Uxin Limited (UXIN) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Uxin's Third Quarter 2019 Earnings Conference Call. [Operator Instructions] After management prepared remarks there will be a Q&A session. [Operator Instructions] I would now like to turn the call over to Nancy Song, Investor Relations Director of Uxin. Please go ahead.

Thank you, operator. Hello, everyone. Welcome to Uxin's third quarter 2019 earnings conference call. Today D.K. our Founder and CEO and Zhen Zeng, our CFO will discuss our financial results for the third quarter. Following the prepared remarks, D.K. and Zhen will be available to answer your questions. Before we start, I would like to remind you that our statements today will contain forward-looking statements that we make under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. These statements are based on the management's current knowledge and assumptions about future events that involve risks and uncertainties, which could cause actual results to differ materially from our expectations. Uxin does not undertake any obligations to update any forward-looking statement, except as required under applicable law. For more information about the potential risks and uncertainties, please refer to the Company's filings with the SEC. With that, I will now turn the call over to our CEO. D.K, please.

Thank you, Nancy. Hello everyone, thank you for joining our third quarter 2019 earnings conference call. We are pleased to report a solid set of results for this quarter. Our total revenue increased by 33% year-over-year to RMB461 million, exceeding the high end of our previous year guidance. In particular 2Q revenue recorded another robust year-over-year growth of 247%. And even more encouragingly our adjusted net loss narrowed notable by 40% year-over-year and 19% quarter-over-quarter to RMB268 million, demonstrating the results from our strong commitment to control costs, enhance operating efficiency and improve margin profile. Looking at our 2C business in further detail, we completed over 23,500 online used car transactions during the quarter, reflecting strong year-over-year growth of 107%. As some cities and regions have adopted the new emission standards China Six starting from July and don't allow car with lower emission standards to register locally, we did experience certain impact from this policy change, which resulted in relatively flat quarter-over-quarter transaction volume. Despite the impact, we are very pleased that our unique value proposition and the strong monetization ability helped to further increase our 2C take rate to 11.6% from 11.2% in the second quarter and 7% a year ago. This translated into per unit revenue of around RMB14,000 for the third quarter, up from about RMB13,000 in the second quarter. Looking ahead, the used car market is typically quite resilient. As more used car inventory meeting the new emission standard becomes available on the market. The sector will gradually digest the impact from policy change. We are also confident that we will be able to deliver strong sequential and year-over-year growth for online transaction volume in the coming year-end peak season. Underpinned by our key customer value, we believe our monetization ability will also get strong along the way. On the franchise model front, we continued to penetrate into lower tier city by expanding the franchisee network to over 1,200 stores. Our franchisee contributed over 35% of total 2C transaction volume for this quarter. Moving on to our 2B business. We recorded a transaction volume of over 30,000 used car from our B2B auction platform. Although the volume declined year-over-year as a result of the continued shift of our steady focus towards our 2C business, we slightly increased our 2B take rate to 4.7% in this quarter from 4.5% in the prior-year period. We all know as one of the most efficient channels for dealer to source their inventory our B2B auction platform will continue to serve as part of our important product and service offering to our dealer customers. Before turning to provide a deeper overview of our third quarter financial details, I'd also like to highlight the key area we have been and will continue to focus on in order to achieve sustainable growth over the long term. First, we are fully concentrated on executing our strategy of focusing on online used car transaction to drive our already leading position as an online used car dealer. We are focused to maximize our key value proposition for customer with our national-wide selection of used car, better price, a one-stop online purchasing experience and a high-quality professional sales consulting the services. We believe this value differentiates us in the market and will enable us to stay ahead of the competition, which in turn will further enhance our ability to monetize online used car transactions. Second, we are committed to continuing to enhance operating efficiency. We have been and will continue to streamline our business operations across the board. To highlight a few of our ongoing initiatives in these areas. In term of inspection, we continued to improve the inspection to sales conversion, which is to sell more used car while keeping the number of car inspection stable or even reduced to some extent. We have been continuously optimizing the inventory mix inspected and listed on our platform by selecting the inventory which meets our customers' preference and has desirable cost performance. For example, we focus more on inspect the car, which meet our target price range and cater to our customers' demographic. We also prioritize the inspection on those which meets a certain price to performance criteria or freeze [ph] the inspection on those which we already have quite enough SKU available for the moment. This makes our real-time inventory essentially getting more exposure and become more marketable, which in turn saves our inspection results and effectively increase productivity. In term of fulfillment, we are able to continuously enhance logistic planning as our transaction volume in growing on much larger scale than previously. With more used car sold and delivered through our network, we have not only gained a stronger bargaining power to get better terms when negotiating with a car shipping company but also become better positioned to optimize the road plan to make sure each delivered trucks can be loaded as full as possible for car transportation. This has effectively lowered our per unit to deliver cost. In terms of traffic acquisition, we continued to optimize our traffic acquisition channel mix by allocating more resource to this generating high quality and more cost-effective sales leads. With our enhanced sales productivity and expanded sales forces team in both our direct and franchisee model, we are confident that we will gradually increase the leads to sales conversion going forward as we drive higher, low transaction volume results having to invest more in traffic acquisition than our current level. All those efforts in cost control and efficiency measures contributed to the improved gross margin and narrow loss in the third quarter. With respect to the near term as we continue to execute on this top priorities, we are confident that we will be able to drive top line growth, improve margin and narrow loss as this year concluded. And with the respect to the long term, we are committed to building the best destination for customer to buying used car online in China. We believe the growing traction from our target customers, coupled with our effort to effectively manage our business will translate into our long-term sustainable growth and profitability in the coming years, which in turn will create long-term value to our shareholders. With that, I would like to turn the call over to our CFO to go over the financial. Zhen please.

Okay. Thanks D.K. Hello, everyone. Thanks for joining us today. As D.K. highlighted, we are very pleased to report a solid third quarter during which our gross margins further improved and operating and net losses significantly narrowed. In addition to the cost control and the efficiency efforts D.K. mentioned, we have also streamlined our headquarter related operations, such as the administrative management and the R&D processes by optimizing internal online business management systems. Moving forward prudent cost control and operating efficiency will be an ongoing focus area for us. We are confident that coupled with our superior monetization ability will help to further narrow our losses towards the end of this year. At the same time, we are confident that our business is well supported by our current cash position. First divesting the loan facilitation related business will significantly lower our cash requirements. Second, we believe our losses will continue to narrow as a result of our ongoing efforts in cost control and enhancing operating efficiency. Third, pursuant to the definitive agreements we entered into with Golden Pacer, the working capital associated with the divested loan facilitation business that we advanced to certain financing partners on behalf of Golden Pacer during the third quarter will be returned back to us in due course when the transaction is closed. Fourth, we expect to receive an aggregate cash consideration of $100 million after the closing of the transaction. All of this will contribute to our cash position and coupled with our continuous effort to enhance our monetization ability and operating efficiency, we believe we can build a more sustainable and profitable business over the long run. Now, let me work you through our financial details for the third quarter. Please note that the financial impact of the proposed divestiture has already been reflected in our third quarter results. And all I discuss relative to continuing operations only. All numbers are in RMB unless otherwise stated. Also, please note that some numbers I refer to are non-GAAP numbers. You can find a reconciliation of these numbers in our earnings release. In the third quarter, total revenues increased by 33% to RMB461 million from RMB346 million in the prior-year period. The increase was primarily due to the increases in the 2C transaction volume GMV, commission rate and the value-added take rate. Drilling down to our business pillars, in terms of our 2C business total 2C revenue was RMB328 million, representing an increase of 247% year-over-year from RMB94 million in the prior-year period. Online used car transaction volume increased by 107% year-over-year to 23,566 units and its corresponding GMV increased by 110% year-over-year to RMB2,828 million. Moving onto more details, commission revenue was RMB176 million, representing an increase of 193% from RMB60 million in the same period last year, primarily due to the increases in the transaction volume, GMV and commission rate benefiting from our stronger value proposition to consumers, improved user experience and higher pricing power. The commission rate increased to 6.2% from 4.5% in the same period last year. Value added service revenue was RMB151 million, representing an increase of 342% from RMB34 million in the same period last year, primarily due to the increases in the transaction volume, GMV and VAS take rate. The VAS take rate increased to 5.4% from 2.5% in the same period last year due to our higher pricing power brought by our optimized and the diversified services. In terms of our 2B business, 2B transaction facilitation revenue was RMB72 million, representing a decrease of 63% year-over-year. Our take rate for 2B transaction facilitation slightly increased to 4.7% from 4.5% in the prior-year period. Cost of revenues increased by 10% year-over-year to RMB207 million. The increase was primarily due to the increases in the salaries and benefits of employees engaged in car inspection, quality control, customer service and after sales service, as well as the increase in the fulfillment cost which was correspondingly driven by the increase in the transaction volume. Gross profit increased by 61% to RMB255 million from RMB158 million in the prior-year period. Gross margin increased to 55% in this quarter compared to 46% in the prior-year period, driven by better economy of scale and optimized cost structure. Total operating expenses was RMB510 million. Non-GAAP operating expenses, excluding the impact of the share-based compensation were RMB511 million. Sales and marketing expenses decreased by 26% year-over-year to RMB330 million. The decline reflects our continuous efforts to enhance operating efficiency. Sales and marketing expenses, excluding the share-based compensation expenses of nil, as a percentage of total revenue decreased to 72% during the quarter from 130% in the prior-year period. G&A expenses decreased by 24% to RMB126 million. The decrease was primarily attributable to the decrease in the share-based compensation expenses. G&A expenses, excluding share-based compensation expenses was RMB126 million, representing 27% of the total revenues in the quarter, relatively flat compared to the prior-year period. R&D expenses increased by 58% to RMB54 million. The increase was primarily due to the increase in the salaries and employee benefits expenses. R&D expenses, excluding the impact of the share-based compensation expenses was RMB55 million, representing 12% of total revenues in the quarter compared to 10% in the prior-year period. Loss from continuing operations was RMB253 million, a decrease from RMB490 million in the prior-year period. Non-GAAP loss from continuing operations, which is through the impact of share-based compensation was RMB254 million, a decrease from RMB418 million in the prior-year period. Non-GAAP loss from continuing operations as a percentage of total revenues was 55%, a significant decrease from 121% in the prior-year period. Net loss from continuing operations was RMB267 million, a decrease from RMB517 million in the prior-year period. The narrowed net loss was primarily due to the better economy of the scale and the greater operating leverage generated from our continuous efforts to streamline business operations and enhance operating efficiency. Non-GAAP net loss from continuing operations, which exclude the impact of our share-based compensation was RMB268 million in the quarter, a decrease from RMB445 million in the prior-year period. Non-GAAP net loss from continuing operations as a percentage of the total revenue was 58%, decreasing significantly from 129% in the prior-year period. Turning to our cash position. As of September 30, 2019, we had cash and cash equivalents of RMB627 million. Moving on to the guidance. Factoring the divestiture of our loan facilitation related to the business to Golden Pacer, we expect the total revenue for the fourth quarter of 2019 to be in a range of RMB540 Million to RMB560 million. As we focus on a cost control and efficiency measures to build a more substantial and profitable business in the long run, we will also provide a guidance on near-term operating profit expectations going forward. We expect the non-GAAP adjusted loss from continuing operations to be in the range of RMB150 million to RMB170 million for the fourth quarter of 2019. This forecast reflects the Company's current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks.

Thank you, Mr. Zheng. Operator, we'd like to open the call for questions now. Thank you.

[Operator Instructions] The first question comes from the line of Eddy Wang from Morgan Stanley. Please ask your question.

Hi, DK, Michael and Nancy. [Foreign Language] I have two questions. The first is about ASP. We have witnessed that the -- that ASP of the 2C business actually has been increased in the past three quarters. So in the third quarter I think the ASP has almost reach around RMB120,000 which is almost the same level as the average ASP of a new car in China. What do you think of the trend of this ASP in next few years, and how do you balance the ASP versus the transaction volume, and what do you think the implied revenue per -- revenue per unit level in the near term and in the long term? The second question is about the competition. Since we have achieved the narrow loss in this quarter and our guidance also implies that a further narrow loss in the next quarter. So I think the -- overall the cross-regional transaction business model have been proven. So that's why I think some of the major competitors have actually also launched this cross-region transaction business. Have you viewed any direct competition from these competitors the same -- the similar business or do you think it's just -- do you have a lot of room for us to gain share even if it's competition from the major competitors? Thank you.

Excuse me, Eddy. [Foreign Language]

Yes, so our platform will actually provide a very full price range for our cars from RMB30,000 up to RMB1 million. So our current ASP is, like you said, is around RMB120,000. So I think it mainly comes from two reasons. The first one is, regarding to the relatively higher car price range, it's more the -- with younger car age. So this -- used cars more cater to the clientele who care more about the services or the after-sales guarantees or wider selection of used cars.

[Foreign Language]

Yes. So if we look at the mature market in the US like CarMax or Carvana, well, CarMax their average selling price is about $22,000; for Carvana, it's about $21,000. But for -- if we look at the overall market in the US, the average selling price is about only $10,000. So this is quite similar to China's market conditions. So for us, we feel very encouraged is that -- we are very encouraged by our current ASP because we can sell like RMB5,000 [ph] used car or a RMB120,000 [ph] used car. But the cost incurred is quite similar regarding the inspection cost or delivery cost. But different car price equals to different per unit revenue whichever, if we look at -- if we target the same take rate.

[Foreign Language]

So in terms of volume and car price, I think it's not the volume of the average. So our current focus is more to maximize our revenue scale and a healthy and sustainable profitability that comes along with this high-processing revenue.

[Foreign Language]

Yes. So our revenue -- per unit revenue increase is actually our evidence of consumers' recognition of our values brought by our online car transactions for our operators. So we won't drive the volume side compromising per unit profitability. With that, we will drive the volume growth as we continue to enhance our online used car transaction services and the more consumers naturally will be attracted to buy cars online from us. So we believe this will help us to reach a sustainable profitability in the longer term.

[Foreign Language]

Yes. We do observe [indiscernible] in the market are copying our online used car transaction model at [indiscernible] level. So this is actually a strong proof, that we did the right thing two years ago to choose such a business model.

[Foreign Language]

So we believe all our used car transactions is definitely the future trend. So we believe OS -- this market is still a Blue Ocean market. So it's large enough to have a second player.

[Foreign Language]

Yes. The compensation in the online used car transaction area is actually multi -- that's dimensional. So it has set a very high bar for Company's ability to organize, operate and manage the business in a highly efficient manner. So -- and the ability to provide high-quality customer services as well to operate a highly efficient and stable supply chain. So as a first-mover in the market, we have accumulated massive know-how and expertise and built a strong competitive advantages here. So we are very confident to win this competition for sure. Thank you.

[Foreign Language]

Thank you. Your next question comes from the line of Ronald Keung from Goldman Sachs. Please ask your questions.

Thank you. Hi DK, Michael and Nancy. I have two questions and then I will translate it to Chinese. Firstly, it's on the industry. As you mentioned, the global [ph] portfolio that has impacted sort of industry growth this year, not only new cars, also used car. Do you see any signs of this bottoming, or do we -- will this impact kind of drag on for a few more quarters before we see any potential uptick? And within the growth in this quarter, can you share just how the lower-tier city growth has been versus high-tier city. So let's see how growth has been trending with these markets, particularly you mentioned about the strong volumes from the franchisees. My second question would be, given that the Golden Pacer restructuring is mostly behind us, can you share just how the current management team DK and rest of the team, how are you spending your latest focus in time into -- with the finance business now, not -- no longer with the Group. What are we focusing on in particularly, in the cost side and then user experience? Just want to hear how the management team is doing in the latest restructured entity? [Foreign Language]

[Foreign Language]

Yes. So we did see the new car market is declining and it's worsening now. So the used car market also took some hit. For the used car market, specifically it's slow -- the growth rate is slowing, mainly because of two reasons; one is like you said, is our new emission standard adopted in a few regions like Cerdon Province or Hebei or [indiscernible]. So for us it affected about 25% of our Q3 volume.

[Foreign Language]

We won't expect the policy will be further adopted by other cities, because back in 2016 the state governments have already issued the regulation to lift the restriction on the car transported into -- across regionally. So --

[Foreign Language]

Yes, we will see the market will be divesting the policy changes and in the next two or three quarters the market will be picking up. So mostly because there will be more used car inventories meeting the new emission standard will be available on the market.

[Foreign Language]

So, the other factor is actually from the new car price decline side. So, from mid -- this Q2, we did see the new automakers has been cutting their new car prices to boost sales. So this will put some short-term pressure on the used car market because it affects the price to performance of the used cars.

[Foreign Language]

So, I think the new car price cuts has already reached to bottom to some percent. So the impact from new car market will be minimizing overtime -- over into next year.

[Foreign Language]

So the transaction volume on our platform from the lower-tier cities in Q3 was basically similar to our Q2 level, about 40% of our total volume and the growth rate between high-tier cities and the lower-tier cities, our platform also pretty similar.

[Foreign Language]

Yes. So the first action we take is, we leverage big data analytics to improve our inventory mix available on our platform. So to target the most physical inventory, we can actually downsize the number of cars impacted. So you can see this year we actually impacted less cars than last year. But the transaction volume is actually quite higher than last year's level. So this will help us to reduce the per unit inspection cost and we can also help consumers to better identify the better price to slow performance cars on our platform as well.

[Foreign Language]

Yes. So the second action we take is, we enhanced the customer satisfaction in terms of the fulfillment, such as the time limit of delivery and the consistency of the car's condition between consumers see the video [Technical Difficulty] put online and the actual car they see when they receive the car. So, the increased satisfaction actually helped us lower our car rate -- current rate impacted with.

[Foreign Language]

So, buying cars online is pretty -- very new way. So our sales consultants needs to be fully prepared to convert the consumers to buy cars online. So we also upgraded our CRM system by leveraging the AI technology, so we can better recommend the cars to our consumers. And we also build out this very highly effective sales consultant, sales assistance system to enhance the professionalism of our sales reps. So, this will also enhance our customer satisfaction and the commission [ph] rates as well.

[Foreign Language]

Yes. So the fourth area is, on the logistics. So we optimize our logistics planning by upgrading the former two-part logistics to three-part logistics. We increased the portion of main route versus the ground route. So, currently, the main route account for about 60% of our total logistic consistence. So it will effectively lower the per unit delivery cost and also increase the -- full order rate as well and also make sure the car can be delivered to the consumer's door step as soon as possible in a timely manner.

[Foreign Language]

You guys did really great. Thanks.

[Operator Instructions] The next question comes from the line of Ashley Xu from Credit Suisse. Please ask a question.

[Foreign Language]

Thanks, management for taking my questions. I have two questions. One is about users of -- acceptance on online car purchase without seeing the cars offline. Is there are any user metrics that could be shared? And second question is on the cash position. How much receivables would we have from Golden Pacer in 4Q, given we have made some deposits on behalf of them. And also, what's our plan on the use of cash together with the $100 million proceeds from the transaction? Thank you.

[Foreign Language]

Yes. So it's true that still there are many consumers go offline to track the car and buy the car -- buying cars online is a totally new experience for consumers. So it will take some time for consumers to shift their shopping habit. But what we do see here is that there are increasing number of our consumers buying cars online from Uxin. So this year, we are looking at 100,000 used -- online car transactions from our platform. So we brought you the same number of consumers actually accepting this way of buying cars online.

[Foreign Language]

Yes. So buying cars online is definitely the future trend. So buying cars online only also have the non-comparable advantages over going offline. So we can provide a much wider selection of used cars from nationwide and also because we don't have our fixed cost of the offline stores, we can offer better prices to consumers. So we are able to also provide a one-stop solution online to consumers, which cannot be provided by the offline stores. So the convenience we can deliver to the consumer also help us.

Zhen?

Okay. Thanks Ashley. I will work to answer your second question. So I'm more likely to give you the overall cash position of our current status. So I think our business is well supported by our current cash position. First of all, divesting the loan facilitation business has significantly lowered our cash requirements. We no longer need to report cash deposits as with this cash would be our financing partner or buyback the default loans. So both will lift the pressure on our working capital. So, secondly, I think without the loan facilitation business enter the [indiscernible] our bottom-line will be a reasonable indicator of our cash flow performance. As we continue to take cost control measures and enhance efficiency, we believe we can keep narrowing the losses and minimizing the cash outflow in their sense. And to address your question, per the definitive agreements, we enter into with the Golden Pacer. This quarter we still advance some working capital associated with the divestiture. After the transaction is closed, the portion of the cash will be returned back to us in due course. Last, we also expect to receive a aggregated cash consideration of $100 million associated with the divestiture after the closing. So, collectively all of this will contribute to our cash position. Again, with our focus on enhancing monetization ability and operating efficiency, we believe all will contribute to our long-term sustainable growth. Thank you, Ashley.

Thank you. We have reached the end of question-and-answer session. I would now like to hand the conference back to Nancy for closing remarks.

Thank you everyone for joining today's call and for your continuous support for Uxin. We look forward to speaking to you again in the near future. Thank you.

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