MOGU Inc. Q1 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the MOGU First Quarter for Fiscal Year 2021 Earnings Call. 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 today’s presenter, Rene Vanguestaine. Please go ahead. Thank you, Michelle. Hello, everyone, and thank you for joining us today. MOGU's earnings release was distributed earlier today and is available on the IR website as well as on the 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. The forward-looking statements are based upon management's current expectations and the 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; 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 the financials. They will be available to take your questions during the Q&A session that will follow. Now it is my pleasure to introduce our Chairman and CEO, Mr. Chen. Please go ahead.

Hello, everyone. This is Shark. Thank you for joining us on the earnings conference call for the first quarter of fiscal year 2021 today. In the past quarter, we continued to execute our live video broadcasting, or LVB, e-commerce strategy, and our LVB business regained strong growth momentum. GMV from the LVB business increased by 72.4% year-over-year to RMB 2.3 billion during this quarter. The LVB business has become an increasingly important driver, accounting for 72.6% of the total GMV this quarter. Our dedicated efforts on the LVB business over the past four years have yielded remarkable results, allowing us to accumulate significant experience in building our ecosystem of KOLs and supply chain partners. In the past two years, MOGU's business has undergone a major transformation. We have established our KOL-driven strategy aimed at creating a truly differentiated experience for MOGU Live. These unique experiences translate into differentiated value for our customers. Consequently, the LVB business has regained gross momentum this quarter and has become the main contributor to our total GMV. The participation of KOLs leads to a lower platform take rate compared to the traditional e-commerce model, as reflected in our company's year-over-year revenue and cost changes. We believe that as the LVB business continues to grow and LVB GMV increases as a percentage of total GMV, the company will resume revenue growth. Our LVB buyer base continues to grow steadily. In the 12 months ended June 30, 2020, the number of active buyers rose by 37% year-over-year to 3.7 million, and these users show consistently high engagement. For instance, active buyers watch LVB for an average of 71 minutes a day and engage for an average of 21 days a month. Their strong participation contributes to a 30-day repurchase rate of 91%, reflecting a deeper connection between users and KOLs that goes beyond a simple buyer-seller dynamic. Users enthusiastically express their appreciation for KOLs and recommend them to friends. We are dedicated to further developing user acquisition through sharing mechanisms. By designing incentive schemes and interactive tools, we can help more KOLs attract new friends from their social networks, allowing our platform to acquire customers at a lower cost. Regarding host incubation, we have created a comprehensive MOGU live host incubation and empowerment mechanism. Numerous new hosts join our MOGU platform daily, enabling us to selectively collaborate with KOLs who show greater potential. We also identify new KOLs by continuously launching events and competitions, such as this year's Super MOGU project, and provide tailored support through our incubation system. This system has proven effective, with the number of established KOLs on our platform increasing by 55% year-over-year. Digital adoption has been a key driver of supply chain evolution in the first half of 2020. More traditional manufacturers have entered the live e-commerce landscape and have prospered due to strong sector growth. We have onboarded numerous supply chain partners by establishing new domains and offering transparent pricing to empower KOLs in driving strong sales. Additionally, we have collaborated with nearly 1,000 brand merchants to enhance KOLs’ product offerings. We continue to empower our KOLs with supply chains and improve the efficiency of matchmaking between KOLs and products. Our live system is designed to enhance collaboration among KOLs, supply chain partners, brand curators, distributors, and MCN companies, giving MOGU greater control over suppliers. Looking ahead, we expect the e-commerce LVB market to sustain strong growth. More C2M factories, SMEs, and Internet-native brands will move their sales online via LVB, and an increasing number of customers will embrace this immersive shopping experience. We are very excited about the future of live video broadcasting e-commerce in China and our long-term growth prospects. Thank you.

Thank you, Shark. This is Raymond, Chief Strategy Officer of MOGU. I would like to go through - thank you for joining our conference call today. Now I walk you through our first quarter fiscal year 2021 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. Our GMV for the first quarter of fiscal year 2021 was RMB 3.1 billion, which decreased by 25.2% year-over-year. GMV for the first 12 months ended June 2020 was RMB 16 billion, which decreased by 8.6% year-over-year. Our focus has been on growing the GMV from live video broadcasting, which has increased by 72.4% during the same period to RMB 2.3 billion. Our live video broadcasting business continues to increase as a percentage of the total GMV and it accounted for 72.6% for the first quarter. Active buyers for the LVB business in the 12 months ended June 30, 2020 grew by 37% to 3.7 million. So let's now turn to revenues. During this quarter, total revenue came in at RMB 132.5 million, a decrease of 46.8%. That was primarily due to a 34.1% decrease in the commission revenue and 73.1% decrease in the marketing services revenue. The commission revenue decreased to RMB 85.3 million, primarily due to the remaining impact of the COVID-19 pandemic, all e-commerce logistics and demand for apparel, as well as the restructuring of our business towards the LVB business. Commission revenue from the LVB business grew significantly and was in line with the continued strong growth in LVB-associated GMV. Marketing services revenue, which is mainly generated from our marketplace business unit, decreased by 73.1% to RMB 24 million, which is primarily due to the remaining impact of COVID-19 pandemic and also the restructuring of our business mix towards the LVB business. Now, I will walk you through our major costs and expenses. Cost of revenues decreased by 19.5% to RMB 48.8 million from RMB 60.6 million in the same period of fiscal year 2020. That was primarily due to a decrease in the costs associated with decreased online direct sales. Sales and marketing expenses decreased by 57.3% to RMB 61.9 million from RMB 145 million in the same period of fiscal year 2020. That was primarily due to optimized spending on user acquisition and branding expenses. R&D expenses decreased by 48.4% to RMB 29 million from RMB 56.2 million in the same period of fiscal year 2020, primarily as a result of headcount optimization. G&A expenses decreased by 31.2% to RMB 23.5 million from RMB 34.2 million in the same period of fiscal year 2020, primarily due to a decrease of share-based compensation expenses. Amortization of intangible assets increased by 9.3% to RMB 70.5 million from RMB 64.5 million in the same period of fiscal year 2020, and that was due to the amortization of the broadcasting license acquired in September 2019. Loss from operations was RMB 94.9 million compared with RMB 105.3 million in the same period of fiscal year 2020. Net loss attributable to MOGU’s ordinary shareholders was RMB 88.9 million. Adjusted net loss was RMB 14.4 million. Adjusted EBITDA was negative RMB 17.4 million. As of June 30, 2020, the company had cash and cash equivalents, restricted cash and short-term investments of RMB 1.05 billion. In summary, the strong MOGU live user engagement is the best endorsement of our KOL-driven strategy. With the continuing rollout of our LVB business, we are seeing more KOLs joining our platform and more fashion supply chain partners onboarding our platform. Our transition into a KOL-driven and LVB-first platform is gradually paying off with strong growth momentum. As you have seen in this quarter, we have adopted a very disciplined approach in terms of sales, marketing, and user acquisition. We will continue to be disciplined and deliver quality growth going forward. 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.

Maybe I will transfer the question first. The question is that it seems the essentials have been growing quite rapidly in this quarter. Charlie is wondering if we have any proven formula or tactics that we can use to nurture these KOLs.

To answer your question, no, we don't have a specific proven formula for incubating KOLs. We can compare it to the entertainment industry, where it's also challenging to produce a movie star with a definitive formula. No one possesses such a formula. However, MOGU is a platform that benefits from a large number of KOLs joining daily. We ensure that all KOLs have opportunities for upward mobility, offering them extensive training and supply chain support. When they first join, the biggest challenge is acquiring sales skills to effectively sell products. They also need to be matched with suitable products to generate sales. As they progress to becoming top-tier KOLs, they will face competition from KOLs across various platforms online. Therefore, our goal is to offer them unique and valuable products that they would not easily access on their own, like the discounted brand products we've tried before. These elements are crucial to empowering the KOLs. Yes. The second question is about established hosts and our outlook on their scale and growth. We have achieved 55% year-over-year growth for established hosts. Our platform employs a specific tiering system for KOLs, categorizing them into ten different tiers from K1 to K10. We've implemented various strategies to ensure that each tier benefits from tailored incubation programs. We believe that moving forward, we can sustain similar growth in the number of established hosts.

Okay. Maybe operator, we can move to the next one.

Your next question comes from Sabrina Hu from Giffords. Your line is open.

Good evening, management. Thank you for taking my question. Given Taobao's strong supply chain management and substantial user base, while Douyin and Kuaishou have a larger number of KOLs, could management provide insights on the competitive landscape of MOGU’s Live Video Broadcast business and whether there is any overlap among your customers? I will translate it myself.

Yes, we closely monitor all the other platforms offering similar services. However, our core value lies in our KOLs helping customers with fashion shopping decisions, allowing us to sell clothes throughout this process. While Taobao has a robust supply chain, being a smaller platform enables us to facilitate deeper matchmaking between KOLs and supply chain partners. This is why our KOLs express more appreciation and loyalty towards our platform. Regarding Douyin and Kuaishou, these platforms effectively monetize their audience through live video e-commerce, but they primarily function as entertainment platforms rather than shopping platforms. Our customers approach MOGU with the intention of shopping, which is a crucial asset for us and a significant barrier to competition with other entertainment platforms. Now, operator, we can proceed to the next question.

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

Okay. I will quickly address the two questions. First, regarding the growth prospects of LVB, it has shown strong growth in the last quarter, and we intend to maintain that momentum moving forward. The second question pertains to our customer acquisition strategy and the expected outlook on acquiring new customers, including the percentage we anticipate coming from WeChat.

Okay, sure. So maybe I’ll talk about the LVB first. So I think it's very important to know that in our previous quarter, our LVB only grew at roughly 50%. That was because of the COVID-19 situation, and apparently in Q2, our growth rate actually picked up a lot, not just because, I think, COVID is partially behind us, but we are seeing very strong recovery from Chinese consumption in general, but also because we have dedicated more efforts in terms of supply chain empowerment. We help our KOLs resume a normal situation as soon as possible. So I think in Q2, we have done a lot of work in terms of helping the KOLs, and this will be our driver for the LVB business going forward. Supply chain empowerment is highly correlated with the supply chain empowerment we provide. Going forward, we wouldn't be able to give very specific guidance, but we believe that there are two things we can provide: number one, the overall market for LVB is very, very big, as we can see that more and more customers are embracing this new immersive form of sales. People are generally very interested in trying out live video broadcasting e-commerce. Number two, there are actually more supply chain partners willing to adopt this form, thanks to the digital adoption in China. So I think these two points add up together, and we are very positive on the outlook for the LVB pocket. And number two is about the customer acquisition strategy. I think Tencent potentially is huge. So going forward, customer acquisition strategy will likely have more diversified tactics.

We are very interested in exploring live video broadcasting e-commerce. Additionally, more supply chain partners are ready to embrace this method due to the digital adoption in China. I believe these two factors contribute to a positive outlook for the LVB segment. Regarding our customer acquisition strategy, Tencent presents a significant opportunity. Moving forward, we will likely implement more diversified tactics for customer acquisition.

Locky, do you mind turning on mute? It seems that we are hearing a lot of background noise. Okay. So the second question is about the customer acquisition strategy. I think Tencent has a lot of potential for our WeChat Mini Programs, and we’ll continue to build more gameplay tools and marketing tools for our KOLs to acquire customers.

Operator, we can move to our next question.

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

Hi. This is Veronica from China Renaissance. My question is regarding the outlook for the second quarter of this year. Well, it seems that the third quarter of this year is usually a low season within the year. So what activity do you then truly anticipate in the third quarter? And how is the plan for doubling them in the fourth quarter this year?

Okay, as you know, the third quarter is typically a slow period for the apparel sector because consumer interest in fashion shopping tends to wane, and the average selling price is usually lower than in other quarters. This quarter, we are concentrating on expanding our categories. Beyond apparel, we plan to introduce products that are not related to fashion. For instance, we may offer branded snacks or even sell offseason items such as down jackets during the second and third quarters. These are some strategies we employ in the third quarter to manage seasonality, and we also focus on controlling costs during this time. We aim to reorganize our team to better prepare for the fourth quarter this year.

In this quarter, we can see we did a good job in cost control, and our non-GAAP net loss has narrowed. How should we look at the margin in the upcoming quarters, and should we expect to reach the breakeven point within this year? Thank you.

Yeah, so I think getting to the financials, right? Currently, you can see that we have adopted a very disciplined approach in Q2 this year, and our costs and expenses have significantly shrunk. This is because we want to be more focused, discreet, and prudent when it comes to our customer acquisition strategy. So I think going forward, we wouldn't be able to give a very precise date for breakeven; of course, breakeven is always our goal. But we wouldn't be able to give a very specific date or guidance on which quarter or which year we'll achieve breakeven. As you can see, we have worked toward that. You can see that we've achieved very significant efficiency in terms of internal operations, and all the relevant expenses have come down. So I think we should be on the right track.

Okay. Thanks, Shark and Raymond.

Thank you.

Thank you, Michelle. This concludes our call tonight. Thank you all for joining us. Should you have any questions or need additional information, please do not hesitate to reach out. Good night.

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