Earnings Call Transcript - BQ Q2 2022

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to Boqii’s Fiscal twenty twenty two Second Quarter Earnings Conference Call. Currently, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, we are recording today’s call. If you have any objections, you may disconnect at this time. Now, I will turn the call over to Mandy Luo, Boqii’s IR Manager. Mandy?

Mandy Luo, IR Manager

Thank you, operator, and good morning everyone. Welcome to Boqii’s fiscal twenty twenty two September quarter earnings conference call. Joining us today are Mr. Louis Liang, CEO and Chairman of Boqii; Ms. Lisa Tang, Co-CEO and CFO of Boqii; Mr. Kai Fang, Chief Strategy Officer; and Mr. Financial Director of the company. We released results earlier today. The press release is available on our company’s IR website at ir.boqii.com, as well as from Newswire services. A replay of the call will be available on our site later today. Before we continue, please note that today’s discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of nineteen ninety five. Forward-looking statements will involve inherent risks and uncertainties. As such, the company’s actual results may be materially different from the expectations expressed today. Further information regarding this and other risks and uncertainties are included in the company’s public filings with the SEC. The company does not assume any obligation to update any forward-looking statement except as required under applicable law. Please also note that certain financial measures that we use on the call such as adjusted net loss, adjusted net loss margin, EBITDA, and EBITDA margin are expressed on a non-GAAP basis. Our GAAP results and reconciliations of GAAP to non-GAAP measures can be found in our earnings press release. Please also be reminded that unless otherwise stated, all figures mentioned during the call are in Chinese RMB. With that, let me now turn the call over to our Co-CEO and CFO, Ms. Lisa Tang. Over to you, Lisa.

Lisa Tang, Co-CEO and CFO

Thank you, Mandy, and once again we welcome everyone attending the call today. We celebrated our new milestone at the end of Q2 of the last fiscal year, as we have successfully admitted on an NYSE. It opened a new chapter for us. Expectations for investors on the industry at large, we continue to strengthen Boqii’s position and impact vertically by enhancing our value chain and improving our product and service offering with the goal of creating more values for end users and the shareholders. In this quarter, we delivered solid financial results with top line reporting of worldwide growth of twenty-three point one percent and our gross profit margin has improved from eighteen point six percent to nineteen point seven percent this year. Our fulfillment margin also increased significantly from five point nine percent to nine point two percent. Behind all these daring numbers, they also point at the growing recognition from both ends of the supply chain effectively connecting with vendors. For perspective, we are well positioned to offer high-quality products and services. Our premier quality through our established ecosystem also strengthens our brand name, as well as our influence to attract non-pet owners. We have achieved growth of more than twenty percent in the number of active buyers for five consecutive quarters. This was no exception in Q2 as we saw our growth of three point five percent. Meanwhile, we continue to expand our brand and product selection. At the end of September, we were providing twenty-four thousand SKUs from six hundred and nineteen brands compared with more than seventeen thousand SKUs from five hundred and sixteen brands at the end of June last year. Revenue from our marketing and information services has more than doubled over the past few quarters. In Q2, we also saw an eleven times worldwide increase in this segment of revenue, showcasing the recognition of purchase capability in brand incubation, as well as in effective marketing through new media channels such as TikTok. Currently, revenue from our marketing and information services has already reached five point seven percent of total revenue, and we believe this will continue to contribute to our gross margin and constitute one of the key differences in our ecosystem compared to generic platforms. As China's pet industry is still in its early stage, especially when compared to other mature categories like women's apparel, there are numerous small and mid-sized brands that are leading in terms of million RMB in GMV. Combining the fact that pet owners are just above twenty-five percent of the total population, it is difficult for most pet brands to secure sizable year impact in traffic. Let it be integrated e-commerce platforms, offline stores, or hospitals for online channels, the diluted pet traffic on generic platforms and the high set-up cost of flagship stores limit profit margins. Even if they have made huge investments in the store, once they reach a certain GMV scale, the growth rate is very likely to stay flat. Talking about offline, the in-store traffic is exactly where the brand's launch. Stores are scattered around the country and lack trained management, requiring brands to invest heavily in a sales team to build their brand channels. The sales points are hard enough to engage with, let alone foster brand awareness or education. Hence we believe a one-stop supply chain and marketing solutions is the way to go for small to mid-sized companies. Other aspects of adjustment Boqii is now performing between sales operating and self-value channels will enable our brand owners to attract new pet parents through the use of integrated platforms. While branding customer loyalty through education and content, we aim to avoid the self-operating channel. Riding our extensive brand mix and SKU selection, we have demonstrated our ability to effectively lower user acquisition costs. As of 30 September, our user acquisition cost has come down to a historical low of RMB nine point nine per user, which has broken the record as the lowest customer acquisition cost among all vertical platforms in China. In this flexible arrangement, brand owners can devote more resources to branded DNA, as well as formulation and product development. We see more of our values as a healthy industry to grow while providing localized professional solutions that are cost-effective. Louis will discuss more about our business and the financial highlights.

Louis Liang, CEO and Chairman

Thank you, Lisa. And thanks everyone for joining our call. We would also like to share with you the three major business developments in our pet ecosystem, as well as our financial data during this quarter. First, we have reached a strategic partnership with Evetsoft, an established leader in the Pet Hospital SAAS Market. Together, we will launch an online procurement platform called Doctors Choice, catering to the procurement needs of over three thousand five hundred independent pet hospitals and small hospital chains across the country. Over the last eleven years, Evetsoft has been committed to creating specialized data management solutions to drive the operational efficiency of independent pet hospitals. Currently, it has a market share of twenty-seven percent covering over three hundred five hundred pet hospitals and clinics, providing them with tailored SaaS solutions. In this partnership, Boqii brings our supply chain expertise to the table, supplying those independent pet hospitals with over six hundred SKUs from sixty-five different brands. The new procurement platform covers not only medical and healthcare products but also snacks and food, allowing pet hospitals to diversify their revenue streams. Together, we provide those hospitals with a convenient online procurement system, which offers better choices and broader selections. We believe this collaboration will establish a disruptive approach to address the procurement problems faced by over ten thousand independent pet hospitals nationwide. We also launched our brand new membership program in July. In this program, we provide comprehensive benefits for pet owners, such as point redemption, free product trials, twenty-four-hour partner services, night medical emergencies, and offline social events. By leveraging data, we're proud to say that this membership is loved by our customers. The points redemption ratio was as high as thirty percent. Members' loyalty has directly led to consumption, with seventeen percent of active rated members having shopped with us in the past quarter. In terms of purchase frequency and ARPU, members in the new program shop three point one times and spend two point five times more than non-member users. We are thrilled by the initial success and will further promote our membership programs among spending customers. Last but not least, in October we established a strategic partnership with China's largest hotel chain, Huazhu Group. Together, we aim to provide pet-friendly experiences in over one hundred boat brand hotels in the coming three years. In this partnership, we will provide pet-care related training to hotel staff, upgrade the hotel room facilities to accommodate pets, operate in-hotel daycare centers for pets, and offer specialized activities for pets and their owners. Going forward, Boqii will co-develop more pet tourism products with Huazhu to benefit our customers. Previously, Lisa already briefly shared our view on our revenue and gross profit performance. Following this, we will discuss our expenses and net loss for this quarter. Quarterly gross profit was RMB 55.7 million, an increase of 30.7 percent year-over-year, resulting in a gross margin of 19.7 percent. Fulfillment expenses rose slightly to RMB 29.6 million from RMB 29 million in the same period last year. Fulfillment cost as a percentage of revenue was 10.5 percent compared to 12.7 percent in the same period last year. Post-fulfillment gross margin improved to 9.2 percent from 5.9 percent in the same period last year. Our initial investments in nationwide fulfillment infrastructure have continued to help reduce fulfillment expenses as a percentage of revenue and enhance our operational efficiency. Our total sales and marketing expenses were RMB 44 million, an increase of 40.3 percent from RMB 31.3 million in the same period last year. Sales and marketing expenses as a percentage of total revenue were 15.6 percent, up from 13.7 percent last year. This increase was mainly due to higher personnel costs related to the cessation of COVID-19 government subsidies for medical insurance, housing lending, and social insurance for employees, as well as higher expenses for business expansion and investment in emerging channels. General and administrative expenses were RMB 23.2 million, reflecting a 39 percent increase from RMB 16.7 million in the same period last year. G&A expenses as a percentage of total revenue were 8.2 percent compared to 7.3 percent last year. This rise was primarily due to increased share-based compensation costs and rising professional fees after our transition to a publicly traded company. We concluded this quarter with cash, cash equivalents, and short-term investments totaling RMB 339.7 million compared to RMB 450 million as of June 30, 2021. We typically experience a cash low point in Q2 of each fiscal year due to certain accounts payables related to promotions and inventory preparations for upcoming sales events, which lead to increased prepayments. In summary, Boqii achieved another solid quarter, making steady progress in our quality growth strategy. We remain dedicated to investing in and developing our pet ecosystem, as this will provide significant value for pet parents and our brand partners.

Operator, Operator

And the first question comes from Darren Aftahi with Roth Capital Partners. Please go ahead.

Darren Aftahi, Analyst

Good evening and thanks for taking my questions. Just a couple if I may. Could you speak to your membership business of the one point six million active buyers? How many of those are currently members? And then how you plan to improve that figure going forward?

Kai Fang, Chief Strategy Officer

Hi, Darren. Nice meeting you again and great question. So far, we are at the early stage of our membership program, and we have around thirty thousand active members. The next stage for our membership program, we're focused on: a) further promoting member activation among our spending customers; and b) enriching the benefit system leveraging our platform advantage. Regarding the membership program, I want to note that it is similar to the membership programs of airline companies and hotel chains. It's free to activate, so we are confident that with sufficient promotion, we should be able to optimize our member numbers.

Lisa Tang, Co-CEO and CFO

Darren, you can continue with your question.

Darren Aftahi, Analyst

Great. Thanks. Two more if I may? Could you just speak to the strength in the online marketing segment, what's driving that and then how sustainable that is? And just the impact it’s having on gross margins?

Unidentified Company Representative, Analyst

So, Darren, regarding your first question about the high growth rate of the service revenue. The reasoning behind why brands are working with us and willing to pay us is because the pet market is growing rapidly. However, we find that middle- to small-scale brands lack effective traffic and struggle to find it through various channels. We offer omnichannel support, and in addition to sales transactions, we provide added value through marketing services, brand awareness programs, and more. Consequently, they are eager to collaborate with us. This quarter, we are pleased to announce that service revenue has increased elevenfold, demonstrating sustained growth over the last few quarters. Additionally, due to U.S. GAAP rules, some of our revenue calculated into gross profit was offset by the cost of goods sold. Therefore, the total service revenue actually accounts for around seven percent of total revenue, rather than the five point seven percent shown in our financial statements. I will now ask Lisa to address the second question about GPM.

Lisa Tang, Co-CEO and CFO

Darren, regarding the gross profit margin, it does have some positive effects, but we see more value in other areas of our ecosystem. As brands collaborate with us and trust us to market their products while investing in user engagement, they have granted us additional opportunities, such as being the first to launch their new products and offering differentiated products. We believe this trend will persist, along with factors driving gross profit margin from other parts of the business.

Darren Aftahi, Analyst

Great. Thank you. Lastly, we've heard from other Chinese e-commerce and service providers that COVID still has an impact, and there's been a slowdown in consumer demand. I'm curious about your thoughts on this and whether there’s any impact on your business going forward. Thanks.

Lisa Tang, Co-CEO and CFO

In response to your questions, management has noticed a slowdown in demand among some e-commerce competitors, but we are not significantly impacted by this trend. Our revenue this quarter continues to grow at a strong rate. While we were somewhat affected by COVID, particularly as some cross-border products could not enter China due to transport restrictions, the impact has been mild. The overall industry remains on a strong growth trajectory. Historically, we have not been swayed by economic cycles, and we expect growth to continue, fueled by the demands of both domestic and international brands, with no signs of a slowdown. Additionally, we have seen sporadic COVID cases in certain areas of China, affecting offline businesses, especially pet stores and hospitals. However, we view this time as an opportunity to consolidate resources, which is why we announced our collaboration with Evetsoft, a provider of SaaS solutions for offline hospitals, to assist independent hospitals. Many of these facilities lack a professional supply chain, and we are dedicated to supporting them in order to enhance medical services for our customers.

Darren Aftahi, Analyst

Great. Thank you.

Lisa Tang, Co-CEO and CFO

Thank you, Darren.

Operator, Operator

Our next questions come from Ming Chen with Goldman Sachs. Please go ahead.

Ming Chen, Analyst

Thank you. I was just wondering if you could elaborate more on what's driving your online marketplace revenue?

Lisa Tang, Co-CEO and CFO

Sure.

Kai Fang, Chief Strategy Officer

The first question is quite broad. The COVID situation does not negatively impact the pet industry; in fact, it creates favorable conditions. This is why we are observing an increase in consumption in this sector. The second question pertains to our extensive experience in the industry, spanning over thirteen years, during which we have built a significant user base. We continue to see the number of active buyers grow at a compound annual growth rate of about twenty percent each quarter, which fuels our revenue growth in the marketplace segment. The third question relates to our efforts in customer engagement; we have also been investing in our supply chain for many years. Currently, we collaborate with over six hundred brands. Our deep experience in this industry helps us understand user needs, which fosters trust from brands in promoting their products effectively. This ongoing engagement plays a crucial role in driving sustained growth in our online revenue segment.

Lisa Tang, Co-CEO and CFO

Ming, do you have further questions?

Ming Chen, Analyst

No further questions from me. Thanks.

Lisa Tang, Co-CEO and CFO

Thank you, Ming.

Operator, Operator

The next question comes from an unidentified speaker. Please go ahead. Hello Mohammed, your line is live. You might be muted on your end.

Unidentified Analyst, Analyst

Sorry. Yes. Hello there. First of all, congratulations on your results. Some excellent work there. I have two quick questions. The first is, you plan to reach profitability by the end of the year; should we assume that you will be reaching profitability next quarter? And finally, the cash position you have, around fifty million dollars, is that enough for future investments or do you plan to raise capital? Thank you very much.

Lisa Tang, Co-CEO and CFO

Hello there. First of all, congratulations on your results. Some excellent work there. I have two quick questions. The first is, should we assume that you will be reaching profitability next quarter? And finally, is the cash position you have, around fifty million dollars, enough for future investments or do you plan to raise capital? Thank you very much.

Kai Fang, Chief Strategy Officer

In response to your question, you can see that our gross profit margin is improving. We released earlier numbers, and expenses are shrinking. Thus, we are optimistic about reaching a breakeven point by the end of the first half of the next fiscal year, before September next year.

Louis Liang, CEO and Chairman

To address your question about cash, we are in a strong cash position with over three hundred thirty-nine million RMB in cash, cash equivalents, and short-term investments. This amount is more than sufficient to carry us through the next year and beyond. Therefore, we are in a very strong position in terms of cash. Additionally, we have sufficient bank facilities from our banks and there are no immediate CapEx needs.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

This concludes our question-and-answer session. I'll turn it back over to management for any closing remarks.

Lisa Tang, Co-CEO and CFO

Okay. Thank you, operator, and thank you for participating in today's call. We appreciate your interest and look forward to reporting to you again on our progress in the next quarter. Thank you.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.