Earnings Call Transcript - BQ Q2 2023

Operator, Operator

Good day, ladies and gentlemen, thank you for standing by and welcome to Boqii’s Fiscal 2023 First Half 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 Lou, Boqii’s Head of Investor Relations.

Lou, Head of Investor Relations

Thank you, everyone, for joining us today. I want to mention that I am currently at home and my cat is not well, so you might hear some background noise. Welcome to Boqii’s fiscal 2023 first-half earnings conference call. With us today are Lisa Tang, our Co-CEO and CFO, and our Financial VP and Head of Investor Relations. Earlier today, we released our results, which are available on the company's investor relations website as well as from various news services. You can also access a replay of this call on our site later today. I want to remind everyone that today's discussion will include forward-looking statements as defined under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, meaning that actual results may differ significantly from what we discuss today. More details on these risks and uncertainties can be found in our public filings with the SEC. We are not obligated to update any forward-looking statements unless required by law. Also, some financial metrics we talk about, like non-GAAP net loss and EBITDA, are presented on a non-GAAP basis. You can find our GAAP results and the reconciliations with non-GAAP measures in our earnings press release. Additionally, unless stated otherwise, all figures mentioned are in Chinese RMB. Now, I will hand the call over to our Co-CEO and CFO, Lisa Tang, to discuss our first-half performance and highlights. Lisa, it's all yours.

Lisa Tang, Co-CEO and CFO

Thank you, Lou, and many thanks to Lou's cat, and we wish it a speedy recovery. And many thanks to everyone for joining the call today. During the first half of this fiscal year, thanks to the efforts of our colleagues, and many thanks to the customers and the partners. Despite the uncertainties of the epidemic, we still achieved the main goals as before and continued with the optimization from obtaining accurate traffic and integrating upstream and downstream to build our delivery. At the same time, we also rationally analyzed the influence of various environmental factors and actively faced challenges from raw materials, manufacturing, and logistics, which further improved our integration timeliness and the efficiency of our system. Due to the impact of the market environment, we experienced a year-over-year slight increase of 2.4% in revenue to RMB 589.6 million during the first half. Despite this, we are still actively pursuing market opportunities, adjusting our operating strategies appropriately, and achieving satisfactory results in the first half. As we continue to integrate upstream and downstream of the industrial chain, optimize our product mix, and adjust the product categories. During the first half of fiscal year '23, our gross margin percentage recorded a notable increase of 240 basis points to 21.0%, with the gross margin of private labels increasing from 27.4% to 33.0%. Our fulfillment margin also increased by 170 basis points to 9.5%. On company management, we further optimized our cost structure and achieved remarkable macro success, reporting a 21.0% year-over-year decrease in operating expenses in the first half. In terms of revenue, our operating expenses dropped from 32.2% of total revenue to 26.1%, highlighting our effectiveness in cost control. This laid the foundation for narrowing losses from operations and a net loss which decreased by 15.42% to RMB 29.6 million from RMB 82.6 million and by 52.0% to RMB 29.5 million from RMB 81.9 million, respectively. All these have demonstrated our business resilience and improved profitability. Looking back at our journey, Boqii has established its leading position as a go-to pet platform in China by creating value for pet owners and their pets. We will continue to expand our ecosystem in the future and hope to become the preferred channel for our users as well as to lead market development as we further expand our product selection and network reach. Now let me pass the time to Al to further update you on market insights and our operations in the first half.

Al, Unidentified Speaker

Thank you, Lisa, for sharing the performance and business highlights. Despite the uncertainties and challenges, we are optimistic about the future of China's pet markets. The iResearch white paper projects that the industry will reach RMB 445.6 billion in value, roughly USD 66.1 billion by 2023. With steady market growth and potential for continued expansion, we are committed to enhancing the industry, both upstream and downstream, by accurately positioning our products and broadening our online and offline reach to secure our standing as a leading pet ecosystem in China and the preferred platform for pet owners and brand partners. In terms of traffic approach, we made significant efforts to improve circle linkage and user engagement in the first half. Our order volume grew by 4.1% year-over-year to 5.03 million. We achieved a record delivery of approximately 3.81 million, marking a 16.4% year-over-year increase. Our cost per click decreased by 54.1% year-over-year to RMB 5.2 from RMB 11.3 in the previous year, marking a record low. All these factors demonstrate that the online community remains active with new traffic and high engagement, setting a robust foundation for future growth. One of our strategies includes making significant progress in our private labels business in the first half, which is essential for fostering cooperation with upstream partners and exploring new product categories to enhance customer satisfaction and loyalty. Our private labels business saw promising results, with revenue up 30.9% year-over-year to RMB 105.1 million, and gross profit margin rising by 560 basis points year-over-year to 33% from 27.44%. The revenue contribution from this high-margin business also grew from 13.3% of total revenue last year to 17.8% this year. Furthermore, bolstered by our solid financial position and strong operating cash flow, we recognize the need for improved infrastructure and support across the supply chain to maintain our competitive advantage and expand our ecosystem. Therefore, we are actively looking into potential collaborations, investments, or acquisition opportunities with other upstream and midstream players, and we look forward to updating you in the future. With our improving financials, we anticipate increased investment value, particularly as we have shown improved profitability over consecutive quarters. This financial strength will enable us to explore various avenues to enhance shareholder returns over the long term. Now I will hand the call over to our Financial VP, who will provide more details on our financials.

Financial VP, Financial VP

Thank you, Al. Now please allow me to walk you through our financial highlights in the first half of fiscal year 2023. Before I go into details, please note that all numbers presented are in RMB and are for the six months ended September 30, 2022, unless stated otherwise; all percentage changes are on a year-over-year basis unless otherwise specified. In this first half, our total revenue decreased by 2.4% to RMB 589.6 million, primarily due to the recurrence of COVID-19, which led to a modest decrease in product sales revenue of 1.5% year-over-year to RMB 568.7 million. In terms of fulfillment, we integrated our back-office service system and completed the upgrade of our fulfillment model, such as intelligent sorting and cloud warehouses, to enhance our services capability in response to the price increases and control restrictions faced by the logistics system in the post-COVID year, resulting in increased transportation and operation costs. In the first half of fiscal year 2023, our procurement expenses slightly increased from 10.4% of revenue last year to 11.6% of revenue this year, maintaining at about RMB 68.2 million. Yet, our total fulfillment gross margins increased from 8.2% last year to 9.5% this year as a result of the gross profit margin increasing by 240 basis points from 18.6% to 21%. Our total sales and marketing expenses were RMB 53.5 million, down by 29% from RMB 89.7 million over the same period last year. Sales and marketing expenses as a percentage of total revenue were 10.8%, down from 14.8%, primarily due to cost savings generated from reducing advertisement expenses and increasing the proportion of our revenue generated from more cost-efficient channels. General and administrative expenses in this period were RMB 22.1 million, down by 48.4% from RMB 42.8 million in the same period of fiscal year 2022. General and administrative expenses as a percentage of total revenue were 3.7%, down from 7.1%, primarily due to decreases in share-based compensation expenses, staff costs, and professional fees. This resulted in a net loss of RMB 29.5 million in the first half, compared to a net loss of RMB 81.9 million in the same period last year, representing a significant improvement of 64%. In terms of EBITDA, it improved from a loss of RMB 77.1 million last year to a net loss of RMB 22.9 million this year. We ended this period with cash, cash equivalents, and short-term investments of RMB 210.3 million. With our strong cash on hand and improving profitability, we believe we are cash sufficient in our operation. Taking a broader view, we are cautiously optimistic about market conditions and remain fully confident in our strategy and execution, supported by our expanding brand portfolio of 704 in the first half along with an 8% year-over-year increase in SKUs to 26,008. With that, we are well-equipped to capture market opportunities. This wraps up my summary, and let's now move on to the Q&A session.

Operator, Operator

Thank you. We will now begin the question-and-answer session. And today's first question comes from Jin Jing with Guosheng Securities. Please go ahead. Hello, Jin Jing, you are live.

Jin Jing, Analyst

Let me translate. Jin Jing from Guosheng Securities asked about two questions. Firstly, she congratulates us on our good performance in the first half of fiscal 2023. Her two questions are: first, which sector is the company's strategic focus in the future? And second, do you have any expectations for the future revenue proportion and gross margin and net margin of private labels?

Lisa Tang, Co-CEO and CFO

For the first question, Jin Jing asked about the company's strategic focus in the future. We will further optimize the operation of the supply chain and create a real mechanism supply chain with continuous feedback from big data in the pet industry. To innovate and improve the supply chain, we will invest more resources in our private labels and further develop them.

Unidentified Company Speaker, Unidentified Speaker

Based on our platform capabilities and our years of experience, we adjusted the product mix in the first half of the year. We added some new SKUs such as snacks and healthcare products to satisfy the needs of pet parents in multiple dimensions. The revenue share of private labels has increased from 13.9% in the first half of last year to 18.5% this year, and we expect it to exceed 20% in the short term. The gross margin of our private label has also increased significantly from 27.4% to 33%, and it is expected to continue to rise and exceed 35% in the near future. That’s our response, Jin Jing. Thank you.

Operator, Operator

Thank you. Our next question today comes from Matt Maa with China Securities. Please go ahead.

Matt Maa, Analyst

Matt Maa from China Securities asked us about how well the company considers buying back or increasing shares in the future.

Unidentified Company Speaker, Unidentified Speaker

For the question about the buyback and increased shares, we will evaluate market conditions to determine the timing and details of the buyback or increasing shares program.

Operator, Operator

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks. Do you have any closing remarks? And ladies and gentlemen, it appears that there are no closing remarks today. So this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.