Earnings Call Transcript - BQ Q4 2021

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to Boqii’s Fiscal 2021 Fourth Quarter and Full Year Earnings Conference Call. Currently, all participants are in a 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. I will now turn the conference over to Mandy Luo, Boqii’s IR Manager.

Mandy Luo, IR Manager

Thank you, operator, and hello everyone. Welcome to Boqii’s fiscal 2021 fourth quarter and full year earnings conference call. Joining us today are Ms. Lisa Tang, Co-CEO and CFO; Mr. Kai Fang, Chief Strategy Officer; and our Financial Director. We released our results earlier today. The press release is available on the company’s IR website at ir.boqii.com as well as from Newswire services. A replay of the call will be available on our IR website 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 1995. Forward-looking statements 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 obligations 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. Also, please be reminded that unless otherwise stated, all figures mentioned during the conference call are in Chinese renminbi. With that, let me now turn the call over to our Co-CEO and CFO, Lisa Tang. Please go ahead, Lisa.

Lisa Tang, Co-CEO and CFO

Okay. Thank you, Mandy, and thanks everyone for joining the call. Fiscal 2021 was a special new year and we paid more attention to the core demands and the pain points of pet parents, as well as the core values and the strategies of Boqii, and we achieved encouraging results despite the challenging market environment. In brand incubation with the help of accurate traffic and the private domain users, we have strengthened the spot of emerging brands and middle-sized brands, so that pet owners have more choices. We now provide more than 600 SKUs and high brands on our platform. On the supply chain side, we continue to strengthen the layout of warehouses and logistics. We now have five large and three bonded warehouses in China. These warehouses will become distribution hubs to meet the needs of pets from food supplies to medical products, including domestic and global pet products. On the operating side, we have continued to reduce customer acquisition costs and fulfillment expenses, significantly improving customer efficiency and profitability. In the final quarter of fiscal 2021, our Gross Merchandise Value grew 50.7% year-over-year, reaching RMB553.7 million. Our total revenues grew 47.1% year-over-year to RMB230.4 million. On the user engagement front, our active buyers reached 3.8 million in fiscal 2021, up 17.4% from 3.3 million in the fiscal 2020. Notably, our users remain highly engaged and our active buyers spent an average of RMB613.35 million in fiscal 2021, reflecting growth of 33.2% from fiscal 2020. Increasing user spending reflects the unique value proposition of Boqii’s ecosystem. In addition to our strong organic growth, we continued to develop a distinguished and defined customer journey by building out an extensive portfolio of quality content, products, and services. Earlier in April, we announced a strategic partnership with one of China’s top content communities, Kuaishou Technology. The partnership will generate more content in the pet category. We will incubate Mocare and general health initiatives. Together, we can raise awareness of pet care and education for pet parents. This is an exciting time, and we look forward to working with Kuaishou on a variety of initiatives to educate pet parents, optimize our pet content offerings, and further promote our pet ecosystem. Most excitingly, we came even closer to pets and pet parents in May by opening our first flagship offline store in Shanghai. This expands our interests and encourages our customers to stay engaged with our ecosystem—online to offline products and services. This offline shopping experience provides us more opportunities to engage pet parents face-to-face, resolve their concerns, and provide effective solutions. Looking further down the road, we intend to provide pet services and products through our comprehensive physical store network, including directly operated flagship stores and franchised community stores. Now I will turn the call over to Chief Strategy Officer, Kai Fang, to give you more details on our strategy and the financial highlights. Kai, please.

Kai Fang, Chief Strategy Officer

Thank you, Lisa, and thanks everyone for joining the call today. Despite the unprecedented challenges brought by COVID-19 in the past fiscal year, we delivered a remarkably strong quarter with a phenomenal growth trajectory. The solid results underscore the sustainability of our ecosystem and all it has to offer. We expanded our service spectrum and touchpoints with pet parents. We are determined to develop all-around experiences for our customers. Our key move to complete the circle of our ecosystem is through a physical pet care network. On May 1, we opened our first offline flagship store to offer comprehensive services and products, including pet adoption, training, grooming, boarding service, and selling of merchandise. This is one small operational step but one giant strategic leap. We are facing a highly fragmented physical pet service market in China, where over 99% of stores are operated by mom-and-pop shops or small franchises with less than five stores. Leveraging our unparalleled user base and data, solid supply chain capabilities, and our partnerships with leading brands, we are confident in reshaping the traditional brick-and-mortar pet services industry. We aim to build a fully integrated multi-channel approach that disrupts the pet market and provides pet parents with a differentiated solution for all their pets' needs. Now let’s dive into the numbers. As Lisa mentioned earlier, we had a solid fourth quarter. Revenue grew to RMB230.4 million, and the 47.1% year-over-year growth rate was the highest in the past three years. Our quarterly active users also increased by a record high rate of 35.2% year-over-year to RMB1.3 million. Revenue generated from our Boqii Mall was RMB87.4 million, up by 52.5% year-over-year, while revenue generated from third-party platforms grew 39.1% to RMB137.6 million. Through our self-operated platforms, we offer a tailored product assortment and a community shopping setting that further improves customer experience. Our strategy is validated by the increase in the revenue mix from Boqii Mall, which accounted for 37.9% of total revenue, compared to 36.6% in the same period last year. Revenue from online marketing and information services, along with other revenue streams, grew more than tenfold to RMB5.4 million, reflecting the growing recognition in the industry of Boqii’s influence on pet parents and our supply chain expertise. This recognition will help us strengthen our strategic partnerships and diversify our revenue streams. Quarterly gross profit was RMB45.3 million, up by 46.7% year-over-year, resulting in a gross margin of 19.6%. Fulfillment expenses were RMB24.0 million, representing 10.4% of total revenue, compared to 15.3% in the same quarter of fiscal year 2020. The post-fulfillment gross margin increased to 9.2%, another record achievement. We demonstrated our capability to achieve high-quality top-line growth without compromising operational efficiency. Our early investments in nationwide fulfillment infrastructure are paying off. Our total SG&A expenses were RMB57.4 million, higher than last year, mainly due to share-based compensation expenses and increased overtime staffing during the Chinese New Year holiday, as the central government discouraged travel due to COVID-19. Net loss was RMB41.5 million compared to a net loss of RMB28.2 million in the same period last year. Adjusting for share-based compensation and the fair value change due to derivative liabilities, the adjusted net loss was RMB38.9 million compared to RMB35.7 million in the same quarter last year. Now let's review the numbers for the entire fiscal year. For fiscal year 2021, our performance set many records. Revenue reached RMB1.0 billion for the first time, while GMV exceeded RMB2.4 billion. These excellent results were powered by our 3.8 million spending customers. Further details: starting from Q2 of fiscal year 2021, the year-over-year revenue growth rate per quarter was 26.2%, 34.3%, 23.2%, and 47.1% respectively, demonstrating a strong top-line growth trend. Revenue generated from Boqii Mall was RMB385.6 million, up by 60.7% year-over-year, while revenue from third-party platforms grew by 17.1% to RMB617.6 million. Gross profit for fiscal year 2021 was RMB187.3 million, up by 18% year-over-year, with a gross margin of 18.5% compared to 20.6% in the fiscal year 2020. Meanwhile, fulfillment expenses as a percentage of revenue dropped from 15% to 11.9%. Our post-fulfillment gross margin improved by 100 basis points annually. With improvements in fulfillment efficiency, we are able to share cost savings with our customers through more favorable pricing while maintaining margins. Sales and marketing expenses as a percentage of revenue dropped by 80 basis points, from 16.7% to 15.9% this year, mainly due to lower customer acquisition costs from our platforms and increasing brand recognition. General and administrative expenses as a percentage of total revenue was 11.3%, compared to 7.0% last year. This spike was primarily due to a share-based compensation expense of RMB42.1 million. Excluding the one-off share-based compensation expenses, our adjusted net loss was RMB149.6 million, representing a RMB39.7 million improvement compared to RMB189.3 million in fiscal year 2020. We are on the right track towards profitability, ending the fiscal year of 2021 with RMB460.8 million in cash, cash equivalents, and short-term investments, compared to RMB88.3 million as of March 31, 2020. Our total cash position gives us extra strength and flexibility to invest in our products, strategy, and expand our portfolio to address a broader user base and needs. In conclusion, we delivered a strong performance with solid operational and financial growth, demonstrating our strategy's effectiveness. We will continue to allocate resources to further optimize our product assortment and prudently expand our brick-and-mortar pillar to capture the immense opportunities in the pet industry. We entered the new fiscal year with a larger and more valuable space for pet parents. We are confident in our ability to lead this industry and are fully committed to creating value for both our users and shareholders. Now let’s start the Q&A session. Operator? Joy?

Operator, Operator

We will now begin the question-and-answer session. Our first question comes from Darren Aftahi with ROTH Capital Partners. Please go ahead.

Darren Aftahi, Analyst

Hi, good evening. Thanks for taking my questions. Just a few, if I may. First on your Kuaishou partnership, can you just talk in general how that’s going to change your social e-commerce strategy going forward? And how much of a strategic emphasis is this as a part of your overall strategy?

Kai Fang, Chief Strategy Officer

Thank you, Darren. That’s a great question. So, yes, as we noted, we entered into a strategic partnership with one of China’s leading short video social networking platforms, Kuaishou. We fully cooperate with Kuaishou in three main areas. First, on content, we are working with KOLs and KOCs on Kuaishou to incubate more pet-related content to attract more traffic. Also, we hope that with this high-quality content we can promote care for the health and wellness of pets to more pet parents and parents-to-be. Second, on the e-commerce front, as we all know that for the last quarter, Kuaishou’s e-commerce GMV growth more than doubled, indicating a strong strategic focus. We hope this partnership will empower Kuaishou with our supply chain expertise and our broad range of pet brands so that pet parents benefit from a more diversified e-commerce setting. Last but not least, this is definitely our landmark partnership with the new content platforms and will be our focus. That said, this partnership is not exclusive. We will also keep embracing all other social networking or new media platforms such as TikTok, Little Red Book, Bilibili, Weibo, and others to optimize our reach to our customers. I hope that answers your question.

Darren Aftahi, Analyst

That’s great. Thanks, Kai. Another one, if I may. On the last call, you talked about kind of a revamped membership strategy, any updates there as it launched? If so, what kind of engagement, retention, or spend metrics are you seeing from those members?

Kai Fang, Chief Strategy Officer

Thanks, Darren, for another good question. Yes, we’re putting some final touches on this new membership program. We target to launch the new membership program by the end of this quarter. As I mentioned before, it will be cost channels across offline and online systems. We are confident about our own product and system. We will share more detailed operational numbers once fully implemented. The metrics we will be observing include the impact on our members' behavior, the absolute number of our members as a percentage of total spending customers, each members cohort rate, operational value, average order value. Ultimately, our aim is to see an increase in total revenues and a decrease in sales and marketing expenses as a percentage of revenue. We strive for our revenue to be generated from multiple spending customers and their operational value. Thank you.

Darren Aftahi, Analyst

Great. And just one last one, it looks like your fulfillment costs were in the 10% range, again in this quarter. How do we think about that percentage going forward as your business grows? Should it remain stable in that 10% range, or decrease? What’s your overall strategy? Can you achieve more efficiencies out of your fulfillment network? Thanks.

Lisa Tang, Co-CEO and CFO

Thank you, Darren. To address your question, as mentioned in our latest earnings release, our fulfillment expenses as a percentage of revenue have already been reduced to 10.4% for the new quarter. Looking ahead, as we expand our warehouses in the Southwest region of China, we anticipate this figure could drop below 10%. We expect this positive trend to continue in the future. I hope that clarifies your inquiry.

Darren Aftahi, Analyst

Great. Thank you all.

Lisa Tang, Co-CEO and CFO

Okay. Thank you, Darren.

Operator, Operator

Thank you. Since there are no further questions, I will now hand the call back to Ms. Lisa for her closing remarks.

Lisa Tang, Co-CEO and CFO

Thank you, operator, and thank you all for participating in today’s call and for your continued support. We appreciate your interest and look forward to reporting to you again as the quarter progresses. Thank you.

Operator, Operator

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