Earnings Call Transcript - EM Q1 2021

Operator, Operator

Hello, and thank you for standing by for Energy Monster's 2021 First Quarter Earnings Conference Call. 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 call, Director of Investor Relations, Hansen Shi. Thank you. Please go ahead.

Hansen Shi, Director of Investor Relations

Thank you. Welcome to our 2021 first quarter earnings conference call. Joining me on the call today are Mars Cai, Energy Monster's Chairman and CEO; and Maria Xin, our CFO. For today's agenda, management will discuss business updates, operation highlights and financial performance for the first 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 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 CEO, Mars Cai, for the business and operational highlights.

Mars Cai, Chairman and CEO

Thank you, Hansen. Good day, everyone. Welcome to Energy Monster 2021 First Quarter Earnings Call. To start off, I would love to give a quick introduction of Energy Monster. We are a consumer tech company providing mobile device charging service through our network of charging cabinets, which are placed in high-traffic locations, such as entertainment venues, restaurants, shopping centers, hotels, transportation hubs and public spaces across China. Users make use of our service by simply scanning the QR code of our cabinet through Alipay or WeChat to borrow our power banks and then return the power banks to any Energy Monster cabinet across China. Our service provides a clear value proposition to both our users, allowing for seamless access to charging service on the go and to our location partners providing value-added service to their customers. As of the end of March 2021, we have over 5.6 million power banks and 716,000 POIs. As the number one player in China's fast-growing mobile charging device industry with 34.4% market share in 2020, we will benefit from the fast growth of the industry. According to iResearch report, China's mobile device charging service industry is poised to grow at a CAGR over 36% from 2020 to 2028, reaching a market size of over RMB 100 billion in 2028. The growth of the industry is expected to be driven by growing demand for our service and the expanding supply through increased location coverage. On the demand side, the increase in smartphone penetration and the continued rapid increase in usage of smartphones, which reached 168 hours per Chinese smartphone user per month are key drivers for growth. The increase in total battery consumption will definitely make the gap bigger between battery consumption and capacity to be beyond the current gap of 3,000 mAh per day. This widening gap will continue to propel demand for mobile device charging service. The increasing adoption of 5G smartphones is another major driver for demand. Chips within 5G phones are 2.5 times more power-consuming than 4G devices, resulting in faster battery drainage. As a result, we acquired more than 16 million newly registered unique users during the quarter, reflecting the growth in demand for mobile device charging service and also our ability to capture this growth. Now from a supply perspective, we continue to see massive opportunities penetrating into both existing and newer regions, expanding into different location types and signing key accounts. Based on industry research, less than 10% of the potential locations suitable for mobile device charging service are covered in China. There continues to be a significant amount of coverage potential to be captured in the future. Combining the opportunities on both the supply and demand side, we believe that the industry is still in its early stages of development and is filled with massive growth potential. As the largest provider of mobile device charging service here in China with strong growth and resilient profitability even during COVID, we believe that we are the best positioned provider of mobile device charging service to capture the growth of the industry. Now let me walk you through our core strategies in expanding coverage, improving operational efficiency, and exploring new initiatives for the quarter. First is our coverage expansion strategy. During the first quarter, we continue to make strides towards making our service more accessible for users across China. We expanded our coverage in higher-tier cities while also developing our coverage in lower-tier cities. As of the end of the quarter, we covered more than 1,600 cities and counties here in China, up from 1,500 as of the end of 2020. We strengthened the network partner investment during the quarter to secure new high potential network partners to drive expansion in lower-tier cities. The network partners have more room to quickly reach scale and to see results earlier, which further aligns the interest between our network partners and us. By utilizing our operational know-how and big data capabilities, we can drive the delivery of sustainable and profitable expansion of coverage while developing value for both our network partners and Energy Monster. Our investment and commitment to our network partner model will expand and create a larger and stronger distribution network. Our direct model coverage also expanded as we offer our service to more high-quality location partners, further propelling our POI coverage growth. The number of POIs increased from 664,000 as of the end of last year to 715,000 as of the end of the first quarter of 2021 through balanced coverage expansion in both new and existing regions. Our POI composition continues to diversify as we move our service into new types of venues, such as office buildings and retail outlets. On the KA front, we have signed a number of significant key accounts with extensive offline presence or notable brand exposure during the first quarter of 2021. Notably, we are pleased to announce the signing of KFC, the largest restaurant chain here in China. The signing of KFC provides us with stronger coverage across China and gives us a strong brand endorsement for Energy Monster. With key accounts such as Huazhu Group, Shanghai Disneyland, and KFC, we work closely with them to integrate our service directly into the key accounts, allowing their users to seamlessly access mobile device charging service during their visits. We believe the signing of these key accounts is a testament to our ability to deliver a comprehensive service package to top national key accounts, reflecting the quality of our hardware, service, and brand. It is important to note that the majority of large key accounts with significant offline presence remain untapped here in China. Going forward, we believe our ability to deliver the most comprehensive package will attract more key accounts, enabling us to create a stronger network effect. Next, it is about efficiency. Energy Monster is by far the leader within the industry in terms of efficiency. Our power banks yield the highest revenue in any given period. Our profitability and growth profile remain consistent, and our revenue to employee headcount ratio leads the industry. These achievements and attributes are all due to our relentless pursuit of operational excellence. Our enduring management philosophy here at Energy Monster is to drive both growth and profitability. This requires us to continuously improve our incentive and management system to ensure delivery. For our Business Development and network partners, we continue to refine the incentive scheme during the first quarter to ensure we are able to continue expanding to POIs that generate positive economics. For the first quarter, it is worth mentioning that it is a low season for the business since many locations are closed and people tend to stay at home for gatherings during the month of Chinese New Year. On the other hand, during the quarter, we see a strong recovery of revenue per power bank per day on a year-over-year basis as the impact of COVID lessened. However, on a quarter-on-quarter basis, re-emerging COVID outbreaks in regions such as Beijing, Shanghai, Hebei, and Northeastern regions of China may still impact the revenue in these areas as well as the revenue per power bank per day during January and February. Despite the impact, our operations normalized starting in March when the partial outbreaks were contained. Another part of our efficiency comes from our long-term commitment to invest in both software and hardware technology. For software, we made improvements to our Business Development tools by implementing new features that further streamline the day-to-day operations of our employees to improve efficiency, allowing Business Development to better manage more POIs and more power banks with greater efficiency and quality. In terms of hardware, we have identified additional areas to improve our cabinets and power banks in both quality and cost. We believe our continuous improvement in operational efficiency and technology will further differentiate Energy Monster from other industry peers. Lastly, I would like to touch upon new initiatives. Energy Monster has accumulated a massive online and offline network since our inception. We have over 236 million unique registered users and 715,000 locations across all provinces of China. Combined, these channels form a unique opportunity for us to leverage and create new products and services. We are already exploring consumer goods that can utilize our online and offline networks for distribution. We are also exploring other IoT industries that can leverage and even extend our existing networks. Going forward, we believe our current set of networks will give us a unique advantage in incubating new initiatives from Energy Monster, creating a company that can truly energize everyday life in all aspects. Overall, we delivered solid results for the first quarter of 2021, despite Q1 being a low season and COVID still having regional outbreaks in January and February. Our core advantages in market leadership, industry-leading operational efficiency, recognized brand, and reliable hardware and software technologies have allowed us to consistently achieve strong performance and unparalleled unit economics within the industry. We believe we can continue to expand our existing advantages and provide comprehensive solutions to more locations and users. Our long-term commitment to both growth and profitability will allow us to continue to expand our market share in China's mobile device charging service industry and deliver long-term value for all of our shareholders. Now I will turn the call over to Maria Xin, our Chief Financial Officer, for the financial highlights.

Maria Xin, Chief Financial Officer

Thank you, Mars. We are pleased to deliver solid results for the first quarter of 2021. Notably, we achieved strong revenue growth while continuing to be profitable despite the impact of COVID and seasonality in early 2021. With the recovery in March, we expect to deliver strong results going into the second quarter of this year. Now let me walk you through the financial results in greater detail. For the first quarter of 2021, revenues were CNY 846.9 million, representing a 162.5% year-over-year increase. Revenues from the mobile device charging business were up 164.5% year-over-year to CNY 816.8 million and accounted for 96.4% of total revenues for the quarter. The increase was primarily due to the impact of COVID-19 on the first quarter of 2020 and was contributed by the increase in the number of POIs and available power banks. Revenues from power bank sales were up 129.2% year-over-year to CNY 25 million and accounted for 3% of our total revenue for the quarter. The increase was primarily due to the impact of COVID-19 on the first quarter of 2020 and was driven by the increase in the number of POIs and available power banks. Other revenues were up 71.5% year-over-year to CNY 5.1 million and accounted for 0.6% of our total revenue. The increase was primarily due to the impact of COVID-19 on the first quarter of 2020. Cost of revenues were up by 14.5% year-over-year to CNY 124.6 million for the first quarter of 2021. The increase in cost of revenues was primarily due to the increase in maintenance costs, power banks sold, and depreciation. Gross profit was up 237.7% year-over-year to CNY 722.3 million for the first quarter of 2021. The increase was primarily due to the increase in revenue from the mobile device charging business. Operating expenses for the first quarter of 2021 were CNY 698.4 million, up 103.6% year-over-year. Excluding share-based compensation, non-GAAP operating expenses were CNY 690.3 million, representing a year-over-year increase of 104.8%. Research and development expenses for the first quarter of 2021 were CNY 20.6 million, up 24.2% year-over-year. The increase was primarily due to the increase in personnel-related expenses. Sales and marketing expenses for the first quarter of 2021 were CNY 661.7 million, up 107.4% year-over-year. The increase was primarily due to the increase in incentive fees paid to location partners and network partners resulting from the increase in mobile device charging business revenues. General and administrative expenses were CNY 26.8 million in the first quarter of 2021, up 55.9% year-over-year. The increase was primarily due to the rise in personnel-related expenses and third-party service expenses. Income from operations was CNY 23.8 million compared to a loss from operations of CNY 129.2 million in the same period last year. The operating margin for the first quarter of 2021 was 2.8%. The net loss was CNY 15.1 million in the first quarter of 2021 compared to a net loss of CNY 137.5 million in the same period last year. The net margin for the first quarter of 2021 was 1.8%. Non-GAAP net income, which excludes share-based compensation expenses, was CNY 23.2 million in the first quarter of 2021 compared to a non-GAAP net loss of CNY 131.1 million in the same period last year. As of March 31, 2021, the company had cash and cash equivalents, restricted cash, and short-term investments of CNY 2.2 billion. Cash flow generated from operations for the first quarter of 2021 was CNY 131.2 million. Capital expenditures for the first quarter of this year were CNY 138 million. Energy Monster currently expects to generate CNY 940 million to CNY 970 million of revenue for the second quarter of 2021. Please note that the forecast reflects Energy Monster's 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, Operator

We have the first question from Vicky Wei from Citigroup.

Vicky Wei, Analyst

And congrats on the successful IPO. My question is related to the competition landscape. So we saw some new steps and small players consolidate and other industry players who aim to go public too. Does management see any change in the current competition landscape? And under the current competition, will management provide some color about the trend of revenue sharing with partners in fiscal 2021?

Mars Cai, Chairman and CEO

Thanks for the question. We do not see a significant change in the competitive landscape during the first quarter. Our core advantages in network scale, operational efficiency, brand, and technologies are still leading the market. We will see that we are still gaining share with more locations and cities on board. Therefore, we are confident that if we stick to our strategy of driving both growth and profitability while focusing on customer satisfaction, we can onboard more key accounts, users, and network partners. So we are very confident. To conclude, there is no major change in the dynamics.

Yi Xin, CFO

Okay. As for your question regarding the revenue sharing percentages, under the direct model, the incentive fee that we pay to the location partners is flat compared with the last quarter. The incentive fee to our network partners increased slightly in the fourth quarter this year due to the launch of network partner campaigns to help expand further into untapped low-tier cities. Unfortunately, we do not provide guidance on these sales percentages.

Operator, Operator

We have our next question from the line from Lucy Li from Goldman Sachs.

Wen Li, Analyst

This is Lucy from Goldman. So my question is on the post-COVID impact. So can management share with us more details on the impact of COVID-19 during the first quarter and the possible impact going forward to the second quarter, please?

Mars Cai, Chairman and CEO

Thanks for the question. In early 2021, we saw a resurgence of COVID in Beijing, Shanghai, Hebei, and the Northeastern regions of China. In the affected regions, the gross revenue in January and February of 2021 was down approximately 25% compared to December 2020 levels. The other regions did not experience this decline. In March, the COVID situation was contained, and we saw full recovery in terms of gross revenue for these areas. The affected regions remained flat during these minor outbreaks. Meaning the impact of COVID on our first quarter revenues could have been 8% to 10% higher in a normalized situation. Unfortunately, due to some minor outbreaks, certain regions were down 25%. We hope that the situation will improve and stabilize. However, we still anticipate minor outbreaks in provinces like Anhui. For example, Hefei was down about 5% to 10%. But I think it is a temporary situation. We will leverage our experience to make the business recover quickly.

Operator, Operator

We have the next question from the line of Ryan Bing from China Renaissance.

Unknown Analyst, Analyst

A few questions. The first one is can you give us color on the new POIs covered this quarter? And is that generally for higher tier cities? And how much percentage will run through the direct model or the network partner model?

Mars Cai, Chairman and CEO

Yes. Thanks for the question. We actually expanded our POI coverage by more than 50,000 during the quarter. Thus, the total number is increasing in both higher tier cities and lower tier cities. With our strategy to push the network partner model, we have observed an increase in revenue from the network partner model from about 30% to around 40%. We see some positive developments happening there. While we focus on operational excellence, no matter where we go or how many locations we add, we remain confident in making it profitable as we enter these markets.

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, Chief Financial Officer

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.

Mars Cai, Chairman and CEO

Thank you very much.

Operator, Operator

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