Earnings Call Transcript - EM Q1 2023

Operator, Operator

Hello and thank you for standing by for Energy Monster’s 2023 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Director of Investor Relations, Hansen Shi. Please go ahead.

Hansen Shi, Director of Investor Relations

Thank you. Welcome to our 2023 first quarter earnings conference call. Joining me on the call today are Mars Cai, Energy Monster’s Chairman and Chief Executive Officer; and Maria Xin, Chief Financial Officer. For today's agenda, management will discuss business updates, operation highlights, and financial performance for the first quarter of 2023. Before we continue, I refer you to our Safe Harbor statement in the earnings press release, which applies to this call as we will make 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 Chief Executive Officer, Mars Cai, for the business and operation highlights.

Mars Cai, Chairman and CEO

Thank you, Hansen. Good day everyone. Welcome to our 2023 first quarter earnings call. We are delighted to announce a strong 2023 first quarter results with both revenues and profitability making strong recoveries both on a year-over-year and quarter-over-quarter basis. Revenues increased 11.6% year-over-year as the challenges that impacted the mobile device charging service industry in the past few years subsides. The rapid recovery of the food traffic is clear throughout the first quarter. In the month of February – in January, February, and March of 2023, our mobile device charging service GMV increased by 3%, 14%, and 34%, respectively, driven by the sequential recovery in revenue per power bank. By March, we believe that the vast majority of the impact from COVID on offline food traffic has recovered, marking an official turning point as we head back to normalization. In the first quarter of this year, mobile device charging service GMV increased by 16% year-over-year and 35% quarter-over-quarter. These recoveries towards normalization are significant, and influenced by drivers across the board. Recovery can be seen across all city tiers and all POI types during the first quarter. First-tier cities saw a year-over-year growth in GMV of 24%, while all the other city tiers saw 15%. In terms of POI types, GMV of retail locations, restaurants, and transportation hubs increased by 25%, 19%, and 44% year-over-year, respectively. This robust growth across the board reflects the recovery in the industry, driven by the restoration of food traffic, as well as our team's dedication to excellence in increasing Energy Monster’s coverage. As the impact of the pandemic decreases, our profitability has also made a significant recovery. The recovery in revenue allows us to reach a scale that can better cover fixed costs. Our non-GAAP net profit for the quarter was 17.1 million, which is the first time we have reached profitability since the third quarter of 2021. This is a significant improvement compared to a loss of nearly 90 million during the same period last year and 327.2 million last quarter. We believe that as offline food traffic continues to rebound, our revenue will continue to normalize as the efficiency of our cabinets and power banks increases. Our profitability will in turn gradually return to normal levels. We believe that this positive trend in the recovery of our profitability will continue to shape going into the rest of 2023. We are also pleased to report that we continue to maintain a strong cash flow, with operating cash flow being positive at 238.6 million for the first quarter of 2023. We are able to continue to grow our cash and cash equivalent balances. The strength in our balance sheet provides us with the financial stability necessary to capture the growth of the industry as well as opportunistically expanding into new initiatives that can leverage Energy Monster’s operational and technological expertise. Our financial strength coming out of the challenges in the past few years is also a testament to our team's strategic planning and disciplined execution. During the quarter, we remained committed to expanding our coverage and improving efficiency to drive growth and achieve our strategic objectives. Both of these initiatives are fundamental aspects of our core belief in effective growth, which balances speed with quality. For our network partner model, we will leverage our brand and partner-oriented values to attract high-quality network partners and provide the necessary tools and support to unlock their growth potential. For our direct model, our ability to acquire and provide high-quality service tailored to key accounts differentiates Energy Monster within the industry. We also continue to optimize our resources and streamline our operations to position ourselves to lead the industry in terms of efficiency. Now, let me walk you through our key initiatives, including coverage expansion and efficiency improvements in greater detail. First is our continuous effort to expand our coverage, so more users can access our mobile device charging service. We are proud to announce that the number of POIs has exceeded 1 million for the very first time. This is a significant milestone that reflects our ability to continue expanding the base of our operation. Compared to the end of 2020 and 2021, our POI count increased by 51% and 18%, respectively. In addition to the number of the POIs, we are also expanding the area where our service is available. During the first quarter of this year, we added 31 new counties, bringing the total number of counties and county-level regions to over 1,900. At the same time, we are also increasing the diversification of our POI mix in addition to the increase in areas. New locations such as office buildings, medical facilities, and public spaces further enhance our network coverage, allowing us to attract more new users and improve the experience of existing ones. This expansion of coverage is a reflection of our commitment to providing convenient and accessible charging solutions to our users, regardless of their location. Our user base continues to grow in accordance with the increase in our POI coverage. During the first quarter, we added 13.5 million cumulatively registered users, bringing the total cumulative registered users to 347.2 million as of the end of the first quarter. The 16% year-over-year increase in cumulative registered users continues to clearly indicate that the demand for our service has not yet been fully met. New POIs continue to attract users who were previously unable to access our service. We believe that as we continue to expand our POI network coverage in more areas and location types, our reputation as the number one mobile device charging service provider will allow us to effectively increase our user base and better meet the demand of users for our service. In the first quarter of this year, we made an adjustment to our POIs under the direct model as offline food traffic in China continues to normalize. Going forward, our direct model business development personnel will put more emphasis on expanding into high-traffic locations that meet our standards. For national and regional key accounts, our business development team continues to sign new brands with higher levels of efficiency compared to industry peers that solely leverage the network partner model. As a result, we continue to sign a large number of POIs that belong to chain stores operating in China during the first quarter of this year. The acquisition of national and regional key accounts continues to be an advantage for the company. Now, for the network partner model, it continues to be the core driver of growth in POI count during the quarter. During the first quarter of 2023, we had 7,700 active network partners. This is an increase of 1,800 compared to the previous quarter and 6,600 compared to the same period last year. Our network partner team continues to train our partners by providing the expertise and data needed to successfully run their operations. Looking forward, the combination of continuously acquiring new network partners alongside unlocking the growth of existing ones will serve as the core drivers of growth under the network partner model. Overall, our point-of-year composition and scale has changed when compared to the end of 2019. Our POIs are now more diversified and expansive than ever. As our service is available to more users across more regions and location types, we remain committed to providing our users with the best possible experience, meaning that our service has to be more readily available in more locations. That's why we will continue expanding our coverage, and with the support of our ever-growing network partners, our coverage will become even more diversified in the future. Our direct model team continues to play a key role in placing our cabinets into high-traffic and high-yielding locations. The improvements in our POI composition and scale are the result of our team's efforts to adapt to the changes in the market. We believe our team's dedication will enable us to further expand our coverage and our market share. Efficiency is the other critical aspect of our business, and we are proud to report that we have made significant progress in this area. We are happy to announce that we have once again regained our profitability for the first time since the third quarter of 2021. While a significant part was due to the increase in revenue, efficiency of our cabinets and power banks as a result of normalization of offline traffic helped us reach a scale that can better cover our fixed costs and expenses. The initiatives we have taken last year to reduce costs and improve efficiency are also bearing fruit. We have taken steps to reduce fixed costs, optimizing our contract structure to ensure that we are operating as efficiently as possible during the pandemic. As a result, the number of entry fee type contracts decreased by more than 60% in the first quarter compared to the same period last year, with entry fee contracts accounting for 15% of incentive fees for location partners down from 24% in the same period last year. Pure revenue-sharing contracts account for over 60% of total direct model contracts in the first quarter, up from about 40% in the same period last year. The cost of our cabinets that we launched into production last year is also starting to help reduce depreciation costs. That's how we are able to achieve a decline in the cost of revenues while our revenues have significantly recovered in the first quarter. On the operational side, the efficiencies of our business development personnel also continue to improve. The number of POIs managed per business development personnel reached about 160 in the first quarter, increasing from about 140 in the same period last year. The efficiency of our network partner team is similarly reaching higher levels of efficiency. We are also investing in the future by designing a new generation of cabinets to continuously improve our competitiveness. Our system and risk control systems are being upgraded, ensuring that we are at the forefront of technological innovation and able to provide our users with the best possible experience. As the number of network partners increases, we continue to improve their efficiency and corresponding risk control measures to provide long-term productivity. We believe that these investments in the future will enable us to maintain our competitive advantage and continue driving growth and profitability in the years to come. We are proud of the progress we have made in improving efficiency, reducing costs, and investing in the future. We remain committed to maximizing efficiency and driving sustainable growth and profitability while also providing our users with the best possible experience. As we look ahead to the rest of this year, we are optimistic about the future and confident in our ability to continue driving both growth and profitability. The first quarter of 2023 marked the beginning of the recovery in offline food traffic. We have delivered a strong recovery trend in terms of financials, both in terms of revenue growth and profitability even during the recovery phase. The first quarter's recovery trend will continue as we head back towards full normalization during the second quarter. In April, mobile device charging service GMV increased by 64% year-over-year and the number is 39% in May. During the Labor Day holiday, we set a new historical high with daily GMV averaging 18 million during the first five days and peaking at 21 million on May 1. We are optimistic about the overall recovery during the second quarter of this year. In conclusion, we are very proud of the progress we have made in driving growth and profitability, and we are optimistic about the future as well. We were able to achieve a significant recovery in terms of our revenue and profits during the first quarter, and the second quarter looks even more promising. We believe that our team's dedication to our company's value and management team's vision on the industry has allowed us to navigate our way out of last year's challenges more efficiently than ever. We are also pleased to see that Energy Monster's market share has reached new heights as of the end of 2022 based on third-party reports, and we continue to lead the industry in terms of market share. We have been cementing our position in China's mobile device charging service industry in the past years and will continue to do so going forward. Looking ahead to the second quarter and into the future, our two main priorities continue to be expanding our network coverage and improving our efficiency. Through a combination of network partners and direct models, we are confident that we can continue to expand our market share, given our advantage in economies of scale. The benefits of our network effect in helping us more efficiently acquire new users and POIs give us a competitive edge over our peers. The execution of our strategies in coverage expansion and efficiency improvement, in combination with our strong balance sheet, position us to best capture the mobile device charging service industry.

Maria Xin, CFO

Thank you, Mars. Now, let me walk you through the first quarter 2023 financial results in greater detail. For the first quarter of 2023, revenues were 822.8 million, representing an 11.6% year-over-year increase. Revenues from mobile device charging business were up 10.7% to 796.5 million and accounted for 96.6% of our total revenue for the quarter. The increase was primarily due to the general recovery in offline food traffic in China during the quarter. Revenues from power bank sales were up 43.7% year-on-year to 18.6 million and accounted for 2.3% of our total revenues for the quarter. The increase was primarily due to the general recovery in offline food traffic in China during the quarter. Other revenues were up 52.8% year-over-year to 9.8 million and accounted for 1.2% of our total revenue. The increase was primarily attributable to the increase in advertisement efficiency and new business initiatives. Cost of revenue was down 0.1% year-on-year to 127.4 million for the first quarter of 2023. The decrease was primarily due to the decrease in maintenance costs and disposal costs, which was partially offset by the increase in depreciation and the cost of power banks sold. Gross profit was up 14.1% year-over-year to 695.4 million for the first quarter of 2023. Operating expenses for the first quarter of 2023 were 711.2 million, up 0.3% year-over-year. Excluding share-based compensation, non-GAAP operating expenses were 704.9 million, representing a year-over-year increase of 0.4%. Research and development expenses for the first quarter of 2023 were 21.4 million, down 20.8% year-over-year; the decrease was primarily due to the reduction in personnel-related expenses. Sales and marketing expenses for the first quarter of 2023 were 665.3 million, up 0.8% year-over-year. The increase was primarily due to the rise in incentive fees paid to network partners, which was partially offset by the decrease in entry fees and incentive fees paid to the location partners and personnel-related expenses. General and administrative expenses were 26.8 million in the first quarter of 2023, down 2.2% year-over-year. The decrease was primarily due to the overall increase in efficiency of our operations. Loss from operations was 15.8 million and the operating margin for the first quarter of 2023 was negative 1.9%, compared to negative 13.5% in the same period last year. Net income was 10.8 million in the first quarter of 2023, compared with a net loss of 96.4 million in the same period last year. Net margin for the first quarter of 2023 was 1.3%, compared to a net margin of negative 13.1% in the same period last year. Non-GAAP net income, which excludes share-based compensation expenses, was 17.1 million in the first quarter of 2023, compared to a non-GAAP net loss of 89.7 million in the same period last year. As of March 31, 2023, the company had cash and cash equivalents, restricted cash, and short-term investments of 3.1 billion. Cash flow generated from operations for the first quarter of 2023 was 238.6 million. Capital expenditure for the first quarter of 2023 was 170.3 million. Thank you for your listening. We are now ready for your questions.

Operator, Operator

Your first question comes from Vicky Wei with Citi. Please go ahead.

Vicky Wei, Analyst

Good evening, management. Thanks for taking my questions. So, I have one small question. Given the current positive recovery trend that you have seen, would you please provide some color about the outlook for the second quarter and for the whole year, for example, in terms of revenue and margin profile? Thank you.

Maria Xin, CFO

Thanks for your question. The first quarter's recovery trends will continue as we head back towards normalization during the second quarter of 2023. In April, mobile device charging service GMV increased by 64% year-over-year and 59% in May. We are also able to reach new historical highs during the Labor Day period in early May. That's why we are optimistic about the overall recovery during the second quarter of 2023, given the current trend. In terms of our net margin, we have regained profitability this quarter. We are confident that going forward, we will be profitable for the full-year 2023 based on the current outlook. Thanks.

Operator, Operator

Thank you. Your next question comes from Violet Yi with China Renaissance. Please go ahead.

Violet Yi, Analyst

Hi management. Thanks for taking my question and congratulations on the recovery for the quarter. I have a question on the POI count for the quarter. It seems like the overall growth in POI is lower than previous quarter. Can management share the exact reason for the lower-than-usual growth and possibly provide any guidance on POI target by the end of the year? Thanks.

Mars Cai, Chairman and CEO

Thank you for your question. It's a very good one. Actually, this quarter is a bit special because it is the first quarter coming out of the COVID control. Due to the lower-than-usual food traffic in China in the past years, a number of locations under the direct model will not be able to meet the revenue standards of our operations. That's why in the first quarter of this year, we've made an adjustment to our POIs under the direct model as the offline food traffic in China continues to normalize. We actually removed approximately 100,000 POIs under the direct model that are considered underperforming during normal food traffic levels. This move has lowered the number of POIs under the direct model as of the end of the first quarter of this year. However, we believe that this adjustment is necessary as we fully emerge from the impact of COVID and position ourselves for the future. As for the POI target for the end of the year, we do not offer any specific guidance on the POI, given that our approach to POI is market-driven, meaning that we expand into POIs only if they fit the standards of the company. On the other side, I would say something very positive. Even with the lower-than-usual growth of POIs, we see the demand of users is strong. We have 1 million POIs, and also, we acquired about 13.5 million accumulated registered users in the first quarter, bringing the number up to 347.2 million as of the end of the first quarter. So, we see that this adjustment of the POI will make the direct model healthier. And also given the POI location expansion, we see more users coming to the services, which also shows a very strong recovery in the demand in the market. Thank you very much for the question.

Operator, Operator

Your next question comes from Victor Tang with Goldman Sachs. Please go ahead.

Unidentified Analyst, Analyst

Thank you, management. Can management provide a bit more insight on the competitive landscape in light of the recovery in the industry? Are we seeing more competition? I also have a quick question on the POI for the network partner model. Is there any growing trend of the network partner model contributing going forward? Thank you.

Mars Cai, Chairman and CEO

Thanks a lot for the great question. From our perspective, the competition is actually a lot less intense in the first quarter. Even after the general recovery, this is a bit counterintuitive, but the general landscape of the industry has changed a lot in the past few years. Prior to COVID, a number of our peers in the industry and Energy Monster relied heavily on the direct model. Competition tends to be higher when all players in the industry are expanding using the direct model. However, during COVID, most of our competitors shifted almost completely to the network partner model, while we maintained our strong direct model capabilities. The current industry landscape is quite different because of the general shift towards the network partner model, since network partners are profit-driven. That's why we are not seeing an uptick in incentive fees for the new signings in the first quarter. Thus, I see the competitive landscape is not as strong as it usually was before COVID. As for your question on the network partner model, our network partner model continues to be the main driver of growth in the POI count during the quarter, mainly because of the increase in network partners count in the past year. Because of this significant increase, one of our main goals this quarter and this year is to work alongside our network partners to operationally support them so that they can grow alongside us. At the same time, we expect the number of POIs operated under the network partner model to continue growing, but the increase in percentage of POIs managed under the network partner model this quarter is largely due to the adjustment in our direct model POI portfolio. Going forward, we will continue leveraging both models to expand our network coverage and further increase our market share within the industry. Thanks a lot.

Operator, Operator

We are now approaching the end of the conference call. I will now turn the call over to Energy Monster's CFO, Maria Xin, for closing remarks.

Maria Xin, CFO

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 continued support, and we look forward to speaking with you in the coming months. Thank you.

Operator, Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.