MOGU Inc. Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to MOGU Fourth Quarter Fiscal Year 2020 Financial Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to turn the call over to Christian Arnell. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us today. MOGU's earnings release was distributed earlier today and is available at the IR website, ir.mogu-inc.com as well as through 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 expectations 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 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 Qi Chen, chairman and CEO; Mr. Raymond Huang, chief strategy officer; and Ms. Hwei Ching Eli Wang, financial controller. Mr. Chen will review the business operations and company highlights, followed by Mr. Huang, who will discuss financials. All of them will be available to take your questions during the Q&A session that follows. It is now my pleasure to introduce chairman and CEO, Mr. Chen. Please go ahead.

It is now my pleasure to introduce chairman and CEO, Mr. Chen. Please go ahead.

Hello, everyone. Thank you for joining our fourth quarter earning call today. Today, I will introduce the company in Chinese first, and Raymond will help to translate.

Hello, everyone. Thank you for joining our fourth quarter earning call today. Today, I will introduce the company in Chinese first, and Raymond will help to translate.

The past quarter was a highly unusual one. Our live video broadcasting business remained the focal point of our strategy throughout the pandemic, and it continued to maintain strong growth momentum. LVB-associated GMV during the quarter increased by 54.1% year over year to RMB 1.6 billion and 91.6% during the fiscal year 2020 to RMB 7.9 billion. Our LVB business is now the key driving force behind our growth, accounting for 65.4% of our GMV during the quarter and 46.2% during the entire fiscal year 2020, while working to help KOLs improve their sales skills with new tools and power them with additional supply chain infrastructure as we build this business out to scale.

Our LVB business is now the key driving force behind our growth, accounting for 65.4% of our GMV during the quarter and 46.2% during the entire fiscal year 2020. We are also focusing on helping KOLs enhance their sales skills with new tools and strengthening their support with additional supply chain infrastructure as we work to scale this business.

Over the past 12 months, active buyers of live video broadcasting business continued to maintain steady growth, increasing 44.9% year over year to 3.6 million. The LVB business continues to generate strong growth momentum and increasing users' stickiness. Active buyers for our LVB business live video broadcast 21 days a month on average. During their 15 days, repurchase rates reached 86% during the quarter.

Over the past 12 months, active buyers of our live video broadcasting business continued to grow steadily, increasing by 44.9% year over year to 3.6 million. The LVB business continues to show strong growth momentum and increased user engagement. Active buyers participate in live video broadcasts an average of 21 days a month, and during their 15 days of activity, repurchase rates reached 86% during the quarter.

We are committed to continuously strengthening the connection between users and the LVB hosts. Our community of content creators is helping to highlight each host's unique personality, improve their interaction with users, and provide snapshots of moments in the showroom. We are pleased to see many users refer their favorite LVB hosts to other brands, which has helped expand and diversify our new user base. We will continue to build out these functions to attract high-quality and targeted users.

We are focused on enhancing the relationship between users and the LVB hosts. Our community of content creators plays a crucial role in showcasing each host's individuality, enhancing user engagement, and capturing memorable moments in the showroom. It's encouraging to see many users recommending their favorite LVB hosts to other brands, which has contributed to growing and diversifying our new user base. We will keep developing these features to draw in high-quality and targeted users.

As a pioneer in the live video broadcasting sector, we have built a dedicated system, which we call K-10 system internally, over the last four years. This is a complete ecosystem for live video broadcasting hosts to thrive in. We quantify the monetization capabilities based on the number of fans, the number of short videos they release, and the historical sales data from their live video broadcasting rooms. Therefore, we provide them with different tools and incentives so that they can grow in a more systematic manner. LVB hosts are somewhat like commercial properties. Once established, they can bring in a steady stream of revenue for themselves and for the platform.

We create an environment where live video broadcasting hosts can succeed. We measure their monetization potential by looking at their fan base, the quantity of short videos they produce, and the past sales data from their broadcasting sessions. As a result, we offer various tools and incentives to help them grow systematically. Live video broadcasting hosts can be compared to commercial properties; once they are set up, they have the potential to generate consistent income for both themselves and the platform.

The outbreak of COVID-19 this year has been a test for the entire human society and has not spared the entire Chinese fashion industry. Tens of millions of clothing practitioners have been devastated. Many government factories have been shut down due to the pandemic. Due to the worldwide spread of COVID-19, tighter export restrictions and sharp declines in domestic sales have made it difficult for garment factories to operate profitably. Business activity in the wholesale market in Guangzhou and other places has dropped by 40%, and traditional offline apparel merchants are looking for ways to survive this crisis. Despite the disruption, however, we know crisis also creates opportunities. The live video broadcasting helps merchants to reach their customers, collect massive small orders, and bypass middlemen with transparent pricing. Offline apparel suppliers are all embracing this opportunity. Despite prior criticism from wholesale market practitioners, we observed that they became the biggest advocates for LVB during this quarter.

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As the industry evolves, MOGU is best positioned to capture this opportunity. Our business model is based on KOL operation and the tight control of the supply chain. We have a strong preference toward supply chain partners that have great access to products, and we bridge them with hosts and the most relevant set of fans. Through the active expansion of brand-less product categories and price ranges, we have made significant progress with our product offerings in the last few months. Our ARPU has been increasing. Our LVB hosts are developing stronger bonds with our users through quality products and they are empowered by the platform. In addition, we have developed a system in which our hosts can select and curate their products from the supply chain directly. This system clearly empowers them and accelerates their growth.

We have made significant progress with our product offerings in the last few months through the active expansion of brand-less product categories and price ranges. Our ARPU has been increasing, and our LVB hosts are building stronger relationships with our users by providing quality products while being empowered by the platform. Additionally, we have created a system that allows our hosts to select and curate their products directly from the supply chain, which clearly empowers them and accelerates their growth.

The COVID-19 outbreak has created challenges for many established offline apparel brands. They have turned to us due to excess inventory and store closures that left them without business opportunities. We have implemented our LVB brand strategy to enhance our supply chain with branded apparel. We support brand partners through dedicated LVB hosts without charging commission fees. For instance, we generated over RMB 40 million in GMV from our Nike and Adidas dedicated sales on March 27, which was just from one night of sales.

Apparel brands have contacted us when they faced inventory buildups and store closures with uncertain business conditions. We have effectively implemented our LVB brand strategy to enhance our supply chain with branded apparel products. We support our brand partners by providing dedicated LVB hosts without commission fees. For instance, we generated over RMB 40 million in GMV from dedicated sales for Nike and Adidas on March 27, and that was just for one night.

We believe the worst is now behind us, and we are seeing the light at the end of the tunnel. Going forward, we remain committed to deploying the best-in-class LVB e-commerce strategy, expanding the lineup of our LVB hosts, improving their quality, continuing to build supply chain infrastructure, and expanding our brand partner strategy. We will achieve better synergy between our KOLs and the supply chain partners. We are very confident that we are ideally positioned and are on the right track to capture the massive growth potential that LVB e-commerce in China presents.

We remain committed to deploying the best-in-class LVB e-commerce strategy, expanding the lineup of our LVB hosts, improving their quality, continuing to build supply chain infrastructure, and expanding our brand partner strategy. We will achieve better synergy between our KOLs and the supply chain partners. We are very confident that we are ideally positioned and are on the right track to capture the massive growth potential that LVB e-commerce in China presents.

Thank you, Shark. Thanks again, everyone, who joined our conference call today. So, now, I will walk you through our fourth quarter and the fiscal year 2020 financials. We believe year-over-year comparison is the best way to review our performance. Unless otherwise stated, all percentage changes I'm going to give you will be on that basis. Let's review the financials first. We'll go through the figures for the fourth quarter of fiscal year 2020 first and followed by that of the fiscal year 2020. Our GMV for the 12-months period ended March 31, 2020, was RMB 17.1 billion, which remained stable year over year. Our focus on growing the GMV from live video broadcasting, which has increased by 91.6% during the same period to 7.9 billion. The LVB business continues to grow as a proportion of the total GMV, and it is now accounting for 65.4% for the fourth quarter and 46.2% for the entire fiscal year 2020. Active buyers of the LVB business in the last 12 months grew 44.9% to 3.6 million. So, let's now turn to revenues. In the last quarter, total revenue came in at RMB 119 million, a decrease of 45.3%. But this was primarily due to a 43% decrease in the commission revenue and a 74.4% decrease in the marketing revenue. The commission revenue decreased to RMB 66 million, primarily due to the impact of the COVID-19 pandemic, including the cancellation of orders as a result of logistics disruption in factories, weakness in the fashion and apparel category and also our exemption of commission fees for the brand merchants as our support. Commission revenue from the LVB business, however, grew significantly and it was in line with the continued strong growth in the LVB-associated GMV. The LVB business also continues to generate a stable commission rate, which was, however, partially offset by a slowdown in the marketplace business. Marketing service revenues, which is mainly generated from our marketplace business unit, decreased to RMB 18.2 million, which is primarily due to the outbreak of the COVID-19 pandemic. Restructuring of our business mix, which shows our determined effort to develop our LVB business. After the revenue, I will now walk you through our major costs and expense. Cost of revenues decreased slightly by 4% to RMB 58.6 million from RMB 61.1 million in the same period of fiscal year 2019. That was primarily due to the decrease of payment handling costs and the IT-related expense. Sales and marketing expense decreased by 56% to RMB 78.2 million from RMB 178.2 million in the same period of fiscal 2019. That was primarily due to optimized spending on user acquisition and branding expense. R&D expense decreased by 42.6% to RMB 32.8 million from RMB 57.2 million in the same period of fiscal year 2019, primarily as a result of headcount optimization. G&A expense decreased by 75.5% to RMB 11.5 million from RMB 46.8 million in the same period of fiscal year 2019, primarily due to the reversal of share-based compensation expense as a result of the headcount optimization. Amortization of intangible assets increased by 93.5% to RMB 87.1 million from RMB 45 million in the same period of fiscal year 2019, and that was due to an increase in the amortization of intangible assets recorded as a result of the business cooperation agreement that MOGU entered into with Tencent, which became effective from April 2019. Loss from operations was RMB 149.1 million. Net loss attributable to MOGU's ordinary shareholders was RMB 141.9 million. Adjusted net loss was RMB 79.3 million. Basic and diluted loss per ADS were RMB 1.3. Adjusted EBITDA was negative RMB 83.6 million. Let's now move to the financials for the entire fiscal year of 2020. Total revenue came in at RMB 835.3 million, a decrease of 22.2%. The commission revenue came in at RMB 438.3 million, a decrease of 13.7%. The marketing service revenues came in at RMB 438.3 million, a decrease of 38.6%. This was primarily due to the restructuring of our business mix toward LVB business and also the outbreak of COVID-19 in the latest quarter. Cost of revenues decreased slightly by 6.4% to RMB 293.8 million. Sales and marketing expense decreased by 17.6% to RMB 613.2 million, primarily due to optimized spending on user acquisition expense and the user incentive program, which was partially offset by an increase in branding and marketing spending. R&D expense decreased by 27.6% to RMB 171.1 million. G&A expense decreased by 23.9%. The loss from operations altogether was RMB 2,072.9 million compared with the loss of operations of RMB 574.2 million in the fiscal year 2019. Net loss attributable to MOGU's ordinary shareholders was RMB 2,223.6 million. This was primarily attributable to a goodwill impairment incurred, which was associated with the weaker than expected synergies created by the acquisition of Meiliworks in February 2016. The shortfall in the realized synergies was in part due to the repositioning of the company's strategy toward building a KOL-driven, interactive e-commerce model as well as an increasingly competitive market environment. In addition, we have a sizable increase in the amortization of intangible assets as a result of a business cooperation agreement that MOGU has entered into with Tencent, which became effective from April 2019. We have also recorded a RMB 114 million loss from our investee company, Weshop, which was closed at the end of last year due to strategy reasons. Adjusted net loss was RMB 414.2 million. Basic and diluted loss per ADS were RMB 20.45. Adjusted EBITDA was negative RMB 320.1 million. We continue to closely monitor the evolving situation in response to the outbreak of COVID-19. This pandemic quarter has accelerated digital adoption and transformation within the Chinese fashion industry. Fashion brands and supply chain partners are embracing LVB as a new form of sales. Our KOL-driven ecosystem has best positioned and prepared to meet their demand. We have clearly reached an inflection point in that the LVB business will be our main growth driver going forward. We'll continue to provide differentiated, personalized and immersive shopping experiences to our customers. So, with that, we would like to open the call for Q&A.

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

Thanks for taking my questions. My first question is about the strategy for your LVB business in the near future. I see three ways to continue expanding your GMV from the LVB business: first, by continually recruiting new hosts or broadcast hosts to increase participation; second, by extending the length of broadcasts by each host; and third, by improving the efficiency of broadcasting sales, which involves increasing the GMV generated per hour from this business. Among these three options, which do you consider to be the primary focus in the near future, and how do you measure or evaluate the return on investment in this business?

We continually recruit new hosts to expand our business, aim to increase the duration of broadcasts by each host, and work on enhancing the efficiency of our broadcasting sales to boost the GMV generated per hour. Among these three strategies, which do you consider to be your primary focus going forward, and how do you assess the return on investment in this area?

Okay. Sure. I would just briefly translate Shark's answer. Basically, we have been doing the LVB business for an extended period of time in the last four years. As Charlie mentioned, it's very important that we need to increase the number of hosts, the duration of the show, and the efficiency of the LVB. Sometimes, we think all these LVB hosts are very diligent, and we worry about their health and the sustainability. So, we believe that improving the LVB efficiency is the critical path that we'll take. How do we improve the efficiency? We have two ways. Number one is the supply chain empowerment. Due to the individual hosts, they just don't have sufficient capability or know-how, or resources or connections to build a solid and sufficient supply chain. So, we can help them to introduce brand products, original factories, and internet KOL brands, providing a powerful support from the supply chain infrastructure that we provide. The best example is the Nike-Adidas Night we had in March this year. We recorded sales of 40 million in one night, attributed to Nike and Adidas. From all the KOLs on our platform, they’re probably not capable of sourcing these two brands. But MOGU as a platform can do that. So, that’s a huge value-add we can provide to the KOLs to improve their efficiency. Number two is about the proprietary traffic they have. For all the KOLs, we encourage them to develop their proprietary traffic within MOGU, so through the app, fans can follow them, enter their chat rooms, and develop a stronger emotional bond with the KOLs. Because of this strong bonding and emotional connection, KOLs can better monetize their fans in a more effective way. Supply chain empowerment and proprietary traffic expansion are two keys to improving the efficiency of the LVB. Okay. Operator, we can turn to the next question?

Your next question comes from Locky Lau from AJ Asset Management. Your line is open.

We can move to the next question. Your next question comes from Locky Lau from AJ Asset Management. Your line is open.

Okay. Locky, your line is open.

Okay. Locky,

Let me translate the question first. Locky was asking about the previous CFO leaving the company and if the company has any plans. The company's answer is that it's probably not the best place to comment on this situation. Operator, maybe we can move on to the next question?

Can you listen? Can you hear me?

Yes. I can hear you.

Yes. I will ask the question on the liquidity. I think our liquidity is not enough. So, is it enough for us to do the share repurchase plan?

Sure. I can take this question. On liquidity, we believe that we are of the view that the company, particularly the LVB business, is growing very fast. As the market will realize the value of the company over time and more investors will follow us, liquidity is not really our concern. We launched the share repurchase plan because we feel our share price is currently undervalued, and we want to deploy company capital to buy back shares. Number one, to send a strong message that we believe the company is undervalued. Number two, this is also a sensible thing to do from a company capital treasury management perspective.

The company is experiencing rapid growth. As the market begins to recognize our value and more investors engage with us, liquidity is not a primary concern. We initiated a share repurchase plan because we believe our stock is undervalued, and we aim to use company capital to buy back shares. This serves two main purposes: first, to convey our belief that the company is undervalued, and second, to make a prudent decision regarding our capital management.

So, maybe let me translate the question. I think the question was, we provide base pay to the KOLs, this program, and if that creates any financial distress to the company. Is that right?

Yes.

We are using company capital to buy back shares for two main reasons. First, we want to clearly communicate that we believe the company is undervalued. Second, from a treasury management perspective, this is also a sensible decision. So, to clarify the question regarding the compensation for KOLs, we do provide base pay to them, and we are assessing whether this could cause any financial distress to the company.

Sure. Let me translate the first part of the answer first. Basically, we are the pioneers of the LVB business, and we spent the last four years dedicated to developing and establishing a complete ecosystem for video broadcasting. As the pioneers, we've accumulated a lot of know-how throughout the entire supply chain, built up a platform, developed an e-commerce closed-loop system, IT infrastructure, and financial services to support them. We are very dedicated to developing our resources in two parts: number one, the supply chain, and number two, the incubation of KOLs. KOLs are effectively the salespeople of our platform. They're extremely important for the success of our business.

We have accumulated significant expertise across the entire supply chain, established a platform, and created a closed-loop e-commerce system, along with IT infrastructure and financial services to support them. We are committed to enhancing our resources in two main areas: first, the supply chain, and second, the development of Key Opinion Leaders (KOLs), who serve as vital sales representatives for our platform and play a crucial role in our business success.

On the supply chain, up to the pandemic, we have been working closely with many supply chain partners. We want to work with original factories providing KOL or K-driven native Internet brands, as these brands are most well-received by our customers. We have customers who like these clothes, and want to provide a strong value proposition by cutting off all the middlemen in the supply chain, working directly with factories to ship the clothes from factories to our end customers.

We have been collaborating closely with numerous supply chain partners up to the pandemic. Our focus is on working directly with original factories that supply KOL or K-driven native Internet brands, as these are highly favored by our customers. Our goal is to enhance our value proposition by eliminating middlemen in the supply chain and facilitating direct shipments of clothing from factories to our customers.

Regarding the second part about incubating KOLs, we believe they are not just sales but we want to develop quality and professional KOLs. They will have professional skills, with the potential to become superstars on MOGU. They can become brand curators or brand owners for many fashion brands on MOGU. This base pay is essentially paying for their high potential. We want to work with them over the next three to five years, with a long-term dedication. The base pay aims to attract talent, but the majority of their income going forward will still come from commissions as they are still video broadcasting hosts. We will help them to grow, and once established, their revenue will primarily derive from sales. The base pay does not create any financial distress for us. We believe this is a critical long-term investment.

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

We have a long-term commitment to attracting talent through base pay, while acknowledging that most of their income will come from commissions as video broadcasting hosts. Our support will help them grow, and once they are established, their revenue will mainly come from sales. The base pay will not put any financial strain on us, and we see this as a vital long-term investment. Your next question comes from Charlie Chen from China Renaissance. Your line is open.

Charlie, you're breaking up. I can't hear you.

Okay. Can you hear me now?

Yes, yes. It's better now.

Yes, all right. I noticed that there are substantial cuts in the sales and marketing expenses in the past three months, both in absolute amounts as well as a percentage of revenue. Can you elaborate on how you achieved this kind of cost saving and how sales and marketing will proceed going forward?

Charlie, you're breaking up. I can't hear you. Okay. Can you hear me now? Yes, yes. It's better now. Yes, all right. I noticed that there are substantial cuts in the sales and marketing expenses in the past three months, both in absolute amounts as well as a percentage of revenue. Can you elaborate on how you achieved this kind of cost saving and how sales and marketing will proceed going forward?

Okay. Charlie, I will quickly translate the answer for the audience. Basically, number one is that we switched the model from traditional e-commerce to focusing more on video broadcasting e-commerce. The traditional model has decreased as a proportion of the total GMV pie. Live video broadcasting customers are very sticky, watching on average 21 days a month, with a 15-day repurchase rate of 86%. The ARPU has been increasing. The ARPU for LVB is much higher than we have ever seen in the traditional model. Therefore, we can see that the live video broadcasting channel is more about unit economics, rather than filtering massive traffic to a small percentage of buyers. Number two, as we mentioned, all the LVB hosts are like commercial properties. They are like stores. Our focus going forward is to deepen our operation and cooperation with them, helping them acquire more targeted users and traffic strategy. Our user experience came down. In the future, we believe it’s possible for it to rise again, but we need to carefully consider the accuracy of acquiring these users because the traditional acquisition methods do not really apply to the new LVB model.

I have no further questions in queue. I turn the call back over to Mr. Arnell for closing remarks.

Thank you, everyone, for joining us tonight. If you have any questions or comments, please don't hesitate to reach out to the MOGU IR team. That concludes the call. Have a good night.

Thank you, all.

Thank you, everyone. This will conclude today’s conference call. You may now disconnect.