Smart Share Global Ltd Q2 FY2021 Earnings Call

Hello, and thank you for joining Energy Monster's 2021 Second Quarter Earnings Conference Call. Today's call is being recorded. If you have any concerns, you may disconnect now. I would now like to hand it over to your host for today's call, Director of Investor Relations, Hansen Shi. Please proceed.

Thank you. Welcome to our 2021 second quarter earnings conference call. Joining me on the call today are Mars Cai, Energy Monster's Chairman and CEO; and Maria Xin, Chief Financial Officer. For today's agenda, the management team will discuss business updates, operation highlights and financial performance for the second quarter of 2021. Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to this call as we will be making forward-looking statements. Also, this call includes discussion of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this call are in RMB. I would now like to turn the call over to our Chairman and CEO, Mars Cai, for the business and operation highlights.

Thank you, Hansen. Good day, everyone. Welcome to our 2021 second quarter earnings call. We are so pleased to announce the solid second quarter results, with revenue growing 52.9% year-over-year, which is above the upper end of our previous guidance range. During the second quarter, the outperformance of certain regions, such as Eastern China, and the rapid expansion of our POI coverage positively contributed to our growth, while the impact of COVID weighed down our overall growth for other regions. Despite facing these external factors, we are committed to remain focused on our long-term strategies of providing best-in-class services and a value proposition to our users, location partners, and network partners. The scale of our mobile device charging service network also expanded quickly during the quarter, with POIs growing by 55,000 to reach 771,000, and the number of power banks in circulation growing by 390,000 to reach 6 million by the end of the second quarter. As a result of continued POI and power bank expansion, we were able to reinforce our leadership and grow our market share to 35.2% within the mobile device charging service industry during the first half of 2021. We continue to see multiple drivers propelling forward the fast-growing mobile device charging service industry. First, the industry penetration rate of potential POIs remains low. Opportunities in terms of increasing penetration across different types of POIs in both existing higher and lower-tier cities continue to be a core driver. Second, there continues to be a large number of counties that are unpenetrated for mobile device charging service. During the quarter, we newly added 29 new counties, extending our coverage to over 1,600 counties and county-level districts as of the end of the quarter, out of the 2,846 total in China. This means there continue to be significant opportunities in expanding to uncovered regions across China. Lastly, our service brings convenience to our users across China by relieving their low battery anxiety. Compared to other services, mobile device charging service has high purchase frequency and user stickiness. During the second quarter, we acquired more than 19 million newly registered users, reaching approximately 255 million cumulative registered users by the end of the second quarter, reflecting that there continues to be increasing demand for the service and that there are still a large number of users who are in need but have yet to trial the service. In the future, as the size of our network continues to grow through increased penetration, we, as the #1 player in the industry, are poised to better capture the benefits of the network effect in attracting more users. Now despite our growth, we continue to experience headwinds from outbreaks of COVID. In the second quarter, outbreaks in Southern China, and especially within the Guangdong province, resulted in a significant revenue drop, upwards to 70% to 80% decline in the impacted regions due to restrictions that required the closing of certain stores and resulted in decreased foot traffic. We estimate that the total impact of the outbreak in Southern China resulted in a RMB 20 million to RMB 30 million decline in revenue during the second quarter. The Guangdong COVID outbreak was eventually controlled, and our revenue has made a strong recovery starting late July. We may continue to experience headwinds from COVID outbreaks, but based on historical numbers, we expect the impact to be short-term in nature. To reduce the impact of the COVID outbreaks on our operations, we implemented measures to increase our recovery speed from external events such as COVID by focusing on reallocating our cabinets from less-utilized POIs to mid- to higher-tier POIs or chain stores of good quality. In the future, we will continue leveraging our operational expertise to reduce the impact of external events on our operations and execute measures that will help us increase our market share during these events. Now let me walk you through our core strategies in strengthening our competitive advantages, expanding coverage, and exploring new initiatives for the quarter. Efficiency has always been the hallmark of Energy Monster that differentiated us from our peers within the industry. Last year, the competitive landscape changed significantly due to the initial impact of COVID. The fast-growing mobile device charging service industry also attracted the interest of major companies. We, meanwhile, continued to focus on our core operating principles of efficient growth and more aggressively competing for mid- to high-tier POIs. Our ability to more accurately assess the revenue potential of POIs, offering correct revenue-sharing policies that result in positive economics for the company, and managing our vast on-the-ground business development team while ensuring that they abide by the company's operating principles has led to the correct alignment of economic incentives for these business development personnel with the company’s interests. This is why we were able to achieve an industry-leading, unique economic profile after COVID last year, while our competitors primarily experienced losses. This difference in unique economic profile has allowed us to more quickly and aggressively develop our network sector. We continue to dynamically balance growth and operational efficiency. We remain committed to our principle of individually assessing each POI based on their economic profiles. Despite the shift in the competitive landscape in recent years, we believe our competitive advantage in network effect and operational efficiency is being strengthened as our market share continues to grow during the first half of 2021. Our best-in-class service for our users, in the form of high-quality hardware and an easy-to-use return service, alongside a clear value proposition to our location partners, in terms of swift response from the business development team and customized cabinets and power banks, are key differentiating advantages of Energy Monster. Going forward, we will leverage this advantage to more efficiently expand into POIs, acquire new users, and further differentiate ourselves from peers within the industry. Now I would love to talk about our expanding coverage. The industry continued to be fast-growing. The POI coverage of the industry still remains low, with continued opportunities across the board in higher- and lower-tier cities and POI types as well. For that, we expanded our business development team by 400 people during the quarter in anticipation of the market potential. Our business development team has actively expanded to obtain more mid- to higher-tier POIs. On the key account front, we had great success in signing new accounts during the quarter, like Ajisen Ramen and UME. Our ability to offer a comprehensive package and deliver high-quality service to key accounts has allowed us to sign these accounts despite not offering the highest revenue-sharing policy. For our network partner model, although we are also leading within the industry through this model, we continue to identify and recruit high-quality network partners. We have continued to attract these partners during our market-leading position due to the full suite of support and training that we offer them when they work with us. The network campaign that we launched in the first quarter of 2021 is tailored to help us acquire additional high-potential network partners to our network. This campaign gives our network partners more room to quickly reach scale and see results earlier, which further aligns the interests between our network partners and us. Our sustained investment and commitment to expanding our network partner model will allow us to better capture the growth of the industry by strengthening the coverage of lower-tier cities and solidifying our network partner model. As a result of our efforts in both the direct and network partner models, we were able to quickly expand our POIs and power bank counts during the quarter. This has helped us attract more customers to Energy Monster, as we were able to acquire 19 million newly registered users during the quarter, reaching a total of 255 million registered users. In the future, we believe the increase in our business development team and network partners, in conjunction with our industry-leading efficiency, will allow us to accelerate the benefits of our network effect advantage and further differentiate Energy Monster within the mobile device charging service industry. Lastly, I would like to touch upon our new initiatives. We continue to be in the testing phase for our first consumer product brand lineup and expect a full launch by the end of this year, the peak season. While leveraging Energy Monster's vast online and offline network consisting of over 250 million unique registered users and 771,000 POIs across all provinces of China, we can scale consumer products more quickly than traditional brands. On the other hand, we continue to explore other IoT and service industry avenues that will leverage and extend our existing networks. Going forward, we believe that our current setup of the network will provide us with a unique set of advantages in incubating new initiatives from Energy Monster. So in conclusion, our core mobile device charging service continues to grow quickly on the back of our expanding network effect and the growth of the industry. Even though the competitive landscape has shifted during the last two years, we remain committed to doing the right thing, which is to dynamically balance growth and operational efficiency based on market conditions. This difference in philosophy has differentiated us from our peers in the past and will continue to do so in the future as we form stronger competitive advantages around our core business. Eventually, our revenue has made a strong recovery after the outbreak in the Guangdong province of COVID. Looking into the third quarter, we continue to see headwinds that will impact what has traditionally been the peak quarter of the year. The recent COVID outbreak in Jiangsu province as well as in a number of cities across the country and weather-induced problems have negatively impacted our third-quarter performance. Since the outbreak, we have seen a gradual recovery but have not yet returned to normalized activity levels. We also continue to see the recovery set back by continual regional outbreaks across the country. Going forward, we may continue to face impact from small-scale regional resurgences of COVID in the future, but we believe these are short-term impacts and will not alter our long-term competitive advantages of network effect and operational efficiency.

Thank you, Mars. Now let me walk you through the financial results in greater detail. For the second quarter of 2021, revenues were CNY 972.4 million, representing a 52.9% year-over-year increase. Revenues from mobile device charging business were up 51.6% year-over-year to CNY 931.6 million and accounted for 95.8% of our total revenues for the quarter. The increase was primarily attributable to the rise in the number of POIs and available-for-use power banks. Revenues for power bank sales were up 83.2% year-over-year to CNY 31.6 million and accounted for 3.2% of our total revenues for the quarter. The increase was primarily due to the rise in the number of POIs, available-for-use power banks, and customers that chose to purchase the power bank. Other revenue was up 111.1% year-over-year to CNY 9.2 million and accounted for 0.9% of our total revenue. The increase was primarily attributable to the rise in users and advertisement efficiency. Cost of revenues were up 44.8% year-over-year to CNY 138.7 million for the second quarter of 2021. The increase in cost of revenues was mainly due to the growth in operational scale, resulting in increased maintenance, disposal costs, and logistic expenses. Gross profit rose by 54.3% year-over-year to CNY 833.7 million for the second quarter of 2021 due to increased revenues from the mobile device charging business. Gross margin for the second quarter of 2021 reached 85.7%. Operating expenses for the second quarter of 2021 were CNY 814.8 million, up 52.6% year-over-year. Excluding share-based compensation, non-GAAP operating expenses were CNY 805.9 million, reflecting a year-over-year increase of 63.1%. Research and development expenses for the second quarter of 2021 were CNY 20.5 million, up 25.3% year-over-year, primarily due to increased personnel-related expenses. Sales and marketing expenses for the second quarter of 2021 stood at CNY 771 million, up 64.6% year-over-year, mainly driven by increased incentive fees paid to location partners and network partners due to the rise in mobile device charging business revenues, along with higher personnel-related expenses. General and administrative expenses were CNY 28.7 million in the second quarter of 2021, up 49.3% year-over-year, primarily attributed to the increase in personnel-related expenses. Income from operations was CNY 18.8 million, down 51.9% year-over-year, with an operating margin of 1.9% compared to 6.2% in the same period last year. Net income was CNY 8.2 million in the second quarter of 2021, down 72.6% year-on-year, with a net margin of 0.8%. Non-GAAP net income, which excludes share-based compensation expenses, was CNY 17.2 million in the second quarter of 2021, compared to non-GAAP net income of CNY 38.8 million in the same period last year. As of June 30, 2021, the company had cash and cash equivalents, restricted cash, and short-term investments of CNY 3.1 billion. Cash flow generated from operations for the second quarter of 2021 was CNY 74.8 million. Capital expenditure for the second quarter of this year was CNY 97.3 million. Energy Monster currently expects to generate CNY 900 million to CNY 930 million of revenues for the third quarter of 2021. Please note that this forecast reflects Energy Monster's current and preliminary view on the industry and its operations, which is subject to change, particularly concerning the potential impact of COVID-19 on the economy in China. Thank you for listening. We are now ready for your questions.

Your first question comes from the line of Vicky Wei from Citi.

So would management share more insight on the guidance for the third quarter of 2021?

Thanks for your questions. So like you're asking, we give you a bit more insight on the guidance. Despite the impact of Guangdong COVID, our revenue was making a strong recovery during July. On a year-to-year basis, we see in early July the revenue growth was on track for more than 20% year-on-year. However, since the Jiangsu COVID broke out, in Nanjing, Zhengzhou and Yangzhou, overall revenue dropped more than 70% from the normalized level. The outbreak in other cities, such as Beijing, Shanghai, Chengdu, and Shenzhen, resulted in significant drops in revenue; for example, Shanghai and Beijing dropped more than 30% in early August compared with early July. However, we are confident that the impact from COVID will be short-term in nature and that our fundamentals are fully intact. The demand from users continues to be strong for our services, as shown by the acquisition of a considerable number of new users during the past quarter. So going forward, we will continue to deliver long-term value for our shareholders. Therefore, the guidance for this quarter is a bit lower due to the impacts from COVID.

Your next question comes from the line of Lucy Li of Goldman Sachs.

So my question was related to the first one. Can management share with us more details on the impact of COVID-19 during the second quarter and a possible impact going forward into the third quarter? And how do you think of more frequent, I wouldn't say lockdowns, but local restrictions going forward?

Thank you, this is Mars speaking. To be honest, actually, even by end of May, I expected that in this call I would proudly announce our first RMB 1 billion revenue quarter. But in June, as you can see, the COVID outbreak in Guangdong was significant. At its peak, the impacted region experienced a 70% to 80% week-over-week decline. Overall, the impact of the outbreak in Southern China resulted in approximately RMB 20 million to RMB 30 million in revenue drop. For the third quarter of 2021, the COVID outbreak, in combination with weather-induced problems, will negatively impact what has traditionally been the peak quarter of the year, as I mentioned. Following the initial outbreak in Jiangsu, minor outbreaks across all places like Shanghai, even Shenzhen, are disrupting our recovery process towards normalized activity levels. Despite facing these external factors, we remain committed to our long-term strategies of providing the best-in-class services and value proposition to our customers, location partners, users, and network partners. That's why we were able to increase our market share in the first half of 2021. So I'm also pleased that even with the impact of COVID, we still met the expectations of the top line last quarter. Thank you.

Your next question comes from Charlie Chen of China Renaissance.

I got one question regarding the competitive landscape. Can you give us more color on the current competitive situation? Are we seeing an increase in revenue-sharing percentage or a fixed entry fee amount? And how has another major competitor's exit, which we heard from the news, impacted the market?

Thank you for the question. Sure, we see that our peers have shifted away from the direct model and moved towards the network partner model. Actually, this is a positive move for the market in the long run and will be healthy for the entire industry. This shift will reduce the amount of aggressive business expansion with high revenue-sharing policies that some players are currently implementing. Due to the large potential that remains within the industry and our industry-leading operational efficiency, we have increased the number of business development personnel in the quarter by over 400 to better capture the market opportunities. Similarly, we have also rapidly increased our signings of key accounts during the quarter by leveraging our large on-the-ground team and our ability to provide comprehensive service to these accounts. Lastly, for our network partners, we launched a campaign in the first quarter of 2021 to attract high-quality network partners with proven track records to more quickly increase their coverage in lower-tier cities. In conclusion, on one side, we continue to strive for growth and efficiency for our direct sales model. On the other side, we are working to improve our policies and facilitate our network partners to become stronger players in the market, especially in gaining market share in lower-tier cities. I would say that in the long run and mid-term, the market will evolve into a more sustainable development, as some players are changing their business models, leading to a less competitive environment within the industry. Thank you.

In terms of the revenue-sharing percentage, it has increased a bit on a quarter-on-quarter basis due to the significant impact of COVID on the second quarter. So in the second quarter, the COVID impact was around RMB 20 million to RMB 30 million on both the top line and the bottom line. For the network partners, as Mars just mentioned, the new campaign has continued to help us attract new network partners. During the past quarter, we acquired around 30 new network partners and delivered about 15,000 cabinets to them. Revenue sharing under this new campaign with network partners has a higher revenue-sharing percentage, contributing to the increase in sales and marketing expenses. At the same time, we have also increased our investments in new initiatives, including our consumer products, and the launch of Energy Monster's new online channels for power banks, which have also contributed to the rise in sales and marketing expenses.

Your next question comes from the line of Lucy Li of Goldman Sachs.

I have a follow-up question. We've seen a lot of regulations coming out recently in various industries, including, for example, Internet companies, but also logistics or transportation companies, including some of the pricing guidelines and the thesis on mutual prosperity. From our perspective, do we see any potential from regulators trying to limit our pricing level? If so, how would that impact our business or our revenue-sharing scheme with our either POIs or the network partners?

Thank you very much for the question. We have been closely monitoring the regulation aspect since the very beginning of our company’s creation. At this time, we are not under direct regulation by any specific government entity other than the standard ones. We are actively tracking all updates in regulation and are fully compliant with the regulations and requirements set forth by the government. So, so far, we don't see any potential that our operations will be influenced by specific regulations. However, we continuously monitor the situation, and we enjoy a positive relationship with the local government because we are one of their important startups, and we are confident in managing our operations well amid this context.

Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your support, and we look forward to speaking with you in the coming months. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.