Earnings Call Transcript - BQ Q2 2024

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to Boqii's Fiscal Year 2024 First Half 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. Now, I will turn the call over to L, Boqii's Head of Investor Relations. L?

Mandy Luo, Head of Investor Relations

Thank you for joining us today and waiting for the start of the conference call. Good morning, everyone. Welcome to Boqii's fiscal year 2024 first half earnings conference call. With us today are Lisa Tang, Co-CEO and CFO, and our Financial VP. We released results earlier today, which are available on the SEC website. A replay of this call will also be accessible later today. Please be aware that today's discussion will include forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements carry risks and uncertainties, and actual results may differ significantly from what is expressed. Additional information about these risks can be found in the Company's public filings with the SEC. The Company does not plan to update any forward-looking statements unless required by law. Certain financial metrics referenced in this call, like non-GAAP net loss, non-GAAP net loss margin, EBITDA, and EBITDA margin, are provided on a non-GAAP basis. Our GAAP results and reconciliations between GAAP and non-GAAP measures are included in our earnings press release. Furthermore, unless stated otherwise, all figures mentioned during the call are in Chinese RMB. Now, I will hand the call over to our co-CEO and CFO, Lisa Tang. Lisa, the floor is yours.

Lisa Tang, Co-CEO and CFO

Thank you, L, and many thanks to everyone for joining our call today. At the beginning of fiscal year 2024, despite the challenges of market uncertainty, we made great strides in revenue mix enhancement and cost control, with high-margin primary labels showcasing resilience and indirect costs, also seeing a normal drop in amount and percentage to revenue, laying the foundation for a solid first half. As part of the management team, we totally believe that we are moving in the right direction and we maintain confidence in the development of China's pet industry. We will continue to work diligently and passionately, and we'll keep a keen eye on market dynamics and opportunities so that we can generate sustainable returns to our shareholders. Let me pass the time to L to further update you on our operations and business developments in the first half of 2024.

Mandy Luo, Head of Investor Relations

Thank you, Lisa. Despite the uncertainties in the macro economy, China's pet economy continues to show its potential. The latest report indicates that the penetration rate of households owning pets in China is projected to rise to 22% in 2023. This figure remains significantly lower than that in the United States and Europe, indicating considerable room for growth. By 2025, China's pet market is expected to reach RMB811.4 billion, marking a compound annual growth rate of 19.8% from 2021 to 2025. This reassures us that China's pet market is likely to recover. Therefore, in the first half, Boqii concentrated on bolstering its market presence, enhancing its brand image, improving customer loyalty, refining its product offerings, and optimizing its business operations in anticipation of better times ahead. Customer loyalty will be a key driver of the company’s growth. Meanwhile, we have seen satisfactory results from our private label. By leveraging our extensive user data and advanced big data capabilities, we optimized our private label offerings to better meet the needs of pet parents while reducing carrying costs for underperforming products. Although the overall GMV for the brand declined, private label GMV actually increased by 2.1% to RMB212.9 million, and its revenue contribution to total revenue grew from 17.8% to 26.4%. This led to stable performance in gross margins and post-fulfillment margins, with gross margin holding steady at 20% and post-fulfillment margins improving by 170 basis points to 11.2%. As our brand grows and we expand our content and tailored product offerings, we see an increase in customer engagement, shown by a historic low in customer acquisition costs, which fell by 46% year-over-year to nearly RMB2.8. Customer purchase frequency rose from 1.32 last year to 1.34 this year, with growth among both new and existing customers. Overall, we remain optimistic about our unique position in China’s growing pet market. We have noted encouraging trends, such as a notable increase in the number of pets and the growing recognition of pet e-commerce, which is positive for our future as a pet industry aggregator. We will continue our efforts to build a comprehensive ecosystem that adds value for both pet parents and brand partners. We are focused on strengthening our leadership position, aiming to create a more resilient impact in our industry moving forward. I will now turn the call over to our Financial VP, who will provide further details on our financials.

Unidentified Company Representative, Financial VP

Thank you, L. In the following, I'd like to share more on our financial performance for the first half of fiscal year 2024. We continue to execute our strategic adjustment and business optimization. Our revenue for the first half of fiscal year 2024 was RMB389.4 million, down by 34% year-on-year, as a result of the voting consumer sentiment and consumption downgrades in China. Overall gross profit margin only decreased by 100 basis points to 20% with gross profit reaching RMB77.9 million. We also made notable efforts on cost control as we improved the operational efficiency of our logistics services, with fulfillment expenses as a percentage of revenue for the first half year decreasing to 8.9% compared to 11.6% over last year. Fulfillment expenses decreased 49.4% to RMB34.5 million, which lays the foundation for improving cost fulfillment margin, increasing from 9.5% last year to 11.2%. Sales and marketing expenses decreased 28.6% to RMB45.4 million, mainly due to the growing efficiency of customer acquisition from more cost-efficient channels. General and administrative expenses were RMB32.2 million compared to RMB22.1 million for the first half year of fiscal 2023. The increase was primarily due to the increase in share-based compensation expenses. That resulted in a net loss of RMB37.7 million in the first half of fiscal year 2024, and the non-GAAP net loss is RMB34.2 million. We did experience a one-off transaction in the first half year of 2024, and the related expenses of RMB7 million are recorded in net loss. Also in the first half year, for the first time, we applied the rule of ASC 326 and expected credit loss model to assess account receivable capability and other receivables, and the expected credit loss of RMB3 million is recorded in net loss, excluding the above two one-off effects. Our net loss is RMB27.7 million, representing an improvement of 6% compared to the same period last year. The non-GAAP net loss is RMB24.2 million, representing an improvement of 15%, which shows our capacity for breakeven in the short-term future. On our financial position as of September 30, 2023, our effective debt-to-asset ratio stood at 39.5%. Our total cash and cash equivalents were RMB86.8 million, a drop of RMB72.8 million, mainly due to a decrease in RMB71 million in short-term borrowings compared to March 31, 2023, with no major CapEx forcing and strong credit line backing us up, we believe we are cash sufficient to support our operation and pursue new initiatives. Besides, in September 2023, we entered into certain financing agreements with third-party investors which will also provide us additional capital to explore new business opportunities. Moving forward, we will continue to strengthen our reach and control throughout the value chain. This includes investments, collaborations, and strategic initiatives that would reinforce our closed-loop community. We believe this approach would allow us to become not only the go-to place for pet owners but also the go-to partner for brands, manufacturers, distributors, and developers soon to be in China. Here, I’ll wrap my summary. Let's now move on to the Q&A session.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question today will come from Zoe Zhao of CICC.

Unidentified Analyst, Analyst

Thank you. We will now begin the question-and-answer session. Our first question today will come from Zoe Zhao of CICC.

Unidentified Company Representative, Financial VP

As described in our earnings report, the decrease is primarily due to the optimization of product mix related to our business strategy and the worsening consumer sentiment and consumption downgrade in China. In the future, we expect our revenue to stabilize as we finish the optimization of our product mix and as the economy recovers in the short-term future. We expect to achieve breakeven in the short term future. Thank you.

Operator, Operator

Our next question today will come from Lisa Lau of Jefferies. Please go ahead.

Lisa Lau, Analyst

This is Lisa Lau from Jefferies. So currently, I have two questions for you, the first one. I want to learn about has the Company's delisting risk been resolved. This is the first one. And secondly, could we provide some more color about the expenses such as sales and distribution, general and administrative, and research and development? And any reduction potentially expected in the future. Thank you so much for your questions.

Lisa Tang, Co-CEO and CFO

Okay. Thank you for your questions. I will answer the first question. The Company has resolved the delisting risk in October this year, and we successfully transferred our listing from NYSE to NYSE America, where the Company meets its compliance requirements and currently has no delisting risk.

Unidentified Company Representative, Financial VP

Our total operating expenses for the first half year were RMB110 million, representing a decrease of 27.1% from RMB154 million for the same period of last year, especially for our fulfillment expenses as we improve the operational efficiency of our logistics services. Our fulfillment expenses as a percentage of total revenue for the first half year have decreased to 8.9% compared to 11.6% of last year. Fulfillment expenses decreased 49.4% to RMB34.5 million. Our sales and marketing expenses were RMB45.4 million, representing a decrease of 28.6% from RMB63.5 million for the first half year of last year. Lastly, our G&A expenses were RMB32.2 million compared to RMB22.1 million over the same period of last year, which is primarily due to the increase in share-based compensation expenses. In the future, as we continue to improve our logistics service efficiency and customer acquisition efficiency, we expect that our operating expenses will maintain a downward trend and that the percentage of our revenue will also decrease in the short-term future. Thank you.

Operator, Operator

Thank you. Seeing no more questions in the queue, let me turn the call back to Ms. L for closing remarks.

Mandy Luo, Head of Investor Relations

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

Operator, Operator

Thank you all again. This concludes the call. You may now disconnect.