Earnings Call Transcript - BQ Q4 2022

Operator, Operator

Good day, ladies and gentlemen, thank you for standing by and welcome to Boqii’s Fourth Quarter and Fiscal Year 2022 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 floor over to Mandy Luo, Boqii’s IR Manager. Mandy?

Mandy Luo, IR Manager

Thank you, operator, and good morning everyone. Welcome to Boqii’s fourth quarter and fiscal year 2022 earnings conference call. Joining us today are Mr. Louis Liang, Chairman and CEO; Ms. Lisa Tang, Co-CEO and CFO; as well as Mr. Kai Fang, our Chief Strategy Officer. We released 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 site later today. 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 obligation to update any forward-looking statement except as required under the applicable law. Please 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 call are in Chinese renminbi. With that, let me now turn the call over to our Chairman and CEO, Mr. Louis Liang.

Louis Liang, Chairman and CEO

Thank you, Mandy. And many thanks to everyone for joining the call today. Fiscal year 2022 represents another changing year for every one of us, whether you are from the U.S., China, or other parts of the world. Before we start, no matter where you are, we appreciate your utmost confidence and support in Boqii, and we are glad that we were able to deliver encouraging results despite the frustrating COVID-19 pandemic. Reflecting on our operations, the supply chain disruption in China has no doubt created difficulties in our daily operations and put pressure on our fulfillment. The regional outcome has also limited spending and affected the performance of the retail market, yet not all negatives as the lockdowns have led to more time at home, more time with our beloved pets, and in return, this has driven the sales of pet products ranging from daily necessities to healthcare, cleaning, and grooming products. As a result, we were able to deliver growth in GMV and revenue, as well as improve our efficiency and expand our margins. More importantly, we pride ourselves on delivering the required pet products to the large community, despite lockdowns and supply chain disruptions. That would not be possible without our extensive in-house facilities and proven fulfillment capability. Looking back, we aim to be a reliable and trusted platform for pet parents since day one, and I believe we have done so. Especially during the pandemic, we firmly believe our value is much more than a simple e-commerce business; as a leading platform with an extensive product range, extensive outreach channels, engaging community, and rich content, we have funded an ecosystem that can effectively connect pet parents and industry partners. As we continue to grow, we believe we are well positioned to capture the leading products and serve the needs for our pet parents, as well as the marketing needs of the underserved SMEs. Financially, we are also moving closer to breakeven. We have the utmost confidence that if we facilitate our value recovery and generate shareholder returns, this will also provide us the capital to explore other opportunities and go beyond organic growth, adding further growth impact to our business. However, we remain optimistic about our future development. As senior management, we will continue to work with passion while keeping a keen eye on our operations, as well as potential market opportunities in order to repay your trust and confidence. Let me pass the time to our Co-CEO, Lisa, to update you on our achievements during the year.

Lisa Tang, Co-CEO and CFO

Thank you, Louis. During the year, Boqii has put great effort into enhancing its infrastructure. This includes improving our warehousing efficiency, expanding our online marketing capability, increasing our offline touchpoints, as well as reaching new collaborations with industry partners, hospital SaaS, and others. All in the hope of better serving our pet parents and brand partners. Supported by our expanding SKU selection of Chinese products, which grew by 33.5% year-over-year along with our growing brand equity and the introduction of a new membership program, we were able to attract new users and boost retention during the year. Our active buyers increased by 13.4% year-over-year to 5 million with the number of orders also increased by 52.5% to 9.8 million for the year. During the steady growth in the user base, our GMV and product sales also recorded satisfactory improvements, increasing by 19.4% and 17.4% respectively. Our community engagement strategy also proved to be a success. By offering users a platform to discuss interactions and make purchases, Boqii has become a go-to place for pet parents, satisfying their product, service, and social needs as 80% of pet parents in the PRC are first-generation pet owners. Our platform has also made us a good information hub. Supported by our comprehensive outreach channels, including OTT, mini programs, WeChat accounts, and video channels that provide us with key private traffic, as well as third-party traffic from search engines, Tmall, JD, TikTok, and others, we can create a vibrant ecosystem characterized by high user engagement, low retention costs, and high sales conversion. Specifically, in the fourth quarter, our customer acquisition costs reached a new low of RMB5.7, highlighting the rising recognition of Boqii brands, as well as the effectiveness of our strategy and measures for user acquisition, including the revamped membership program. This growing business also allows us to do more for our industry partners as our new partnerships opened more cost-effective marketing solutions for them. We can also provide marketing intelligence to our brand partners so that we can make swift business decisions regarding product mix and the supply chain. As a result, we were able to deliver a remarkable 5.3 times year-over-year increase in revenue from online marketing and information services, reaching RMB49.1 million. We would also like to bring to your attention that our private labels have made good progress during the year. Its SKU grew by 69.4% to 5,643 and revenue also grew by 15.8% year-over-year to RMB42 million in this quarter. Gross profit margin of our private labels reported a significant enhancement from 26.9% last Q4 to 33.4% this Q4. Financially, growth in product sales and online marketing and information services have brought our revenue to a new high of RMB1.19 billion, up 17.4% year-over-year. As we continue to grow in scale and GMV, along with factoring in the high-margin nature of our online marketing business, our gross profit margin and post-fulfillment margin also reported record highs of 20.5% and 9.2% for the year respectively, laying a solid foundation for future turnarounds. We are confident that we will achieve breakeven in the coming quarters. And now, I will turn the call over to our CSO, Kai Fang, who will share more details on our financials and future strategy.

Kai Fang, Chief Strategy Officer

Thank you, Lisa. In the following, I'd like to share more on our financial performance for the year. Given the supply chain disruption and the customer market difficulties brought by COVID-19, we still delivered strong results in the year with steady growth from all four quarters. Our full-year revenue grew 17.4% to RMB1.2 billion with a notable increase in revenue from online marketing and information services. Gross profit was RMB242.7 million, up 29.6% from the fiscal year 2021, and gross margin, driven by the increasing product GPM and growing contributions from online marketing and information service, was 20.5%, up by 200 basis points. Our total sales and marketing expenses were RMB171 million, up by 6.7% from RMB160.2 million. Sales and marketing expenses as a percentage of total revenue was 14.4%, down from 15.8% last year, mainly due to the lower customer acquisition cost enjoyed from the growing revenue contributions of marketing improvements, as well as the adoption of more cost-efficient channels. Fulfillment expenses slightly increased to RMB134 million compared to RMB120.2 million in the last fiscal year. Fulfillment expenses as a percentage of revenue was 11.3%, down from 11.9% in the fiscal year 2021, mainly due to the improved utilization of warehouses and lower delivery service prices through negotiations with third-party service providers. As a result, the post-fulfillment margin increased to 9.2%, compared to 6.6% last year. General and administrative expenses were RMB76.2 million, down by 33.1% from RMB114 million in fiscal year 2021. The decrease was mainly due to lower share-based compensation expenses. With this, we saw a lowering adjusted net loss for the year of RMB121.2 million compared to RMB149.6 million last year. As mentioned by Lisa, we are confident about achieving breakeven in the coming quarters. On our financial position as of March 31, 2022, excluding long-term debt, our effective debt to asset ratio stood at 44.8% as we are in the process of completing shareholders of ODI. The company is expected to receive the equivalent amount in U.S. dollars from overseas, which will be recorded in equity after repaying the long-term debt. With no major CapEx planned and under a strong credit line backup, we believe we are cash sufficient to support our operations and pursue new initiatives, especially with our CAC achieving new lows as we get closer to our breakeven point. Operationally, to expand our business scope and provide all-around services to our branded partners and pet parents, we actively explored collaboration opportunities during the year. We established strategic partnerships with Evetsoft, covering our 3,500 pet hospitals to provide hospitals with convenient tools such as online medical services, membership management, notifications and reminders, and event promotions. Supported by our strong supply chain capability, we transformed the procurement system of hospitals, making us a reliable platform. We believe the collaboration will establish a new standard for professional and personalized pet medical services and will provide strong benefits to our product sales business. On the other hand, we also made progress in strategic partnerships with industry partners. We look to do good while doing well. Over the last forty years since our inception, we have been contributing to larger communities through a series of donations and activities that promote pet adoption. In the recent wave of COVID-19 in the PRC, we were able to reach communities across various districts in Shanghai through group purchases, supported by our supply chain. When logistics were extremely difficult, we took on our responsibility as a corporate citizen by donating pet supplies to various caring centers, satisfying the daily needs of thousands of stray dogs and cats. Thanks to our 5 million spending customers, we achieved these excellent results. In the upcoming quarters, we will continue expanding our portfolio offerings, strengthen our supply chain, and establish more experienced touchpoints. We believe the strong growth momentum in active buyers and post-fulfillment margin will help us stand out in the increasingly challenging pet market. In the meantime, while growing our business, we will also continue our mission of caring for pets to the best of our ability and staying vigilant to the changing dynamics in our industry to best serve our pet owners and industry parents and generate further returns to our shareholders.

Darren Aftahi, Analyst

Hi. Thanks for taking my question and good evening. I'm just kind of curious if you could maybe try and quantify how bad COVID impacted your business during the quarter? And then, post-March how has that changed?

Louis Liang, Chairman and CEO

Darren, thank you for your question. Actually, as you all know, Shanghai's pandemic started from early March and that has really impacted the supply chain and the pet supply chain as well. It was like the situation back in 2020, and we did see some influences. However, during the pandemic, we also developed a new way to connect with our customers. We used group buying initiatives mentioned in the earnings call that made up for some of the sales drops, but still, we saw some influence from the pandemic. On the other hand, we are also seeing that the pandemic hurt offline scenarios even harder, which might have lasting effects. However, during this time, we see that online demand is still there. If we can find a solution to the logistics and the supply chain block, we believe we can overcome these influences in time and that will not hurt our overall sales.

Darren Aftahi, Analyst

Great. And then a couple more if I may. You touched on your membership program. I'm just kind of curious could you give any general sense for the level of spend of members versus non-members in the quarter?

Louis Liang, Chairman and CEO

Hi, Darren. This is Louis. I was dropped off due to a bad signal. Regarding the membership program, yes, we are still seeing the same pattern with member versus non-member spending. In general, members spend about three times more than non-members in the same quarter. We do see a bit of a flat growth rate, but we are seeing acceleration in the addition of new members, mainly due to the many benefits of the membership program, which is not only about online discounts but also offers many offline benefits. Our CAC costs have dramatically dropped from previous levels to RMB5.7 per customer, which includes non-members. Averaging that out shows how effective our membership programs are.

Darren Aftahi, Analyst

Great. And then two more for me. One, what level of revenue gets you to adjusted EBITDA breakeven? And then I may have asked this on the last call, but just given where your stock is and your cash position, what are your general thoughts about a shareholder buyback plan? Thanks.

Kai Fang, Chief Strategy Officer

Maybe I'll just before we jump on to the detailed financial numbers, I'll just touch on the buyback plan. Yes, definitely we are open to the buyback plan and it's in our roadmap. Given the current market conditions, we think we can implement this opportunistically, depending on the market. We will choose the best timing for the buyback, so we are not rushing to market but will act when it is right for the company.

Louis Liang, Chairman and CEO

And Darren, one point to add is that we expect that when our quarterly revenue achieves between RMB350 million and RMB400 million, and our gross profit margin reaches 25%, we will achieve breakeven, possibly in the December or September quarter.

Darren Aftahi, Analyst

Great. Thank you, Louis.

Operator, Operator

Our first question today comes from Darren Aftahi from Roth Capital Partners. Please go ahead with your question.

Lisa Tang, Co-CEO and CFO

Lisa just made some final remarks regarding the questions from our retail investors. I believe that will be the end of our sharing today. And thank you for your time and attention. We'd like to see you in the next call as well.

Operator, Operator

Ladies and gentlemen, that will conclude today's presentation. We do thank you for joining. You may now disconnect your lines.