Earnings Call Transcript - EM Q1 2022

Operator, Operator

Hello, and thank you for standing by for Energy Monster’s 2022 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections you may disconnect at this time. I now like to turn the meeting over to your host for today's conference call, Director of Investor Relations, Hansen Shi. Thank you. Please go ahead.

Hansen Shi, Director of Investor Relations

Thank you. Welcome to our 2022 first quarter earnings conference call. Joining me today on the call 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 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 updates.

Mars Cai, Chairman and CEO

Thank you, Hansen. Good day everyone, welcome to our 2022 first quarter earnings call. The first quarter of 2022 has been a challenging quarter for Energy Monster. In light of the continuous outbreak of COVID in regions such as Shenzhen, Beijing, Tianjin, Hangzhou, and Changchun throughout the quarter, and especially due to the significantly worse than expected outbreaks in Shanghai which began mid-March, this radiated towards our other regions. For example, the outbreak in Tianjin in January resulted in a 67% decline in revenues within the city. During the 15-day period after the initial case, Hangzhou's January outbreak resulted in a 58% decline; Shenzhen in March saw a 51% decline; Changchun’s March outbreak caused an 86% decline; and the outbreak in Shanghai starting mid-March resulted in a 70% decline in March. The frequency and size of the COVID outbreaks in the first quarter of 2022 are increasing compared to 2021. These COVID outbreaks resulted in a significant decline in offline food traffic as people are more likely to stay at home, and offline locations are being forced closed due to lockdown measures. The outbreaks are resulting in a general decline in offline user food traffic across the board, negatively impacting almost all brands with an offline presence. These outbreaks continue to adversely affect food traffic to offline points of interest in both regions of the outbreak and surrounding regions. This in return results in lower food traffic to points of interest where our cabinets are placed. During the first quarter of this year, same-store revenue decreased by approximately 35% year-over-year as a result of the general decrease in food traffic. Despite the impact, we continue to stay long-term oriented and focus on laying the groundwork for expanding our market leadership. We continue to make strides in expanding our points of interest network, which reached 851,000 as of the end of the first quarter of 2022, increasing by over 20% year-over-year. With the increase in coverage, our service becomes available to more customers across China. Cumulative registered users reached 299 million as of the end of the first quarter, implying the acquisition of 12 million new registered users and increasing by over 25% year-over-year. We also continue to reduce both fixed and variable incentive fees to better mitigate against fluctuations in revenue resulting from COVID outbreaks. Notably, incentive fees as a percentage of revenue for new signings continue to trend down in light of diminishing competition. Lower incentive fees and decreased usage of fixed incentive fees will eventually help us lower our planned incentive fee rates and decrease the impact of external events such as COVID outbreaks on our operations. While we continue to be impacted by COVID, we remain confident in the long-term development of the market. The general demand for our service remains unchanged, as regions coming out of COVID impact quickly recovered within one to two months after containment. That's why we continue to uphold a long-term perspective in terms of our core strategies during COVID. We will continue increasing our points of interest network coverage through both our direct and partner models, as well as launching innovative ways for the two models to work together to further expand our market presence. We also continue to innovate to increase our market-leading efficiency programs such as our power bank optimization program, and the launch of our new generation of cabinets will unlock our asset efficiency capabilities. We are confident that our innovative initiatives will further help us both cement our competitive advantage and capture the growth of China's mobile device charging service industry. Now, let me walk you through our core strategies in coverage and efficiency. First is the coverage of our service. We continue to expand the coverage of our service. Through a combination of our direct operation and network partner models, our points of interest coverage and our user base continues to increase, despite the headwinds presented by COVID outbreaks. In terms of our direct operation model, our business development personnel continue to spearhead our coverage expansion, primarily in higher tier cities. During COVID, the expansion rate of our points of interest has significantly decreased compared to that of a normalized period as the declining offline traffic to points of interest makes a large number of potential points of interest inadequate for coverage in terms of our profitability requirements. While this has resulted in a decrease in potential points of interest fit for our coverage during the period of COVID impact, it also resulted in a general reduction in incentive fee rates for new signings. After the outbreak is contained, the potential points of interest pool is restored when offline traffic within the region is normalized, because our incentive system aligns the interests of our business development with that of the company. We continue to maintain a healthy and efficient increase in points of interest coverage even during periods of COVID outbreak. On the other side of the coverage expansion is our network partner model. Through a series of marketing campaigns and implementation of new channels for partner acquisition, such as telemarketing and online acquisition tailored to attract high-quality network partners to Energy Monster, we continue to rapidly increase our network partner count. At the end of the first quarter of 2022, we have a network of over 1,300 network partners spanning across China. Our network partner count is up by over 180% year-over-year and 30% quarter-over-quarter as we accelerate our pace for attracting high-quality network partners. These network partners generally have previous experience working with points of interest within a given region, making them highly efficient partners for the expansion of our service network. The number of points of interest operated under the network partner model increased from 38% at the end of the first quarter last year to 38.9% at the end of the first quarter this year. We also launched a series of innovative initiatives that leverage the advantages of direct operation and network partner models. Initiatives such as the opening of all regions to both models and leveraging our direct operation team to attract new network partners allow us to extract a higher level of synergy between our two core models. Our direct operation model, which has extensive coverage across China, can now leverage its presence to identify not just new points of interest partners, but also potential network partners. At the same time, our network partners can work alongside our direct model in all regions to increase coverage in areas that were previously exclusive to the direct model, allowing us to better leverage our network partners' unique advantages. Both models capture market share effectively. We believe additional synergy between the two will help us extend our market leadership more rapidly, flexibly, and efficiently. We also continue to make strong progress expanding our key accounts coverage. Notably, during the quarter, we signed major brands such as Pizza Hut. The continuous expansion of key accounts remains an important component of our coverage expansion as key accounts generally have higher levels of food traffic, while the impact of COVID does so to a lesser extent compared to smaller brands. This makes key accounts strategically important as they are less impacted during COVID and have higher levels of potential in periods of normalized food traffic. Our key priority is to target the top key accounts within each point of interest segment such as chain stores, shopping malls, transportation hubs, and movie theaters. By utilizing a top-down approach, we are able to more efficiently onboard smaller brands given our experience working with larger ones. Our ability to customize our service to better fit within the points of interest experience and to provide high-quality support also serves as key differentiators for Energy Monster’s value added to key accounts when compared to our peers. Going forward, we believe we will be able to leverage our existing strength in the key account segment to accelerate our penetration into all types of key accounts throughout China. In terms of the competitive environment, throughout last year and this year, we are seeing a general decline in competition under the direct model as our peers within the industry continue to significantly scale down their direct operation personnel. In combination with the COVID outbreaks and the more significant impact on our peers, we see a lighter competitive environment for points of interest across all segments and regions. This decrease in new signing, incentive fee rates, and the reduction in usage of fixed incentive fees for new signings will help us navigate through the period of COVID impact better. Next is our initiatives on the operational efficiency front. Efficiency has always been a crucial part of Energy Monster's operating philosophy and a key differentiator that sets us apart from our peers within the industry. Because of the impact of COVID on our top line, we continuously optimize our fixed costs and expenses, greatly improving efficiency helps us reduce these fixed costs and expenses, which in turn lowers the proportion of fixed costs and expenses as a percentage of revenue. Although the efficiency of our direct operation and network partner team remains market-leading, we continue to identify ways to increase their efficiency through measures such as back-end tool improvement and model innovation. Our business development personnel's coverage of points of interest continues to increase as we implement measures to unlock the efficiency potential through better systems and improved standard operating procedures. In the first quarter, our business development personnel's coverage of points of interest per person has increased 33% year-over-year, representing a significant increase in terms of efficiency. The implementation of innovative models such as leveraging our direct operation team to attract more network partners will further unlock our efficiency potential as our business development personnel can have more avenues to contribute growth. We also continue to make strides in improving our asset efficiency through our power bank optimization program and the launch of our newer generation of cabinets this year. We continue to implement our power bank optimization program during the quarter, which provides us the most efficient amount of power banks that should be in each cabinet based on historical data. Additionally, we are also in the final testing phase of our new generation of power bank cabinets featuring redesigned external form factors and internal layouts. While these new cabinets will have similar durability and features, they will have significantly lower capital expenditures. These new cabinets will also significantly enhance our ability to acquire more high-quality network partners as they reduce the payback period for our partners and unlock their growth potential. We believe our continuous pursuit of efficiency, both in terms of employee performance and asset management, will significantly distinguish Energy Monster’s position within the industry and unlock value for all of our stakeholders in the long run. In conclusion, we continue to face challenges from COVID in the first quarter of 2022 and will face even more in the second quarter given the larger scale outbreaks stemming from Shanghai and Beijing. Starting in mid-March, Shanghai’s foot traffic was nearly halted due to the citywide lockdown imposed by the government. As a result, from mid-March to May, our revenue in Shanghai decreased by an average of 93%. Beijing is similar, but to a lesser extent. From late April to May, our revenue in Beijing decreased by an average of 74%. While these outbreaks are challenging, they are short-term in nature. Starting in June, the recovery trend has been clear. For example, in the first week of June, average revenue in Shanghai recovered to 27% compared to the same period last year and this is an improvement from the 7% revenue from mid-March to May. Despite ongoing outbreaks in Beijing and other regions, we see that demand for our service remains unchanged and regions impacted by outbreaks quickly recover to normalized levels in due time. Overall, COVID outbreaks cannot and will not be predictable. That’s why we have to focus on the fundamentals of the company so that we can navigate through periods of lower foot traffic and capture the growth of the industry during times of normalized foot traffic. We will continue to expand our coverage from our direct and network partner models, expanding our points of interest coverage across all cities, point of interest types, and brands. We will also continue to introduce innovative ways for our direct operation and network partner models to leverage their respective advantages to achieve higher levels of synergy between the two models. We will relentlessly pursue higher efficiency both in terms of our employees and assets. Going forward, we believe our efforts in coverage expansion and efficiency improvements will provide us with a strong competitive advantage that sets Energy Monster apart from industry peers and allows us to effectively capture the long-term growth of China's mobile device charging service industry. Thank you very much. I will now turn the call over to Maria Xin, our Chief Financial Officer for the financial highlights.

Maria Xin, CFO

Thank you, Mars. Now, let me walk you through the financial results in greater detail. For the first quarter of 2022, revenues were 737.1 million, representing a 13% year-over-year decrease. Revenues from the mobile device charging business were down 12.1% to 717.7 million, accounting for 97.4% of our total revenues for the quarter. The decrease was primarily attributable to the impact of COVID-19 during the first quarter of 2022. Revenues from power bank sales were down 48.3% year-over-year to 12.9 million, and accounted for 1.8% of our total revenues for the quarter. The decrease was primarily due to the impact of COVID-19 during this quarter. Other revenues were up 25.5% year-over-year to 6.4 million, accounting for 0.9% of our total revenues. The increase was primarily attributable to the rise in users, advertisement efficiency, and new business initiatives. Cost of revenue was up 2.4% year-over-year to 127.6 million for the first quarter of 2022. The increase in the cost of revenues was due to the increase in operational scale, resulting in higher depreciation costs. Gross profit was down 15.6% year-over-year to 609.5 million for the first quarter of 2022. The decrease was primarily due to the decline in revenues from the mobile device charging business. Operating expenses for the first quarter of 2022 were 708.8 million, up 1.5% year-over-year. Excluding share-based compensation, non-GAAP operating expenses were 702.1 million, representing a year-over-year increase of 1.7%. Research and development expenses for the first quarter of 2022 were 27.1 million, up 31.2% year-over-year. The increase was primarily due to higher personnel-related expenses. Sales and marketing expenses for the first quarter of 2022 were 659.7 million, down 0.3% year-over-year. The decrease was mainly due to lower entry fees and incentive fees paid to the location partners. General and administrative expenses were 27.4 million in the first quarter of 2022, up 2.1% year-over-year. The increase was primarily due to higher professional service and office rental expenses. Loss from operations was 99.3 million, and the operating margin for the first quarter of 2022 was negative 13.5%, compared to 2.8% in the same period last year. Net loss was 96.4 million in the first quarter of 2022, with a net margin of negative 13.1%. Non-GAAP net loss, which excludes share-based compensation expenses, was 89.7 million in the first quarter of 2022, compared to non-GAAP net income of 23.2 million in the same period last year. As of March 31, 2022, the company had cash and cash equivalents, restricted cash, and short-term investments of 2.8 billion. Cash flow generated from operations for the first quarter of 2022 was 160.9 million. Capital expenditures for the first quarter of this year were 110.7 million. Energy Monster currently expects to generate 660 million to 690 million in revenues for the second quarter of 2022. Please note that this forecast reflects Energy Monster’s current and preliminary view on the industry and its operations, which is subject to change. Thank you for listening. We are now ready for your questions.

Operator, Operator

Thank you. Our first question comes from Charlie Chen from China Renaissance. Please go ahead with your question.

Charlie Chen, Analyst

Thanks management for taking my question. I have a question regarding your business model. So, can management elaborate a bit more on the synergy that you mentioned during your prepared remarks between the direct and the network partner models? Does the company have any preference between the two models during COVID or going forward? Thank you.

Mars Cai, Chairman and CEO

Thanks, Charlie. I will take this question. Our service network expansion has always been driven by both the direct and the network partner models. Historically, our direct operation model generally focused on higher-tier cities, while our network partner model focuses on the lower ones. For our direct model, we do not generate strong economies in the lower-tier cities, so we generally select only one model for each region or city based on the city tier. In the past few quarters, we have also launched a number of test regions that run on both models. The results are very encouraging, as utilizing both models has shown superior growth rates. Our direct model team is able to penetrate into relatively larger points of interest, while our network partners can leverage their existing relationships to expand our points of interest network. Combined, these two models work in cohesion to help Energy Monster expand its coverage network, which in turn helps us increase our market share. Following the successful tests in pilot regions, we are considering opening all locations that we cover to both models in order to leverage the advantages of both across China. We believe our network partners’ unique relationships will help us further penetrate existing regions and assist us in moving into newer ones. In addition to adopting both models in all regions, we have launched a new program that synergizes the two models by empowering our direct operation team to identify and attract network partners to our platform. Our direct operation model, which expands across China, can now leverage its presence not only to identify new points of interest partners but also potential network partners. Because both our models lead the market in terms of market share, we believe additional synergy between the two will enable us to extend our market leadership more rapidly and flexibly while aligning the interests between our direct and network partner models more closely. Thank you for the question.

Operator, Operator

Thank you. Our next question comes from Vicky Wei from Citigroup. Please ask your question.

Vicky Wei, Analyst

Good evening, management. Thanks for taking my question. So, will management provide some color on the monthly performance in the second quarter? And by merchant categories, does management notice any changes in coverage of different merchants, such as catering, cinemas, and other sports? Thank you.

Mars Cai, Chairman and CEO

Sure. Thanks for your question. The general environment has been challenging due to the continuous impact of COVID on our operations both in the first and second quarters of 2022. I must say that the second quarter, so far by the end of May, is even worse compared to the first quarter. Most notably, the outbreak in Shanghai, where our headquarters is located, which began in March, was more significant than we previously expected. During the first quarter of 2022, same-store revenue decreased by approximately 35% year-over-year as a result of these outbreaks and the general decrease in food traffic. In the second quarter, various clusters of COVID outbreaks, primarily originating from Shanghai, have had significant impacts. Starting in mid-March, Shanghai's foot traffic was nearly completely halted due to the citywide lockdown imposed by the government, leading to our revenue in Shanghai decreasing by 93% from mid-March to the end of May. In terms of the overall GMV, we were down approximately 37% in April and 29% in May due to a general surge in COVID cases across China. Starting in June, the recovery trend has been clear and encouraging across all regions impacted by the Shanghai outbreak. In the first seven days of June, we see Shanghai's average revenue recover to 27% compared to the same period last year. Other regions that do not have active COVID cases are showing a similar trend. In terms of points of interest categories, the impact of COVID generally more negatively impacts tourist-driven areas such as transportation hubs, hospitality, and tourist attractions. Entertainment revenues are frequently required to close due to government regulations if COVID is present within the region. So, these categories are down year-over-year. While the points of interest that I just mentioned are more significantly impacted by COVID outbreaks, the general recovery trend seems to be more region-driven as opposed to points of interest type driven. Regions that have contained outbreaks recover uniformly across point of interest categories as lockdown or quarantine restrictions are removed. Going forward, we are confident that the impacts of COVID will eventually diminish as containment is achieved in all regions. Thank you.

Operator, Operator

Thank you. Our next question comes from Ronald Keung from Goldman Sachs. Please go ahead.

Ronald Keung, Analyst

Thank you. Hi, Mars, Maria, and Hansen. Can you give us more insight on the competitive environment in the first half of this year? And how do we anticipate the incentive fee rate going forward into the second half? Thank you.

Maria Xin, CFO

Thanks. I will take your questions. In terms of the competitive environment throughout 2021 and in 2022, we are seeing a general decline in competition, particularly in the direct model as our peers within the industry continue to significantly scale down their direct operation personnel. We currently operate the largest and most experienced team under the direct model within the industry. This direct model team was instrumental in helping us achieve rapid market share increases during the initial COVID outbreak in the first half of 2022. With our industry peers scaling down their direct operation teams, we remain long-term focused and have maintained our direct model team at a similar scale in anticipation of COVID recovery. In terms of the incentive fee rate, the decrease in competition has benefited us as new signings generally have a reduced incentive fee as a percentage of revenue compared to our blended rate. This means our incentive fee rates are going down as a percentage of revenue. Also, we are more widely adopting the use of variable incentive fees compared to fixed ones. While we do not provide guidance on future incentive fee rates, the current trend is that decreased competition and the reduced utilization of fixed fees is positive for our financials moving forward. Thank you for your questions.

Operator, Operator

Right. Thank you. 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

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