Earnings Call Transcript - EM Q3 2022

Operator, Operator

Hello, and thank you for joining Energy Monster’s 2022 Third Quarter Earnings Conference Call. At this moment, everyone is in a listen-only mode. The conference is being recorded. I will now hand the meeting over to Hansen Shi, Director of Investor Relations, who will host today’s call.

Hansen Shi, Director of Investor Relations

Thank you. Welcome to our 2022 third 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, operational highlights, and financial performance for the third quarter of 2022. 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 conference 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 2022 third quarter earnings call. In the third quarter, the effects of COVID continue to impact our operations as quarantine and lockdown measures resulted in a general decline in offline foot traffic in several regions within China. We, however, remain resilient against these challenges and are committed to delivering value to all of our partners. We continue to transition our operations to better mitigate the impact from COVID-related reasons, namely through the increasing contribution of the network partner model and the decreasing usage of entry fees or upfront fees for new signings. Revenues for the third quarter were above our guidance as the recovery from COVID was better than we previously expected, and as we continue implementing measures to effectively expand the coverage of our mobile device charging operation despite the COVID headwinds. Our mobile device charging service network is expanding as ever. As of the end of the third quarter, our network features 965,000 POI locations, 6.4 million power banks in circulation, and 325 million registered users across 1,800 counties and county-level regions. The recovery during the third quarter was strong quarter-over-quarter with revenue increasing by 18%, revenue per power bank increasing by 11%, and adjusted net loss declining by 50%. While the recovery trend is clear cut, the impact from COVID is also evident across various regions. In the third quarter of 2022, notable COVID outbreaks in Shiyan and Xiamen in mid-August, Chengdu and Shenzhen starting from late August resulted in 49%, 68%, 84%, and 50% week-over-week declines in revenue respectively. The recovery rate from the outbreaks is also more pronounced. Chengdu, Shiyan, Shenzhen, and Xiamen bounced back to 94%, 82%, 85%, and 62% in the following week when COVID cases were fully contained. While those outbreaks have been less severe compared to the outbreaks in Shanghai and Beijing during the second quarter, the frequency of these outbreaks has increased during the third quarter and continues to weigh down our operational and financial performance. The headwind set forth by COVID continues to be the largest challenge to our operation on and off in the past three years. In recent weeks, there has been a clear trend towards the easing of COVID-related quarantine measures across the country. We believe this trend will help unlock the full recovery of the offline traffic and release the growth potential of the mobile device charging service here in China. While we are excited about the long-term outlook and the general recovery of the industry, we expect the impact from COVID to persist during the fourth quarter and into early next year. That is why we remain committed to effectively increasing the coverage of our mobile device charging service network. On the coverage expansion side, our increased coverage through the combination of our direct and network partner models will help us further extend the Energy Monster network effect, which makes it easier for us to acquire users, location partners, and network partners. This network effect continues to be a vital differentiating factor in our industry-leading growth as the industry is poised for recovery. On the efficiency side, our focus on lowering incentive fee rates for new signings with less usage of fixed incentive fees, reducing hardware CapEx per cabinet, and increasing efficiencies of our employees continue to help us reach higher levels of efficiency. These initiatives in improving our efficiency will be especially apparent once the offline foot traffic fully normalizes in China. The impact from COVID has challenged our operation in recent years, but now more than ever, we are expecting a gradual recovery to full normalization. Our strategies in expanding our network coverage and improving our efficiency have developed into our competitive mode and will serve as the key drivers for our growth as the industry enters into an overall recovery trend. Now let me go through our core strategies during the third quarter in terms of expanding our coverage and increasing our efficiency in greater detail. First of all, it is the coverage, which continues to be primarily driven by our network partner model. POIs operated under the network partner continue their upward trajectory as of the end of the third quarter. POIs under the network partner model reached 47%, reaching a historical high compared to 43% last quarter and 36% during the same period last year. The rapid growth in our network partner contribution is driven by the increase in our network partner count and the growing strategy synergy between our two models. We continued to acquire network partners at record speed. During the third quarter, the number of active network partners reached more than 5,300, a substantial increase from the approximate 3,000 during the second quarter of this year and 800 during the same period last year. This growth momentum in network partners is primarily filled through the combination of the program, allowing our direct model business development personnel to acquire network partners, as well as the increase driven by our network partners development team. The network partner program under the direct model, initially launched in April this year, was designed to give our direct model team an alternative avenue to effectively increase Energy Monster’s coverage. Because our direct model business development personnel are locally based and have extensive relationships with local partners within their region of coverage, they also accumulate relationships with potential network partners as well. Notably, their understanding of the regional competitive landscape in conjunction with their ability to deploy either the direct or network partner model gives us the ability to more flexibly increase our market presence. This program continues to be widely popular among our direct model business development team and is a key driver for our network coverage expansion. With the large influx of new network partners, our operational collaboration after launching the new partnership becomes all the more important. A number of these new network partners have existing expertise in other industries but with limited experience in the mobile device charging service industry. That is why it is important to help these new partners hit the ground running. To do so, we have dedicated teams of operational expertise that closely monitor the performance of each network partner. They constantly share the know-how of the industry that we have accumulated over the years with these network partners so that they can successfully manage their own teams. For more experienced network partners, we also provide advanced metrics such as local heat maps and competitive landscape analysis, so they can scale their operation to new heights. During the quarter, we also launched more features for the network partners' backend system so they can more efficiently manage their POIs and teams. Our focus on providing post-engagement, consultation, and operational tools for our network partners is the main differentiator for Energy Monster. Our commitment to these values helps our network partners achieve industry-leading returns and helps Energy Monster effectively and constantly increase its market share in China's mobile device charging service industry. While the ability for our direct model team to also leverage the network partner model greatly increases our expansion and the network partner model, our direct model also continues to maintain its commitment to effective expansion. The impact of COVID has been challenging, especially for our direct model, given that outbreaks typically affect higher tier cities, where our direct model typically resides more frequently and severely than lower tier cities. These outbreaks have resulted in an increase in closures for location partners within the regions of impact. As a result, the number of POIs under the direct model decreased to 53% as of the end of the third quarter 2022. Our direct model will in the future focus more on high traffic locations or KAs in higher tier cities. We believe the ability for our direct model team to utilize either the direct or network partner models synergizes the two models and paves the way for Energy Monster to continue effectively and efficiently increase its network coverage. By increasing our POI coverage, more customers will be able to find our service when they are in need of a power bank, which ultimately converts into more registered users. This self-reinforcing cycle stemming from increased coverage allows us to continuously scale our operation and reach higher levels of benefit from the network effect. Next is our initiatives in improving Energy Monster’s overall efficiency. COVID’s impact in the last few years has demanded us to further improve our industry-leading levels of efficiency to higher levels. Even with the general easing of quarantine and lockdown measures in sight, and the gradual recovery to full normalization in progress, we believe efficiency was and always will be a part of our core competence. We continue to reduce the amount of fixed and upfront fees paid to location partners during the quarter as we further offload fixed types of expenses and better mitigate ourselves from COVID. During the third quarter, more than 70% of newly signed POIs were purely revenue sharing, while less than 15% utilized some form of fixed fee. We currently primarily reserve the usage of fixed fees strictly for KAs with established scale due to their lower closure rate and higher traffic. Now, a centerpiece of our efficiency derives from the cost efficiency and stabilities of the hardware we place into the market. With that, we are pleased to announce that we have completed the development and started the mass production of our latest generation of power bank cabinets based on the feedback from our users. These new six or 12 slot cabinets feature redesigned bodies with a futuristic touch that visually differentiates our cabinet from that of our peers. The internal features have a complete redesign so that it is more easily assembled on the production front. The functionality and capabilities have all been upgraded from previous versions. This features a significant reduction in CapEx per cabinet. Compared to the last generation of cabinets, the newer ones feature over a 40% reduction in CapEx per cabinet. The reduction in cost is significant and will increase asset efficiency for both Energy Monster and our network partners. This reduction in the cost of our cabinets is especially helpful for attracting new network partners and expanding the scale of existing ones, as it reduces the amount of investment that a network partner has to invest, which effectively increases the rate of return on the investment. We are excited to ramp up the production and development of the latest generation of cabinets as it will increase Energy Monster's competitiveness and further enhance the experience of the millions of users that rely on our hardware for their everyday charging needs. Our pledge to improving operational efficiency has also reached every corner of our operation. We have left no stone unturned in this regard. During the third quarter, we continued refining the details of our operations in place such as enhancing the logistics and warehousing of our hardware, testing new marketing campaigns to increase user stickiness, upgrading the tools that our employees and partners rely on every single day, and optimizing headcounts so that every function performs at an industry-leading level of efficiency. In each of these regards, we continue to elevate the competitive mode surrounding Energy Monster, one block at a time. By doing so, our pursuit of operational excellence will set us apart from our peers within the industry and unlock higher levels of return for our stakeholders and investors. In the fourth quarter, COVID continued its course and significantly impacted a number of regions. Outbreaks in Beijing resulted in an approximately 70% week-over-week decline in revenue compared to the week before, Guangzhou and Shiyan down about 40%, Tongxin down 80%, and Tongshan down about 30%. In recent weeks, we are also seeing a general trend toward the easing of quarantine and lockdown measures across the country. We remain cautiously optimistic about this easing trend. We are optimistic in the sense that this will be a first step to the normalization of the offline traffic here in China, but we also remain cautious as the road back to normalization will take a bit of time and there will be ups and downs during this path to recovery. In recent weeks, after the easing of quarantine and lockdown measures across the country, the recovery trend was strong. However, the outbreaks of the virus in the general population in the last week have driven demand down significantly. We expect the impact from the spread of the current virus to continue affecting us during the fourth quarter and into early 2023. We have continued to expand our network coverage and improve our efficiency during the past three years alongside COVID. While the impact has challenged us operationally and financially, we are confident that Energy Monster will come out of it stronger than ever. Our coverage network is as expansive as ever and our efficiency is evolving to better lead the changing environment. While we remain cautiously optimistic about the short-term recovery, we are fully confident that the normalization of the traffic in China is inside, and we are better than ever to capture the recovery and growth of China's mobile device charging service industry. Thank you very much. I'll now turn the call over to Maria Xin, our Chief Financial Officer for the financial highlights.

Maria Xin, Chief Financial Officer

Thank you, Mars. Now let me walk you through the financial results in greater detail. For the third quarter of 2022, revenues were RMB815 million, representing a 12.4% year-over-year decrease. Revenues from the mobile device charging business were down 11.7% to RMB791 million and accounted for 97.1% of our total revenues for the quarter. The decrease was primarily attributable to the impact of COVID-19 during the third quarter of 2022, which resulted in a significant decline in general offline foot traffic in China due to COVID-19 restrictions. Revenues from power bank sales were down 33.9% year-over-year to RMB18.1 million and accounted for 2.2% of our total revenues for the quarter. The decrease was primarily attributable to the impact of COVID-19 during the third quarter of 2022, which resulted in a significant decline in general offline foot traffic in China due to COVID-19 restrictions. Other revenues were down 19% year-over-year to RMB5.8 million and accounted for 0.7% of our total revenues. The decrease was primarily attributable to the decrease in user traffic as a result of the impact of COVID-19 during the third quarter of 2022. Cost of revenues was down 10.2% year-over-year to RMB125.5 million for the third quarter of 2022. The decrease in the cost of revenues was primarily due to the decrease in maintenance costs and costs of power banks sold, which was partially offset by the increase in logistics costs for the delivery of equipment to network partners. Gross profit was down 12.8% year-over-year to RMB689.4 million for the third quarter of 2022. The decrease was primarily due to the decrease in revenues from the mobile device charging business. Operating expenses for the third quarter of 2022 were RMB786.4 million, down 9.9% year-over-year, excluding share-based compensation. Non-GAAP operating expenses were RMB779.3 million, representing a year-over-year decrease of 10%. Research and development expenses for the third quarter of 2022 were RMB24.3 million, down 16.7% year-over-year. The decrease was primarily due to the decrease in personnel-related expenses. Sales and marketing expenses for the third quarter of 2022 were RMB752.5 million, down 7.5% year-over-year. The decrease was primarily due to the decrease in entry fees and incentive fees paid to location partners and personnel-related expenses, which was partially offset by the increase in incentive fees paid to network partners. General and administrative expenses were RMB29.4 million in the third quarter of 2022, down 7.9% year-over-year. The decrease was primarily due to the decrease in personnel-related expenses, which was partially offset by the increase in share-based compensation expenses. Loss from operations was RMB97 million and the operating margin for the third quarter of 2022 was negative 11.9% compared to negative 8.8% in the same period last year. Net loss was RMB95.8 million in the third quarter of 2022. The net margin for the third quarter of 2022 was negative 11.7%. Non-GAAP net loss, which excludes share-based compensation expenses, was RMB88.6 million in the third quarter of 2022 compared to a non-GAAP net loss of RMB73 million in the same period last year. As of September 30, 2022, the company had cash and cash equivalents, restricted cash, and short-term investments of RMB3.1 billion. Cash flow generated from operations for the third quarter of 2022 was RMB268.6 million. Capital expenditures for the third quarter of this year were RMB111.2 million. Energy Monster currently expects to generate RMB550 million to RMB570 million in revenues for the fourth quarter of 2022. Please note that the forecast reflects Energy Monster’s current and preliminary view on the industry and its operations, which is subject to change. We are now approaching the end of the conference call. 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.