MOGU Inc. Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the MOGU Second Quarter Fiscal Year 2020 Unaudited Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. Thank you. I would now like to hand the conference over to your speaker today René Vagenštajn. Please go ahead.

Thank you, Melisa. Hello, everyone, and thank you for joining us today. MOGU's earnings release was distributed earlier today and is available on the IR website at ir.mogu-inc.com, as well as on Business Wire services. On the call today from MOGU are Mr. Shark Chen Qi, Chairman and Chief Executive Officer; Ms. Helen Wu, Chief Financial Officer; and Mr. Sean Zhang, IR Director. Mr. Chen will review business operations and company highlights followed by Ms. Wu, who will discuss financials. All three will be available to take your questions during the Q&A session that follows. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expect, anticipate, future, intends, plans, beliefs, estimates, targets, going forward, outlook and similar statements. Such statements are based upon management's current expectation and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law. It is now my pleasure to introduce Mr. Chen. Mr. Chen, please go ahead.

Hello, everyone. Thank you for joining our second quarter earnings call today. China's Internet landscape has undergone significant changes over the years, with various sectors like social media, e-commerce, entertainment, and lifestyle services increasingly blending together. New business models are emerging daily, and this trend has intensified in recent years, which we are keenly aware of. MOGU was founded with the goal of making fashion accessible to everyone. It has been a challenging journey, but like many new companies, we have adapted to the changing environment over the past nine years while remaining committed to our mission. To rapidly adjust our business to the evolving market and seize growth opportunities, we strategically began developing an innovative KOL-driven social shopping model supported by an integrated supply chain. We believe this model provides unique value to consumers and aligns better with the future direction of the fashion industry in China, compared to traditional storefront and merchandise-based models. Specifically, KOLs play a crucial role here with their ability to understand, influence, and serve our users, while significantly enhancing overall industry efficiency by consolidating the existing fashion supply chain in China. Focusing on this KOL-driven model will allow us to progress and stay committed to our mission while driving long-term growth. Empowering KOLs is key for MOGU to create an engaging and comprehensive social shopping experience for our users. In our last earnings call, we outlined three strategies for driving our next growth phase, and I want to share some highlights. First, we expanded our talent pool for Live Video Broadcast (LVB) hosts, recruiting nearly 2,000 new hosts this quarter, which diversifies the fashion and lifestyle-related content. We currently have over 64,000 KOLs and 24,000 LVB hosts on our platform, generating more than 3,400 hours of engaging live streaming content daily. Many new hosts bring diverse skills from various backgrounds outside e-commerce, including personal stylists, fitness instructors, makeup artists, cooking teachers, and artists. We also introduced dedicated content channels for new KOLs in the recent version of our mobile app. Second, we are increasing our investment in KOL-generated short video content, enhancing KOLs' ability to capture user attention beyond their daily broadcasts. This is vital for boosting user conversion to higher-value LVB users and driving consumption on our platform. We are already seeing early results this quarter, with LVB monthly active users up 76% year-on-year and an increase in LVB active buyers over the last 12 months of 64% year-on-year. Thirdly, we are enhancing the infrastructure to support KOLs by rapidly growing our network of premium suppliers, which is essential for fostering a vibrant community of new KOLs and LVB hosts. Our integrated supply chain capacity is also key for differentiation in our sector. Additionally, we are developing new live streaming technologies and mini-programs to broaden our hosts' product selections and improve user experiences during Live Video Broadcasts. To create a more seamless and efficient platform and leverage the momentum of our LVB business, we are integrating the backend systems of our Live Video Broadcast and marketplace operations. This integration will enhance synergies as both businesses grow. We expect this will not only extend the duration of live-streamed merchandise availability but also improve both the quantity and quality of products in our marketplace. The execution of our strategy continues to yield positive results. We're encouraged by the triple-digit growth of our live streaming business, which has accelerated since last quarter. Live Video Broadcast has contributed to GMV, increasing to 39% of total GMV, doubling from last year and rising by 7.6 percentage points from the previous quarter. The daily hours of Live Video Broadcast have also risen to 3,400, up 10% from the last quarter. We anticipate this trend will persist in the coming quarters, driving long-term growth in both GMV and revenue. While we acknowledge the challenges ahead, both internally and externally, we are working to enhance the monetization of our expanding Live Video Broadcast business, as it increasingly comprises a significant portion of GMV. We plan to introduce more innovative monetization tools tailored to the Live Video Broadcast model and adjust our cost structure over the next two to three quarters. Importantly, we are transitioning from a user traffic operating model to a high-value customer operating model to adapt to new trends in the China Internet landscape and improve our operational efficiency. Externally, we will continue to innovate and maintain our competitive edge against new entrants in the market. While this highlights the immense market opportunity in live streaming e-commerce, it also increases competition. We believe live streaming is simply a technology or method that requires a suitable environment and infrastructure to succeed, in which we have already established advantages. Not every platform with traffic can operate a KOL-driven live streaming e-commerce model. Therefore, we are confident that through our continuous innovation, execution of our online strategy, and commitment to our mission, we will successfully establish a new breed of company—a next-generation KOL-driven social shopping destination—with the potential for long-term and sustainable user and business growth. I will now hand the call over to our CFO, Helen, who will provide a detailed overview of our financial results for the quarter. Thank you.

Thank you, Shark. Thanks again everybody for joining the call today. I will walk you through our second quarter fiscal year 2020 financials. And we believe that year-over-year comparison is the best way to review our performance. So unless otherwise stated, all percentage changes I'm going to give will be on that basis. So let's review the financials. For the overall platform, we generated pretty steady GMV growth over the past 12 months with GMV increasing nearly 10% when compared to the same period last year, while our Live Video Broadcasting business continued to grow strongly with the associated GMV for the second quarter of fiscal year 2020 increasing 115.2% year-over-year to RMB1.6 billion and an average APP MAUs who clicked on a Live Video Broadcast in the quarter increasing 76.2% year-over-year. The LVB associated GMV contributed roughly 40% of total GMV during the quarter and active buyers of the LVB business in the 12-month period ended September 30, 2019 grew 64%. Our total revenue came in at RMB197.9 million, a decrease of 15.3% year-over-year primarily due to the decrease in marketing service revenues and other revenues that were partially offset by an increase in the commission revenue. The commission revenue increased by 3.3% to RMB101.3 million, mainly driven by the increase in the LVB-associated GMV. Marketing service revenues decreased by 30.8% to RMB63.1 million, which is primarily due to our decision to strategically increase our focus on the LVB and allocate more of our resources towards it, as well as the initiatives in merchant structure upgrade that to a certain extent led to a lower number of long-tail merchants spending on marketing service in our marketplace. Other revenue decreased by 24.3% to RMB33.5 million, mainly due to a decrease in online direct sales and also the technology supporting services we provided to one of the investee companies which was newly established in March 2018, but later developed its own back-office technology supporting function. Next, I will walk you through the major cost and expense line. First of all, the cost of revenue decreased by 3.8% to RMB76 million from RMB79 million in the same period last year, primarily due to the decrease in the payment handling costs and the costs associated with decreased online direct sales, which was also partially offset by an increase in IT-related expenses due to the growth in the LVB business. Sales and marketing expenses decreased by 7.1% to RMB180.8 million from RMB194.7 million in the same period last year. This is due to the lower spending on the user acquisition expenses and also the user incentive program, which was partially offset by an increase in branding and marketing expenses. Research and development expenses decreased by 17.5% to RMB50.3 million, primarily due to a decrease in payroll costs which were in line with the decrease in headcount as a result of our headcount optimization exercise. General and administrative expenses increased by 6.5% to RMB39.5 million, roughly RMB2 million over the period, primarily due to an increase in payroll costs. Amortization of intangible assets increased by nearly 40% to RMB76.8 million from RMB55.2 million in the same period last year. That’s mainly due to the increase in the amortization of intangible assets recorded as a result of the business cooperation agreement that we entered into with Tencent, which became effective from April of this year. Loss from operations was RMB223.6 million, and net loss attributable to MOGU's ordinary shareholders was RMB326.6 million, compared to a net loss of RMB453.7 million in the same period of fiscal year 2019. The adjusted EBITDA was negative RMB124.6 million compared to negative RMB113.1 million in the same period last fiscal year, and the adjusted net loss was RMB196.9 million. Going forward, we continue to focus on the Live Video Broadcast business. While we are exploring more various revenue streams from our Live Video Broadcast, we do expect that the commission revenue will continue to drive the total revenue for the foreseeable future and our Live Video Broadcast business growth to account for a more significant portion of our business. So with that, we'd like to open the floor for the Q&A.

Thank you. We do have a question from the line of Ashley Xu from Credit Suisse. Your line is open.

I have a quick one. Just want to get an idea about our future marketing strategy and the way to approach new user acquisition and thinking on that? And would there be any changes in the budgeting for marketing? Thank you.

I briefly mentioned in our opening remarks that we're shifting our strategy or model from a user traffic operating model to a high-value customer operating model. I have two points to share with you here. First of all, look at our Live Video Broadcast business, the ARPU and repeat purchase rate of our Live Video Broadcast users are multiple times those of non-Live Video Broadcast users, and the model has proven to be more suitable than traditional merchandise-based models. Right now, the live-streaming broadcast contribution to GMV is still not big, less than 40%. So, our priority is to grow this high ARPU user for our Live Video Broadcast business. Currently, within our own active user base, the live-streaming active user contributes very little, although GMV is almost 40%, but the user contribution is much smaller. Our priority is to convert more of our users to Live Video Broadcast users. In this way, we can improve the ROI. We have already launched a live short video content channel. This will actually help to convert users from non-Live Video Broadcast to Live Video Broadcast users. Yes. Externally, we acknowledged that the user acquisition cost has been increasing due to competition, which has been a challenge for us. So, we are trying to innovate our user growth strategy. From a very simple acquire and convert model, we want to move to a deeper operating maintenance model, where we want to have repeat users who are also high ARPU users. So, we’ll invest more in the user loyalty program. I expect we will have encouraging results in terms of user acquisition costs and our cost structure. Do you have any more questions?

We next question comes from the line of Charlie Chen from China Renaissance. Your line is open.

We aim to enhance our user growth strategy. Transitioning from a simple acquire and convert approach, we want to adopt a deeper operational model focused on retaining repeat users who also bring in high average revenue per user. Therefore, we will increase our investment in the user loyalty program. I anticipate positive outcomes regarding user acquisition costs and our overall cost structure. Do you have any additional questions?

Okay. Let me briefly translate for the benefit of other audience. So basically, Charlie asked a question. He has seen the number of Live Video Broadcast hosts and KOLs increasing rapidly on our platform. The first question is, how do you handle the management issue? Would that impact kind of efficiency in terms of how to better manage a large number of KOL hosts? Second is, we have seen many other platforms or other verticals also adopting KOL-driven e-commerce models. He wants to understand how MOGU differentiates itself from other players?

Okay. The answer to your first question is, we have been building our Live Video Broadcast for more than three years. So we already have a very established organizational structure and technology in place. It's easy for us to leverage our infrastructure to recruit more hosts and KOLs. We are seeing a very stable cost structure and we expect our cost structure to remain stable in the future. We are seeing, yes, more other players from other verticals entering the space. While this is a typical attribute of China’s Internet space, when there is a higher efficient business model, everyone will chase it. But in my view, there are two strong attributes a company must have in order to establish live streaming e-commerce. Number one, the platform needs to have established infrastructure with the capacity to empower KOLs. MOGU has this established capacity in the field. We have been accumulating KOLs since our first day. We know how to operate effectively. Number two, the platform needs to have established supply chain capacity. In order to provide a smooth e-commerce live streaming experience, it's more than just setting up a software or tool. You have to provide full e-commerce services; otherwise, the service costs will skyrocket. So, both operating people and supply chain, I think we have established advantages. For the KOLs and for the people who are live streaming hosts, MOGU provides a very comprehensive solution, including more than live streaming technology, but also software, hardware, customer service, e-commerce solutions, payment, and of course supply chain. These capabilities are something I believe not many other players have in-house. So, this is how MOGU stands out.

There are no further questions at this time. Mr. Vagenštajn, I’ll turn the call back over to you.

Thank you, Melisa. Thank you everyone for joining the call tonight. If you have any questions or comments, please don't hesitate to reach out to anyone here at MOGU. This concludes the call. Have a good night.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.