MOGU Inc. Q3 FY2020 Earnings Call

Thank you, Chris. 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. 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 are based upon management's current expectation and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties or 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. On the call today from MOGU are Mr. Shark Chen Qi, Chairman and CEO; and Ms. Helen Wu, CFO. Mr. Chen will review business operations and company highlights, followed by Ms. Wu, who will discuss financials. Both will be available to take your questions during the Q&A session. Now it is my pleasure to introduce our Chairman and CEO, Mr. Chen, please go ahead.

Hello, everyone, and thank you for joining us for our December quarter earnings call today. We continue to execute on our live video broadcasting e-commerce strategy and made significant progress during the quarter, which is traditionally China's peak shopping season. Our LVB business has increasingly become a key business driver and maintained strong growth momentum, with GMV increasing 99.5% year-over-year during the quarter. Its contribution to our overall GMV also jumped to 53% during the quarter, up 14% sequentially and more than double from the same period last year. The rapid growth of the LVB business has been driven primarily by the enhanced content being created and further supported by the consolidated supply chain capacity we are actively expanding. LVB broadcast hours per day increased to 3,800 hours in December from 3,400 hours per day in September. Average LVB monthly active users also increased 133% from a year ago, which reflects the direction we are headed as our strategy takes hold and bears fruit. Cultivating and empowering our KOLs and LVB hosts is a key component of our engaging fashion and lifestyle destination we are building for our users and will create a solid platform to drive long-term sustainable growth. During the quarter, we continued to strengthen our ability to empower KOLs and hosts. First, we expanded the talent pool of LVB hosts by recruiting nearly 5,000 new hosts during the quarter to increase the diversity of fashion and lifestyle-related content and amplify engagement with a broader demographic of users. Second, our new KOL incubation and empowering programs launched in July 2019 are already beginning to generate solid results and drive growth momentum. We are seeing performance and growth of our new and mid-tier hosts improve rapidly on our platform, as a result of the effective execution of this supporting program. Third, we enhanced the infrastructure to empower KOLs by adding 2,000 new supply chain vendors that cater to various product categories and are located throughout China. We believe that expanding the LVB host talent pool and increasing our supply chain capacity will create significant synergies that enhance our competitive advantage and drive sustainable growth moving forward. At the same time, we continued to enrich our live streaming e-commerce business by broadening our product categories, price ranges, brand portfolio, and innovative tools to support the KOLs. We continue to grow the catalog of fashion and lifestyle-related short video content created and shared by our LVB hosts to increase overall engagement with their followers during off-peak hours when they aren't broadcasting. This is critical for improving user conversion rates and driving consumption on our platform. We pioneered the development of the live streaming e-commerce model when we began building an interactive platform connecting consumers, KOLs, and suppliers long before the live streaming technology was embraced by the broader e-commerce sector. This is captured in our unique P2K2C model. Under this model, K represents KOLs, who are pivotal in bridging the social-commerce gap through their unique ability to understand, influence, and aggregate diverse consumer demands. P represents our platform as a provider of consolidated resources, including our supply chain, live streaming infrastructure, and KOL-empowerment system. C stands for our customers. We are committed to empowering KOLs by harnessing their capabilities and those of our supply chain partners to serve the diverse needs of our users. The outbreak of COVID-19 has posed serious health concerns and affected the lives of many families around the world. Countless frontline medical professionals in China and globally are bravely confronting the virus at great personal risk. In China, many civil servants and volunteers are tirelessly working to contain the outbreak, while numerous citizens have chosen to self-quarantine as part of the nationwide prevention efforts. The people of China and across the globe are showing remarkable resilience and making significant sacrifices in this fight. I am extremely proud of their courageous actions and sincerely wish everyone health and safety. The epidemic has also disrupted various consumer-related industries. As a company primarily serving a female-oriented consumer base with a deep-rooted supply chain across China, we have not been unaffected by the outbreak. We anticipate our near-term performance to be impacted due to the temporary suspension of operations by factories, large wholesale markets, and delivery services. In response to the rapidly changing economic landscape, we have implemented several measures in collaboration with our KOLs and business partners to mitigate the outbreak's effects and position ourselves to seize emerging opportunities. We have capitalized on the growing awareness of the importance of e-commerce, especially live streaming, in today’s economy, and added over 500 new brand partners to our supply chain. We have prioritized collaboration with brand partners whose sales have been most affected by the outbreak, further showcasing our platform's unique value proposition and differentiated solutions through live video broadcast discount sales. We are also leveraging this as an opportunity to optimize our systems and processes for empowering KOLs and suppliers, benefiting from the improved efficiency of our cost structure. We believe the outbreak will eventually be contained, and business will recover swiftly. The word crisis in Chinese contains the characters for both danger and opportunity. Challenges create opportunities. We firmly believe that the outbreak will allow us to strengthen the impact of our KOL-centered live video broadcast business on the e-commerce sector's growth in China. We remain committed to our mission of creating long-term sustainable growth for our shareholders. With that, I’ll turn the call to Helen to discuss the financial details.

Thank you, Shark. Thank you again, everyone, for joining the call tonight. I will walk you through our third quarter fiscal year 2020 financials. We believe year-over-year comparison is the best way to review our performance. So unless otherwise stated, all the percentage changes that I’m going to give you are on that basis. So let’s review the financials. Our overall operations continued to generate pretty steady GMV growth over the past quarter, with the GMV increasing 8% when we compare it to the same period last year. Our LVB business, in particular, continued to grow significantly with the associated GMV for the third quarter of fiscal year 2020, increasing by 99.5% year-over-year to RMB 3.4 billion. The LVB business continues to grow as a proportion of total GMV, accounting for 53% through the quarter, up 14% sequentially, and is growing strongly as our associated commission revenues, which have increased significantly, accounting for a larger portion of our overall commission revenue. Going forward, it will continue generating strong growth momentum, driven primarily by our strategy and the continued upgrading of our merchant structure on our platform. The average APP MAU, who clicked the live video broadcast in the quarter, increased by 132.7% year-over-year. Active buyers of the LVB business in the past 12-month period ending December 31, 2019, grew by 32.4%. Now let’s turn to revenues. Total revenue came in at RMB 269.5 million, a decrease of 26.6% year-over-year. This was primarily due to a 19.6% year-over-year decrease in the commission revenue and roughly 45% year-over-year decrease in the marketing revenue. The commission revenue decreased to RMB 141.2 million, mainly driven by the decrease in the GMV and also the commission revenue related to our marketplace business. While our revenue in the Live Video Broadcasting business has continued to grow strongly, offsetting part of the revenue losses in the commission revenue in the marketplace business. Marketing service revenue, which is mainly generated from our marketplace business unit, decreased by 45% to RMB 72.5 million, which is primarily due to the decrease in the GMV in our marketplace business, as the company focused its resources on developing the LVB business and accelerating the optimization of its merchant structure on the marketplace, which began during the second half of the calendar year 2019. Other revenue decreased by 7.3% to RMB 56 million, mainly due to a decrease in the online direct sales, while the revenue from financing solutions to our consumers continued to increase. Next, I will walk you through our major cost and expenses. First of all, our cost of revenue was relatively flat in comparison to the same period last year. It did decrease marginally by RMB 2.1 million to RMB 19.3 million from RMB 100.4 million in the same period last year. This was primarily due to a decrease in the payment handling costs and a decrease in the costs associated with lower online direct sales, which was partially offset by an increase in the IT-related expenses associated with the LVB business. Sales and marketing expenses. This expense increased by 2.2% to RMB 209.3 million from 204.7 million in the same period last year. This was primarily due to the consistent spending on the marketing and the user acquisition channels, which was partially offset by a decrease in the payroll cost. Research and development expenses decreased by 42.3% to RMB 32 million from RMB 55 million last year. That was primarily as a result of the headcount optimization. General and administrative expenses decreased by 15% to RMB 40.7 million primarily due to a decrease in payroll costs. Amortization of intangible assets increased by 64% to RMB 103 million from RMB 67 million in the same period last year. That’s mainly due to an increase in the amortization of intangible assets recorded as a result of our business cooperation agreements that MOGU entered into with Tencent, which became effective from April 2019. Loss from operation was RMB 1.6 billion, and the net loss attributable to MOGU ordinary shareholders was RMB 1,634.5 million compared to a net loss of RMB 42.2 million in the same period of fiscal year 2019. This was primarily attributable to a goodwill impairment incurred as a result of a weaker-than-expected synergy created by the acquisition of Meilishuo in February 2016. The shortfall in the realized synergy was in part due to the repositioning of the company’s strategy towards building a KOL-driven interactive e-commerce model as well as an increasing competitive marketing environment and also the impact from the outbreak of the COVID-19. The adjusted EBITDA was negative RMB 84.1 million compared to a negative RMB 5.3 million in the same period last year and the adjusted net loss was RMB 92.9 million. We continue to closely monitor the evolving situation in response to the outbreak of COVID-19. As Shark mentioned earlier, this challenging market environment may impact our performance in the near term. That said, we remain confident in the longer-term growth prospects of our business. We firmly believe that the outbreak will create more opportunities for us to strengthen the social influence of our KOL-centered LVB business has on the growth of the e-commerce sector, where we will be strongly positioned to capitalize on that. With that, we will open to Q&A.

Thank you. Your first question comes from Charlie Chen of China Renaissance. Your line is open.

Maybe let me first translate the question for listeners’ sake. The first question is regarding the impact from COVID-19; in which area do you see the most impact? Is it on the supply side, the availability of live video broadcast hosts, or logistics? The second question is, when do you expect your business to return to a normal state? The third question is, do you see a decrease in your pool of live video broadcast hosts or an increase due to people staying home for an extended period?

Yes, there is an impact on our business. The news came out in late January, and we noticed the most significant effects in February. In early February, our live streaming hosts were unable to return to their studios and had to quarantine at home. As they started to return, we discovered a supply bottleneck, primarily due to an extended holiday that delayed the reopening of factories and large-scale offline markets. As of early March, most hosts have returned to work, and most factories have resumed operations. However, delivery services have become challenging because some customers are concerned about safety with packages being delivered from other cities. Additionally, many neighborhoods are requiring delivery drivers to leave parcels outside the gates. This situation has also affected brands and suppliers, leading many to realize that sales of spring collections will be significantly impacted, prompting a shift towards producing summer and autumn collections. Consequently, there is currently a shortage of spring collections. Regarding recovery, our platform data shows that daily active users and user engagement have rebounded well, indicating strong demand. However, challenges remain on the supply side, as we continue to encounter bottlenecks with offline suppliers and brand partners. In China, the situation appears to be largely contained, although the outbreak abroad remains uncertain. We expect business to return to normal relatively quickly. We are witnessing encouraging developments in both demand and supply for our live video broadcast hosts, with a stable number returning to work. While our pool of live streaming hosts has not diminished, rapid growth in this pool is limited due to the constrained supply from brands and suppliers.

Okay. Thank you.

Your next question comes from Charlie Chen with China Renaissance. Your line is open.

The first question is regarding the stable growth in monthly active users for live video broadcasts, while overall users have declined. I'm curious about the source of the new live video broadcast users. Additionally, how many of your users from the traditional marketplace have transitioned to live video broadcast users?

Okay. We have four main channels for user acquisition. The first is the major social platforms. The second is the main app stores. The third, which has been affected, is online entertainment like OTV as well as offline marketing channels. The fourth is user referrals through word-of-mouth. These are the four primary channels we utilize to acquire users for our LVB business. Currently, LVB users make up about 30% of our total users, but their metrics significantly outperform those of our legacy marketplace users. For instance, the average revenue per user is four to five times higher for LVB users, and their repeat rate is also much greater.

Basically, my question is, when you encounter a challenge or limitation on the supply side, but at the same time, your LVB hosts are returning and interacting with their fans, do you anticipate a long-term decrease in user engagement if supply side constraints continue?

Okay. When we mention a constraint on the supply side, we mean there is not an abundance of supply, but we do have a substantial amount available for our key opinion leaders. Over the past month and a half, we have focused on two main strategies. First, we have expanded our product categories, particularly in cosmetics, which have not been as adversely affected as apparel, leading to increased contributions from our cosmetic sales. Second, we have successfully broadened our brand portfolio. Historically, brands were not our primary source of supply, but the epidemic has significantly impacted traditional apparel brands in China, resulting in limited offline sales and excess inventory. This situation presents us with an opportunity to delve into brand live streaming e-commerce sales. Our key strategy this year is to grow our brand portfolio, widen our price ranges, and enhance our product categories. In the last month and a half, we have partnered with over 500 new brands. Previously, live broadcasting hosts were hesitant to collaborate with brands due to higher price ranges, but now they have to depend on us more to secure sufficient supply from these brand partners for their shows.

Thank you.

Sure. Thank you, Chris, and thank you, everyone, for joining the call today. If you have any further questions or comments, please don’t hesitate to reach out to any one of us here at MOGU. This concludes the call today.

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