customized this event to ensure our optimal consumer experience and the sales conversion rate, the flexibility and the attractive ROI of our events have made us ideal partner for OEMs and for auto dealers. As a result, our special promotion events, geographic coverage, number of events organized, sales transactions facilitated, GMV of new cars sold and the service fees generated, all improved significantly in the quarter. Notably, since we utilized OEMs and their dealer store locations and customer bases for each event, our special promotion events can generate a higher profit margin than our traditional auto shows. Looking for -- looking ahead, we are confident that the rapid expansion of our special promotion events will help to revitalize those and drive margin improvements going forward. Second, we continued to drive growth in our new business initiatives to cultivate additional revenue streams, especially for our online marketing services, following our agreement for the acquisition of Longye International in the previous quarter. We have continuously improved our service offerings. While enhancing both our AI and Big Data analytics capabilities, the integration of Longye's state-of-the-art social CRM cloud systems will significantly enhance our ability to provide accurate and relevant sales leads to our industrial partners. Moreover, we will also be able to leverage our systems analysis to help our industrial partners improve their lead conversion rates and the booster -- and boost their customer base monetization efficiency. Although our online marketing services are still at an earlier stage of development, we are confident that they will become an increasing sought-after service by OEMs and the dealers alike based on their highly attractive value propositions. Lastly, I would like to share an update on our recently announced partnership with Tmall Auto. Tmall Auto is the automotive arm of tmall.com, china's largest e-commerce platform for brands and retailers. As part of this partnership, we plan to integrate Tmall's online resources, e-commerce infrastructure and Big Data analysis capabilities with our pervasive national coverage and the proven track record managing offline automotive operations and the sales events. We also plan to develop innovation -- innovative and the data-driven automotive transaction process by integrating Tmall's massive online traffic stream with our extensive offline operations. Both parties share the same mission of providing Chinese consumers with a superior, smarter, and alternatively, more transparent automotive shopping experience. These types of partnerships with industry leaders, such as Tmall, will enable us to continue bolstering our core suite of services along each line -- each link of the automotive transaction value chain. In summary, we made meaningful progress in the expansion of both auto shows and higher margin special promotion events in the third quarter. In addition, our efforts to enhance service offerings for OEMs and auto dealers are helping us to capture valuable market share. We are confident that these improvements alongside our market-leading position, pervasive coverage network, diversified revenue streams and a strong brand equity will help us weather this adverse market conditions and launch into a new growth cycle going forward. Now I will return -- I will turn this call over to Zhihai, our CFO, for a closer look at our financial performance in the third quarter.

Thank you, Wei. Hello, everyone. Before I start, please be reminded that beginning January 1, 2019, we changed our revenue classifications and decided to report our net revenues under the following segments: first, offline marketing services, auto shows; second, offline marketing services, professional -- special promotion events; and the third, virtual dealership, online marketing services and others. Now before I move on to our third quarter financial results, please also note that all numbers said here are in RMB terms and all percentage comparisons are on year-over-year basis, unless otherwise noted. During the quarter, our total revenue decreased by 12.7% to CNY 135.6 million from CNY 155.3 million in the same period last year, primarily due to the slowdown in offline marketing services revenues, which decreased by 15.6% year-over-year to CNY 129.7 million from CNY 153.6 million in the same period last year. The total gross merchandise volume, or GMV, of new automobile sales transactions facilitated decreased by 0.9% to CNY 10.5 billion from CNY 10.6 billion in the same period last year. Meanwhile, the number of automobile sales transactions facilitated during the quarter decreased by 6.0% to CNY 76,800 from CNY 81,700 in the same period last year. As Mr. Wen mentioned earlier, such decrease was primarily attributable to the slowing macro economy as well as the persisting challenges in the automotive industry. Our strategy to rejuvenate our growth has started to show results in the quarter as offline marketing services revenues generated from our special promotion events reached CNY 6.0 million. The solid performance of special promotion events continues to give us confidence about our business growth prospects. In addition to our offline marketing services business, revenues from our virtual dealership, online marketing services and others increased to CNY 5.9 million during the third quarter compared to CNY 1.7 million in the prior year period. Such growth underscores our success in growing our online initiatives to date. Due to the increased number of auto shows that we organized this quarter had a fixed cost associated with them, our gross profit in the third quarter decreased by 14.5% to CNY 93.2 million from CNY 109.1 million. Our gross margin fell to 68.7% from 78.2% in the same period last year. In the third quarter, selling and marketing expenses decreased by 8.9% to CNY 108.8 million from CNY 119.5 million in the same period last year, primarily due to a decrease in staff compensation expenses as well as a decrease in online advertising and promotional expenses. Selling and marketing expenses for the third quarter included staff compensation expenses of CNY 37.4 million compared to CNY 43.6 million in the same period last year, including share-based compensation expenses of CNY 1.6 million compared to CNY 18.0 million in the same period last year. General and administrative expenses increased to CNY 25.0 million from CNY 23.0 million in the same period last year due to a headcount increase as a result of our recent business expansion. We also incurred a higher allowance for doubtful accounts as well as the professional fees and other ongoing expenses as a public company in the third quarter of 2019. Research and development expenses increased to CNY 12.2 million from CNY 5.5 million in the same period last year as a result of our efforts to innovate and diversify our product and service offerings. Consequently, our loss from continuing operations was CNY 52.8 million in the third quarter compared to CNY 38.9 million in the same period last year. Excluding the effect of share-based compensation expenses, fair value loss of warrant and impairment investment, adjusted net loss attributable to company's shareholders were CNY 37.6 million in the third quarter compared to CNY 8.2 million in the same period last year. Our adjusted basic and diluted loss per share were both RMB 0.13 in the third quarter compared to RMB 0.08 in the same period last year. Adjusted EBITDA was a loss of CNY 37.9 million in the third quarter compared to a loss of CNY 7.6 million in the same period last year. Now turning to our balance sheet. At the end of September 2019, we had a CNY 291.7 million in cash and cash equivalents. Let me also give a brief overview of our first 9 months results. For the first 9 months of 2019, our net revenues increased by 8.8% to CNY 462.0 million from CNY 424.6 million in the prior year period. The increase was primarily driven by the continuous expansion of our offline marketing services as its revenues for the first 9 months of 2019 increased by 5.4% to CNY 445.7 million from CNY 422.8 million in the same period last year. The operating matrix of auto shows for the first 9 months of 2019 have certainly reflected a healthy expansion of our offline marketing services. For the first 9 months, we successfully organized 734 auto shows across the 233 cities, representing a 41.2% increase from 520 auto shows in 148 cities in the same period last year. The number of automobile sales transactions facilitated increased by 9.7% to 251,900 from 229,700 in the same period last year. In addition, the total GMV of new automobiles sales transactions facilitated during the first 9 months rose by 6.3% to CNY 34.0 billion from CNY 32.0 billion in the same period last year. Additionally, revenues from our virtual dealership, online marketing services and others in the first 9 months results of 2019 reached CNY 16.3 million compared to CNY 1.9 million in the same period last year. Finally, gross profit for the first 9 months of 2019 increased by 7.2% year-over-year to CNY 326.1 million from CNY 304.3 million in the same period last year. For the fourth quarter of 2019, we expect our net revenues to be between approximately CNY 180 million and CNY 190 million, representing approximately a year-over-year decrease of 20.5% to 16.1%. While providing this forecast against the current backdrop of the macroeconomic slowdown in China and an unprecedented deceleration of domestic auto industry, we expect these uncertainties to persist in the near term and their continued impact in our financial and operating performance for at least another quarter. However, we remain confident about our future growth prospects. Despite the challenging market conditions, we plan to continue elaboration of in-depth automotive domain expertise, proven transaction facilitation capabilities and highly appealing value propositions for both OEMs and auto dealers. Notably, as we continue to diverse our service offerings and our revenue streams through promising new business initiatives, such as the promotion -- special promotion events, virtual dealerships and online marketing services, our efforts to vitalize revenue growth have started to come to fruition. Meanwhile, we are actively optimizing our cost expense structures to ensure prudent expansion of our auto show network. We believe these efforts and the preparations will position us well for new opportunities as industry recovers in the coming years. As always, please note that this forecast for future financial performances reflect our current and preliminary views on the market operational conditions, which are subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

[Operator Instructions] Your first question comes from the line of Jack Vander Aarde from Maxim Group.

Just a few questions from me. I believe you mentioned certain national celebration activities or something similar to that resulted in some auto show events being canceled in the quarter. Can you talk about how many auto shows you would have expected to organize during the quarter if those factors weren't involved?

Wait -- Jack, this is Cynthia. Please wait for me to translate the questions. [Foreign Language]

[Foreign Language]

[Interpreted] Jack, we have, like, canceled over 10% of our auto shows due to the national celebration event. So that would be approximately 20 to 30 events.

Okay. That's helpful. And then I wanted to follow up on your partnership with Easyhome. I didn't hear you guys talk about this quarter, but it seems like that's a significant opportunity to help drive increased auto show events. Can you provide an update on your partnership with Easyhome? What that contributed to this quarter? And how that's coming along?

Sure. Please wait for the translation first. [Foreign Language]

[Foreign Language]

[Interpreted] Jack, we are continuing cooperating with Easyhome in over 40 cities, as we disclosed last quarter. And due to that, we need to, like, arrange the shows together with Easyhome due to the different resource allocation. So that's still ongoing. And then we do not disclose further details. It will be like similar cities just like last quarter.

Okay. That's helpful. And then turning to the virtual dealership business. I know it's an early stage business model. I think last quarter, you guys discussed, you had 10 locations. Can you talk about how many locations you currently have? Or how many locations you ended third quarter with?

Sure. [Foreign Language]

[Foreign Language]

[Interpreted] We actually are continuing refine our business model of the virtual dealership model. Currently, we are focused on the penetration of the model into counties and towns across China that have -- that are historically underserved. We actually called out our pilot shop in a -- on a county level. So far, we have achieved like encouraging results on our pilot store as our virtual dealership services are very well received by the car buyers and industry partners in these under-penetrated market. Based on the orders, our pilot stores have gathered so far, we are optimistic about our ability to get over 30% of the local market share in these areas. This is only the data from our pilot store -- shop. While we continue to optimize and standardize the operation model, we are confident that our virtual dealership service will help us unlock the tremendous potential in countries and help nationwide. Does that answer your question, Jack?

Yes. Could you -- is there -- are you able to provide how many specific locations you ended the quarter with? Or is that not something you can provide?

[Foreign Language]

[Foreign Language]

[Interpreted] We don't provide our exact location right now. But according to our research, the county levels that we can -- actually penetrated is over 1,000 across China.

Okay. Got it. That's helpful. And then I noticed gross margin for this quarter was the lowest it's been as -- historically, as far as I can tell from my data that I have. Can you talk about what dragged gross margin this quarter? And then where do you see gross margin looking at Q4 and thereafter? Do you expect this level? Or do you expect it to increase back to like 70%, 71%?

Jack. This is Zhihai. Let me answer your question. Definitely, we experienced a minor decline in gross margins compared to the same period last year, mainly due to the average revenue per show decreased due to the current market conditions in the automotive industry. We still incur similar fixed amount -- fixed costs, such as venue fees, poster setup fees. So with -- the decrease in top line, definitely, impacted our gross margins this quarter. We expect similar trends -- a similar level of gross margins for the fourth quarter this year.

Got it. That's helpful. And then my last question is regarding the China auto environment as a whole. Last quarter you talked about an impact, a headwind from auto OEMs providing concessions to prepare for tighter emission standards. Do you expect that to continue to have any sort of headwind on the top line? Or have you passed that obstacle? Is that no longer a factor on revenue growth?

Sure. Please wait for the translation. [Foreign Language]

[Foreign Language]

[Interpreted] Actually, the emission standard shift mainly impacts the market for July and August. And when it enters to the later part of the third quarter, the market becomes more stabilized. But actually, many industry experts primarily expected a turnaround in the new car sales by the second half of 2019; however, the market contraction persisted in the third quarter.

That's helpful. And then how about looking at Q4 then? Do you expect that headwind to have subsided? Or is there still aftermath kind of effects dragging on that as it relates to the new emission standards? Are you past that obstacle? Or will it continue into Q4 a little bit?

Sure. Please wait a second. [Foreign Language]

[Foreign Language]

[Interpreted] We actually expect the headwinds will continue at least for the fourth quarter. Our primary partners, including OEMs and their authorized dealers are operating under increasing pressure to reduce their sales and marketing budgets in such adverse market conditions. Based on our observation, many OEMs are actually running very low on budget as we approach the end of the year. This is why we have proactively shifted toward a more prudent approach and increased our focus on the quality of our expansion. First, we constantly strengthen our ability to facilitate other transactions from OEMs. As a result, the revenue contribution from direct contracts with automakers actually increased to 11.3% of our total revenue in the quarter from 2% in the same period last year. In addition, we also make strides and -- in diversify our product and revenue streams, including special promotion events, [indiscernible], et cetera. Facing an unprecedented industry downturn, we are confident that our unique ability to provide industry customers with a high ROI and attractive value proposition will enable us to grow their top line sales performance, making us their ideal partners going forward. Does that answer your question, Jack?

Yes, yes. That's great. It's very helpful. And that's all my questions from me.

Thank you.

[Operator Instructions] Your next question comes from the line of Laura Liu from Stone Street Group.

I just have one question today. So I'm very interested in the collaboration between the company and the Tmall Auto. Can you just tell us more about the details of that?

Sure. Please wait a little bit. [Foreign Language]

[Foreign Language]

[Interpreted] First of all, our partnership with Tmall Auto has already been in the pipeline for a few years so far. Both companies remain committed to improve the shopping experience throughout the entire transaction cycle for all consumers by leveraging our superior collaboration process. We are really excited about commercial potential of our partnership. This is actually proven by our strong performance during the November 11 shopping festival a few weeks ago. Utilizing both our leading capabilities in offline event organization and Tmall's massive stream of our online traffic, we successfully held auto shows in about 100 cities nationwide during the November 11 festival, attracting 107 other brands and approximately 500,000 consumers. We cannot comment too much on the future development of our partnership at this point so far. However, we are actively exploring new innovative ways to combine our resources. In the near future, our goal is to create a better, smarter and more efficient online to offline auto transaction process for all types -- for all car buyers in China. We will keep everyone up-to-date on our progress in the coming quarters. Does that answer your question, Laura?

Yes. Great. That's very helpful.

Thank you very much.

[Operator Instructions] Thank you. We have no further questions at this time. And I'd now like to hand the conference back to management for closing remarks.

Okay. Thank you, everyone, for joining us on our call. See you next quarter. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]