Earnings Call Transcript - BQ Q4 2023

Operator, Operator

Good day, ladies and gentlemen, thank you for standing by and welcome to Boqii's Second Half and Fiscal Year 2023 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 floor over to L, Boqii's Head of Investor Relations. L?

Mandy Luo, Head of Investor Relations

Thank you, operator, and good morning, everyone. Welcome to Boqii's second half and fiscal year 2023 earnings conference call. Joining us today are Ms. Lisa Tang, Co-CEO and CFO, as well as Mr. our Financial VP. We released results earlier today. The press release is available on the company's investor relations website and from Newswire services. A replay of the call will be available on the 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 1995. Forward-looking statements involve inherent risks and uncertainties, so the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements except as required by applicable law. Please note that certain financial measures used on this call, such as non-GAAP net loss, non-GAAP net loss margin, EBITDA, and EBITDA margin, are presented 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 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, L, and many thanks to everyone for joining the call today. In fact, fiscal year 2023 was a challenging year for e-commerce in China. Increasing geopolitical risks and lingering COVID-19 impact led to a wide range of changes in the global supply chain. That subsequently translated to growing raw material and logistic costs. The rising inflation and uncertainties have also led to a general conversation among consumers. In the case of China, the COVID prevention priorities have also created short-term problems with production and delivery. Despite this, we remain confident in our unique positioning in China's expanding tech market. We saw a favorable increase in the number of pads and the growing penetration of party e-commerce. That will support further growth online. We also saw the trend of consumption upgrade supported by the strong growth in unique markets such as pet food and healthcare products. Over the year, we strived to strengthen our group along the supply chain integration in order to improve operational efficiency and enhance margins. For example, in the post-COVID era, based on the system supporting, we switched from traditional warehousing to cloud warehousing management, allowing us to achieve better efficiencies. We also restructured our upstream production and manufacturing network so that we can optimize our cost, accelerating production and variety for our growth business. We are particularly encouraged by the fact that we saw strong monthly performance at the end of the fourth quarter. We also have to report that non-GAAP net loss has significantly narrowed by 41.6% in fiscal year 2023, laying a solid foundation for growth in fiscal year 2024. Looking ahead, we expect China's consumer sentiment to rebound as a result of the post-COVID era, as well as the reversing macro uncertainties and the inflation impact. We will continue to drive business development and financial growth through organic development and M&As as we are confident that Boqii will continue to grow in creating long-term value for our shareholders, branded partners, and pet parents. As part of the management team, we believe we are heading in the right direction. Our team will continue to work with passion while keeping a keen eye on our operations and potential market opportunities. In order to repay your trust and confidence, let me hand the call back to L to further update you on our operations and the private label strategies in fiscal year 2023.

Mandy Luo, Head of Investor Relations

Thank you, Lisa. Despite the challenges we encountered throughout the year, we remained committed to building a community and enhancing our supply chain proposition through our expanding brand profile, comprehensive content, and a wide range of products. Our Boqii mall managed to demonstrate resilient performance, even with relatively weak consumer sentiment in the second half. In numerical terms, our user base grew by 16.2% year-on-year, surpassing 5.8 million. This retention is further highlighted by a significant reduction in our safety metrics, down 57.2% year-on-year to RMB5.3 for the year. This reflects our capacity to gain user loyalty at a low cost, establishing a robust foundation for future growth. Throughout the year, our private label also performed admirably, with its GMV increasing by 6.2% year-on-year. Revenue saw a notable rise of 19.2% year-on-year despite a weak second half. We experienced growth in all product categories, including pet food, snacks, pet supplies, and medical and health products. By leveraging our enhanced big data capabilities, we optimized our private label mix to eliminate underperforming products, enhancing asset efficiency and product quality to meet the needs of pet parents. The restructuring, along with increased revenue contributions from private label growing from 15.4% to 19.9%, resulted in a gross profit margin of 21.4%, a modest improvement of 90 basis points year-on-year. Given the disruptions in service, supply chain, and the consumer market, we see the private label business as a crucial driver of growth moving forward. Looking ahead, we will keep refining our product mix, improving product quality, and expanding our distribution network to support our private label development. Overall, we believe it's vital to enhance our value proposition, providing us with a buffer against macroeconomic fluctuations. As a leader in the pet industry, we will continue finding ways to reinforce our closed-loop community by improving our presence from upstream production and midstream distribution to downstream touch points. With the pet market being fragmented, we're excited to develop a comprehensive ecosystem that delivers value to pet parents and brand partners. Now, I will pass the call to our Financial VP, who will provide more insights into our financials.

Unidentified Company Representative, Financial VP

Thank you, L. I would like to discuss our financial performance for the year, despite the significant challenges posed by COVID-19. We achieved year-over-year improvement, aided by expanding margins and better cost management. Our total revenue for the year was RMB1.09 billion, reflecting an 8% year-over-year decrease due to ongoing COVID-19 disruptions and tough market conditions. However, we benefitted from growing contributions from Boqii Mall and our private label, along with our efforts to optimize the private label product mix. Our gross profit margin increased by 19 basis points to 21.4%, with gross profit reaching RMB233.5 million for the year. Fulfillment expenses decreased to RMB126.3 million from RMB134 million the previous year, due to a decline in GMV and revenue. Despite rising logistics costs and the pandemic, our fulfillment margin improved from 9.2% last year to 9.8% this year. Total sales and marketing expenses were RMB124 million for the year, a decrease of 27.5% from RMB171 million last year. Sales and marketing expenses as a percentage of total revenue dropped to 11.4% from 14.4%, mainly due to a reduction in advertising expenses by RMB36.7 million, resulting from a higher proportion of revenue generated from more cost-efficient channels. General and administrative expenses were RMB46.6 million, down 38.9% from RMB76.2 million in fiscal year 2022, and as a percentage of total revenue, they reduced from 6.4% to 4.3%. This decrease was mainly due to a reduction in share-based compensation expenses. The net loss for the year was RMB106 million, compared to a net loss of RMB132.8 million last year, marking a 20.2% year-over-year improvement. We recorded an impairment of goodwill of RMB40.7 million in our net loss for fiscal year '23, while there was none in fiscal year 2022. Excluding that impairment, the net loss for this year is RMB65.3 million, a 51% improvement over last year's loss of RMB132.8 million. The non-GAAP net loss for the year amounted to RMB70.7 million, indicating a 41.7% year-over-year reduction. As of March 31, 2023, our effective debt to asset ratio was 39%, excluding RMB102.8 million of long-term debt. We are in the process of finalizing share for the investment, and the company is expected to receive an equivalent amount in U.S. dollars from overseas, which will be recorded in equity after repaying the long-term debt of RMB102 million. Additionally, as of March 31, 2023, our cash and cash equivalents along with short-term investments were RMB160 million. Our net operating cash outflow for fiscal year '23 was RMB52.3 million, which is a significant reduction of RMB95 million compared to RMB147 million in 2022. With no major CapEx postings and strong credit backing, we believe we have sufficient cash to support our operations and pursue improvements, especially as our CSC approaches near low and we move closer to our breakeven point. Now, let's proceed to the Q&A session.

Operator, Operator

The first question comes from Matt Maa with China Securities. Please proceed.

Matt Maa, Analyst

What is your question?

Mandy Luo, Head of Investor Relations

Matt wants to know about the decline in revenue and whether it is related to COVID-19 last year. He would like to hear our forecast for fiscal year 2024 revenue.

Unidentified Company Representative, Financial VP

Yes, our revenue has slightly decreased compared to fiscal year 2022 due to COVID-19. After the recovery from COVID-19, we expect our revenue growth to be higher than last year. Thank you.

Matt Maa, Analyst

Yes, our revenue has a slight decrease compared to fiscal year 2022 due to COVID-19. After the recovery from COVID-19, we expect our revenue growth to be higher than last year. Thank you.

Mandy Luo, Head of Investor Relations

Let me translate first. Matt wants to know that the net loss for the whole year narrowed down by around 20% and which is lower than that of the first half of the year. So he would like to know about the reason.

Unidentified Company Representative, Financial VP

Our net loss for fiscal year '23 was RMB106 million, reflecting a 22% reduction from the net loss of RMB132.8 million in fiscal year '22. We recorded an impairment of goodwill totaling RMB40.7 million in the net loss for fiscal year '23, while there was no such impairment in fiscal year '22. Excluding the goodwill impairment, the net loss for fiscal year '23 was RMB55.3 million, which represents a 51% decrease from the net loss of RMB132.4 million in fiscal year '22. Thank you.

Operator, Operator

Are you ready for the next question?

Mandy Luo, Head of Investor Relations

Yes. Of course, please.

Operator, Operator

Thank you. The next question comes from indiscernible with CICC. Please go ahead.

Unidentified Analyst, Analyst

What is your question?

Mandy Luo, Head of Investor Relations

Okay. Let me translate first. Yushi asked two questions. First, she mentioned that we have operated the private labels for a long time. She noticed that the private label performance is good in fiscal year 2023. She would like to know our plan for private labels and the future forecast for the private label revenue and gross profit margin.

Lisa Tang, Co-CEO and CFO

The next question comes from an analyst with CICC. Please go ahead. Mandy Luo, Head of Investor Relations, mentioned that she will first translate. An unidentified analyst asked two questions. First, she noted that we have operated the private labels for a long time and observed good performance in fiscal year 2023. She would like to know our plans for private labels and the future forecast for private label revenue and gross profit margin.

Mandy Luo, Head of Investor Relations

Okay. Let me translate first. Lisa answered that yes, we have made a plan on the strategy of the private label and relying on the original data and user advantages. It is expected that the proportion of private label revenue will exceed around 30% in the future. And the gross profit margin rate will exceed 35%. And the second question, Yushi mentioned that she would like to know the current cash flow of the company and how long the current cash flow could sustain business operations.

Lisa Tang, Co-CEO and CFO

Lisa confirmed that we have developed a strategy for the private label, leveraging our original data and user advantages. We anticipate that private label revenue will surpass 30% in the future, with a gross profit margin exceeding 35%. Regarding the second question, Yushi inquired about the current cash flow of the company and its sustainability for business operations.

Unidentified Analyst, Analyst

Yes, we have developed a strategy for the private label, leveraging our original data and user advantages. We anticipate that private label revenue will surpass 30% in the future, and the gross profit margin will exceed 35%. In response to the second question, Yushi inquired about the company’s current cash flow and its sustainability for business operations.

Lisa Tang, Co-CEO and CFO

The strategy focuses on private label products, leveraging original data and user advantages. It is anticipated that private label revenue will surpass 30% in the future, with a gross profit margin exceeding 35%. As for the second question, Yushi is interested in understanding the current cash flow of the company and how long it can support business operations.

Mandy Luo, Head of Investor Relations

Okay. Let me translate first. For the second question, Lisa answered that our cash flow in fiscal 2023 has greatly improved compared to before, thanks to the efforts of the team. As of March 31, 2023, the company has RMB160 million in cash and cash equivalents and short-term investments, and the operating cash outflow of RMB147 million in fiscal year 2022 narrowed significantly to RMB51 million in fiscal year 2023. We expect that the narrowing range will be further improved with stable market conditions and consumption, along with the growth of income and improvement of operating data which can sustain the company's operations for a long time. Yushi asked the third question: Will the forecast for the private label be achieved and what measures will the company take to achieve this guidance?

Lisa Tang, Co-CEO and CFO

The cash outflow of RMB147 million in fiscal year 2022 has significantly decreased to RMB51 million in fiscal year 2023. We anticipate that this trend will continue to improve with stable market conditions and consumer spending, alongside income growth and enhanced operating metrics that will support the company's long-term viability. Yushi inquired about whether the forecast for the private label will be met and what actions the company will implement to reach this target.

Mandy Luo, Head of Investor Relations

Okay. Let me translate first. The proportion around 30% is a medium-term goal, then there will be more for the future. And at present, we could see that the industry is relatively scattered and we have developed a series of strategies to complement the current market situation and use big data to improve label brand metrics and brand lane. For the gross profit margin, we think that the different categories and different brand combinations could help us to improve the gross margin. Some categories of rebrand in incubation stage will make process to cultivate customer combinations. We believe that the comprehensive performance will exceed 35%. Okay, thank you.

Operator, Operator

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

Operator, Operator

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