Earnings Call Transcript - EM Q2 2022

Operator, Operator

Thank you. Welcome to our 2022 second 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 second 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 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 second quarter earnings call. The second quarter of 2022 continued to be a challenging quarter for Energy Monster due to a number of larger scale COVID outbreaks notably in Shanghai, Beijing, Shenzhen, and Chongqing. However, the impact of these outbreaks along with the lockdown measures implemented were better-than-expected as we were able to achieve revenues above our guidance. During the second quarter, we continued to expand our services to more locations across China. The total number of Points of Interest (POIs) has increased to 895,000 locations, an increase of 4% quarter-on-quarter and a 15% year-over-year. The total number of countries and country-level regions with Energy Monster service has now reached 1,800 for the first time as we continue to strive to increase our coverage to reach more users that meet our service. The increased accessibility of our service has allowed us to attract 11.6 million newly registered users during the second quarter. That has put us at a new milestone as cumulatively registered users reached over 300 million for the first time. Even though COVID outbreaks continue to weigh us down financially, we continue to position ourselves for long-term success operationally through increased service coverage both in terms of POI count and regions covered and in terms of user coverage. Now it's time for the impact of COVID on our operations during the second quarter. Let me share a bit more detail on the impact. Whenever a region has active discovery of new COVID cases, a few things happen. A stricter COVID testing procedure is implemented at the regional level. This generally means that the regional population has to take the recent COVID test results before entering commercial or public locations. With larger outbreaks, a number of commercial locations where our cabinets are typically placed are required to be temporarily shut down. In cases where there is an even larger scale spread of COVID, more restrictive lockdowns for the general population of the region are implemented, such as one in Shenzhen during March and Shanghai during April and May. All of these countermeasures directly impact the amount of people in active circulation within a certain region, meaning that less foot traffic passes our cabinets each day. This ultimately reduces the revenue efficiency of our cabinets and power banks. In April, larger outbreaks in Shanghai, Chongqing, Guangzhou, and Chengdu resulted in year-over-year declines in GMV of 95%, 60%, 30%, and 0%, respectively. In May, outbreaks in Shanghai, Beijing, and Tianjin resulted in year-over-year declines of 96%, 76%, and 51%, respectively. And also in June, outbreaks in Beijing and Shanghai resulted in declines of 54% and 68%, respectively. The second quarter was riddled with these regional outbreaks impacting both the region's internal foot traffic and resulting in a general decline in foot traffic in nearby regions. Overall, in April and May, our GMV declined by 34% and 27%, respectively, as a result of COVID outbreaks. We also continue to observe that the impact of COVID outbreaks is completely correlated with the number of active COVID cases in a given region. In regions where COVID cases are contained in April, recovery trends in May and June are clear. For example, Guangzhou's GMV increased by 26% month-over-month in May and 14% in June. Hangzhou’s GMV increased by 36% month-over-month in May and 13% in June. Similarly, Suzhou's GMV increased by 143% month-over-month in May and 93% in June. We see similar recovery trends across all regions where outbreaks are fully contained, meaning that COVID-related impacts are short-term in nature. That is why we remain focused on longer-term strategies of extending our coverage network and increasing our efficiency. We believe the increased coverage through the combination of our direct and network partner models will help us further expand the Energy Monster network effect, which makes it easier for us to acquire users, location partners, and network partners. We increased efficiency through the declining usage of fixed incentive fees and the reduction in hardware CapEx per cabinet will reduce the impact of COVID on our operations and serve as the basis for reaching higher levels of efficiency in the future. We believe Energy Monster's strategic initiatives and longer horizon approach to strategy development are crucial in differentiating ourselves from market peers in the future and will allow us to be best positioned to capture market opportunities within the industry. Now let me go through our core strategies in terms of expanding our coverage and increasing our efficiency in greater detail. First is our coverage expansion strategy, which continues to be fueled by both our direct and network partner models. During the second quarter, we continued to extract the synergy between the two models by allowing our direct model business development personnel to leverage their own network to identify and acquire new network partners. This new program, initiated in April, has quickly gained traction among our business development personnel. During the quarter, 40% of our BD participated in the program and acquired at least one new network partner. By leveraging the scale and existing capabilities of our direct model, we have drastically accelerated the pace of our network partner acquisition, with approximately 1,800 new network partners acquired during this quarter, of which more than 70% were sourced through our direct model personnel. The increased number of network partners has helped us grow our presence across the board by further penetrating existing regions and especially moving into newer regions. With the significant increase in our network partner count, the next natural focus is helping these network partners grow alongside Energy Monster. Newer network partners are often new to the market, so providing guidance is the most important aspect we focus on early in their development so they can quickly achieve scale. We offer guidance primarily by sharing our latest insights from the industry, as well as providing one-on-one consultations on their current progress. We also provide a complete set of backend systems, so they can clearly see the key metrics of their own key, POIs, and cabinets. It is through these various avenues of providing operational and strategic support that our network partners are able to grow alongside our company and maintain higher levels of efficiency compared to those who work with our peers in the industry. We believe that our ingrained values of helping our network partners maintain sustainable returns is the key differentiator in defining Energy Monster's network partner model and is also the reason why we maintain the highest market share in China's mobile device charging service industry. We continue to explore ways to synergize and promote collaborations between our two models. We recently opened all direct model regions to network partners to further extend our leading market share in existing regions. We also launched a program to allow our direct model personnel to help increase our network partner acquisition. This unique balance and collaboration between the two models have paved the way for market share acquisition as we expand our coverage across all regions. We also have the largest direct model workforce within the industry, allowing us to continue moving into key accounts and larger size POIs. Once the impact of COVID diminishes, we are uniquely positioned to quickly acquire market share, as our direct model typically acquires POIs at a faster pace than network partners due to its higher level of execution capabilities. Overall, we believe that increasing POI coverage remains our number one priority. The increased POI count allows more customers to use our service, which ultimately converts into more registered users. This self-reinforcing cycle allows us to continuously scale our operation and reach higher levels of benefit from the network effect. That's why we continue to rapidly increase our network partner count and maintain our direct model personnel so that we can continuously expand our POI coverage, even during times of COVID impact. Next is our strategies on improving Energy Monster’s efficiencies, both on the front and back-end sides. While the expansion of our coverage is crucial to our long-term development, improvements in our efficiency are also important, especially during periods with external events like COVID outbreaks. The outbreak of COVID has resulted not only in a decline of foot traffic to a number of POIs, but it has also resulted in the permanent closure of some of these locations. That is why we continue to reduce the amount of upfront payments we make to location partners in order to reduce our exposure to the decline in foot traffic and the increased risk of POI closure during the outbreak. During the second quarter, we continued to significantly reduce the number of new POI signings using upfront or fixed fees. 95% of all new POI signings now only use variable incentive fees. This is up from 54% during the same period last year. As we continue to scale down fixed-type incentive fees in new signings, this declining usage will benefit us during COVID when revenues slow down, due to declines in foot traffic which significantly dragged down our bottom line. The increasing contribution from the network partner model also increases our efficiency, especially during COVID. Under the network partner model, the company takes a fixed share of the revenue generated by the cabinets of our network partners. This reduces our exposure to fixed expenses, the closure rate of POIs, and the general effect of COVID. We are also making significant improvements to the efficiency of our direct model business development. In the second quarter of 2022, our BD coverage of POIs per person has increased by 43% year-over-year, marking a significant increase in terms of efficiency. As we continue introducing new back-end system features that enhance our personnel's ability to manage more POIs and optimize the workflow of our business development personnel's tasks, the introduction of our new program with direct model BD personnel also allowing them to acquire network partners, paves the way for unlocking a higher level of efficiency. This business development personnel can now contribute through both the direct model and help accelerate our network partner acquisition progress, which increases their overall contribution to the company per person. We believe this innovative program will elevate our already market-leading operations efficiency to a new level. In terms of technology, we continue to innovate our software and hardware technologies to increase our competitiveness in operating efficiency and asset efficiency. Our software is closely tailored to our operating workflow and the needs of our employees, location partners, and network partners. We designed our software to increase automation in each workflow segment to boost efficiency. Recently, we launched a new system for our network partners, helping them systematically manage their relationships with location partners. This system is gaining wide adoption among our network partners and has proven helpful in managing their operations effectively. Aside from software, we are also making progress in optimizing our hardware and the maintenance process of this equipment. The CapEx per power bank cabinet is expected to continue to decrease in the second half of 2022. As we scale up the production of our new cabinets, we anticipate a significant reduction in terms of costs. We are also improving the maintenance process of our cabinets and power banks to maximize the lifetime value of each piece of equipment. These improvements to hardware will help drive up asset efficiency moving forward. Overall, the continuous outbreak of COVID has had a significant impact on our operations during the second quarter. Newer outbreaks and existing outbreaks carried over from the second quarter continue to be headwinds in the third quarter. Although the recovery trend is clear-cut, smaller outbreaks within the region can still weigh down the recovery speed. New outbreaks such as the one in Zhixiang resulted in a year-over-year decline of 31% in July and 75% in August. Similarly, following a spike in new COVID cases since late August in Chengdu, a lockdown has been imposed, leading to a week-over-week GMV decline of 83%. While the impact of COVID continues to drive down both our revenue and profitability, the size and frequency of these outages are slowing down in the third quarter compared to the second. In conclusion, I would like to emphasize that although COVID has been challenging in terms of its direct impact on operations, we continue to see that its impact is not a systematic change in user behavior. Regions coming out of COVID impacts are able to scale back to normalized levels within two months after an outbreak is fully contained. In the meantime, we will continue to strengthen the foundation of our competitive advantages by focusing on our strategies in coverage expansion and efficiency optimization. Both our direct and network partner models continue to serve as the pillars of our coverage expansion strategy, but new ways of synergizing the two models have proven to be a new driver for coverage expansion. Our efficiency is expected to improve as we scale back all forms of prepaid and fixed incentive fees, increase the contribution of the network partner model, and optimize the asset efficiency of our equipment. Our focus on these strategies will serve as the foundation for our market share growth and market-leading operational efficiency in the future. Especially when the impact of COVID is reduced, we remain confident that Energy Monster continues to be best positioned to capture the growth of China's mobile device charging service industry and deliver long-term value for all our stakeholders. Thank you. I'll now turn the call over to Maria Xin, our CFO 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 second quarter of 2022, revenues were RMB690.5 million, representing a 29% year-over-year decrease. Revenues for our mobile device charging business were down 27.8% to RMB672.6 million and accounted for 97.4% of our total revenue for the quarter. The decrease was primarily attributable to the impact of COVID-19 during the second 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 57.7% year-over-year to RMB13.3 million and accounted for 1.9% of our total revenues for the quarter. The decrease was primarily attributable to the impact of COVID-19 during the second 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 15.8% year-over-year to RMB4.5 million, accounting 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 second quarter of 2022. Cost of revenues were up 17.4% year-over-year to RMB162.9 million for the second quarter of 2022. The increase in cost of revenues was primarily due to the recognition of impairments for inventory and equipment and the increase in maintenance costs, which was partially offset by the decrease in the cost of products sold. Gross profit was down 36.7% year-over-year to RMB527.7 million for the second quarter of 2022. The decrease was primarily due to the decrease in revenues from the mobile device charging business. Operating expenses for the second quarter of 2022 were RMB718.7 million, down 11.8% year-over-year. Excluding share-based compensation, non-GAAP operating expenses amounted to RMB711.5 million, representing a year-over-year decrease of 11.7%. Research and development expenses for the second quarter of 2022 were RMB23.7 million, up 15.8% year-over-year. The increase was primarily due to the increase in personnel-related expenses. Sales and marketing expenses for the second quarter of 2022 were RMB664.9 million, down 13.8% year-over-year. The decrease was primarily due to the reduction 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 RMB28.5 million in the second quarter of 2022, down 0.8% year-over-year. This decrease was primarily due to the reduction in personnel-related expenses and office rental expenses, which was partially offset by an increase in professional services. Loss from operations was RMB191 million, and the operating margin for the second quarter of 2022 was negative 27.7%, compared to 1.9% in the same period last year. Net loss was RMB184.5 million in the second quarter of 2022. The net margin for the second quarter of 2022 was negative 22.7%. Non-GAAP net loss, which excludes share-based compensation expenses, was RMB177.5 million in the second quarter of 2022, compared to a non-GAAP net income of RMB17.2 million in the same period last year. As of June 30, 2022, the company had cash and cash equivalents, restricted cash, and short-term investments of RMB2.9 billion. Cash flow generated from operations for the second quarter of 2022 was RMB136.1 million. Capital expenditure for the second quarter of this year was RMB85.5 million. Energy Monster currently expects to generate revenues of RMB717 million to RMB800 million for the third 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. Thank you for listening. We are now ready for your questions.

Operator, Operator

Thank you. The first question comes from Lin from GS. Please go ahead.

Unidentified Analyst, Analyst

Thank you, management for taking my question. Can management give a bit more insight into the reason behind the increase in cost of revenues? And it would also be great if you could provide a bit more color on the third quarter's revenue guidance? And possibly any guidance on the bottom line? Thanks.

Maria Xin, Chief Financial Officer

Thanks. I will take your question. The reason for the increase in the cost of revenues was primarily due to a few factors. First is the impact of COVID on POIs, which has resulted in many closures of businesses where our cabinets are placed. Because of the closures, in some cases, our equipment cannot be returned to us, resulting in recognition of impairments for inventory and equipment during the quarter. There were also some actual maintenance costs this quarter, as we wanted to optimize some of our equipment to give our users a better experience and maximize the lifetime value of that equipment. Additionally, the cost of revenues as a percentage of revenue also increased because we now have more POIs, but due to COVID, the revenue per cabinet and power bank has decreased significantly during the second quarter. Overall, the primary reason for the increase in cost of revenues as a percentage of revenue is still the impact of COVID. As for the guidance, we continue to see outbreaks during the quarter, although to a lesser degree compared to the second quarter. We were actually seeing strong results in August as new large-scale outbreaks were less frequent. Our GMV was able to grow year-on-year in August. However, revenue operating challenges such as one in Chengdu during late August and other outbreaks in early September will weigh down our recovery for the third quarter. Given that, we can't accurately assess the developments of these outbreaks, so we will not offer any guidance on our profitability. Thank you.

Unidentified Analyst, Analyst

Thank you, Maria.

Operator, Operator

Next question comes from Charlie Chen from China Renaissance. Please go ahead.

Charlie Chen, Analyst

Thank you, management for taking my questions. Could management give us more insight into the current competitive landscape in this industry? Is competition escalating, or you also mentioned that the company is acquiring new network partners at record speed? So I just want to understand how the company balances the two models strategically? Thank you.

Mars Cai, Chairman and CEO

Sure. Thanks for the question. As for competition, we are seeing a general decline in competition for POIs, especially for larger size POIs and key accounts. Most of our peers in the market have significantly downsized their direct model scale and thus we are seeing much less competition for new signings across the board. Additionally, a number of our peers have irrationally prioritized growth without much concern for the quality of growth. Energy Monster’s per POI quality is market-leading. When COVID came around, while we also experienced challenges, our peers faced even more pressure due to their lower quality in POIs. As a result, incentive fee rates for new signings during the second quarter continued to trend down due to the lower level of competition. While it may take time for this decreasing competition to translate into financial metrics, given that newer signings are only a portion of the total contracts, we are optimistic about the current trend. Regarding the balance of the two models, I think the balance between the two largely depends on maximizing value for our shareholders and stakeholders. We do not have an exact percentage target for GMV contribution between the two models because both models are important to the company. Our network partner model is growing more quickly than our direct model this quarter due to the introduction of our new program, which allows our direct model business development personnel to contribute to acquiring new network partners. The network partner model allows us to better mitigate risks coming from the COVID impact. We believe the network partner model will continue to be a core driver of growth in the near future, however, in the long run, both models will be equally important to the company. The direct model has advantages in execution speed and the ability to sign large key accounts, while the network partner model has advantages in the coverage of long-tail POIs and regions, along with risk mitigation. This shows that each model has its own set of advantages. That’s why we continue to innovate new ways for the models to work together, ultimately helping Energy Monster increase its market share. Thank you for the question.

Charlie Chen, Analyst

Thank you, Mars. Thank you very much.

Operator, Operator

Next question comes from Vicky Wei from Citi. Please go ahead.

Vicky Wei, Analyst

Thanks management for taking my questions. I just want to get your perspective on COVID, given that these outbreaks are happening on and off for some time now? How will the company cope with the pandemic if it continues into next year? Thank you.

Mars Cai, Chairman and CEO

Hi, thanks for the question. Yes, COVID outbreaks are very unpredictable and there's no way for us to know for sure when and where it will happen and the size of the outbreak. While the challenge exists, we are seeing slight improvements in the size of the outbreaks when compared to the second quarter. From a longer-term perspective, we believe the COVID impact will eventually diminish as containment measures become more precise and the danger of the virus also diminishes. That's why we continue to expand the scope of our service coverage and strengthen Energy Monster’s network effect. We remain very optimistic about the eventual, but permanent containment of COVID. For the near future, we are prepared to coexist with COVID. We are finding ways to reduce our exposure to COVID, namely in ways such as reducing upfront or fixed incentive fees, expanding our network partner count, increasing the efficiency of our business development personnel, optimizing our front and back end processes, and enhancing both our software and hardware technologies. These are just some of the things we focus on to increase our efficiency during COVID. I think when we can fully implement these initiatives, we can mitigate most COVID-related risks and truly coexist with COVID. However, I believe COVID will not be a long-term challenge, and we are taking all necessary measures to reduce any short-term impact. Thank you.

Vicky Wei, Analyst

Thank you.

Operator, Operator

There are no further questions at this time. I’ll now hand it back to 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 quarter. Thank you.

Operator, Operator

That does conclude our conference for today. Thank you for participating. You may now disconnect.