Earnings Call Transcript - MOGU Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for joining us, and welcome to MOGU's Second Quarter Fiscal Year 2021 Financial Results. All participants are currently in listen-only mode. After the presentations from our speakers, we will have a question-and-answer session. I will now turn the call over to Mr. Rene Vanguestaine. Please proceed.

Rene Vanguestaine, Manager

Thank you, 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 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 tonight from MOGU are Mr. Shark Chen Qi, Chairman and CEO; Mr. Raymond Huang, Chief Strategy Officer; Mr. Le Li, Investor Relations Director; 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. They will all 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.

Qi Chen, Chairman and CEO

Hello, everyone. Thank you for joining us for the announcement of our second quarter results for the fiscal year 2021. Over the past quarter, we experienced significant growth in live video broadcasting e-commerce. Our gross merchandise volume (GMV) rose by 42.2% year-over-year to RMB2.3 billion, making up 74.4% of our total GMV. MOGU Live has established itself as a key growth driver in the live e-commerce sector. In the last four years, we've created a unique shopping experience that allows us to seize greater growth opportunities in China's e-commerce market. We not only provide quality and affordable products sourced directly from manufacturers, but our Key Opinion Leaders (KOLs) also enhance the experience with diverse fashion content, immersive interactions, and companionship. This approach has strengthened customer engagement, leading to increased time spent on our app and more frequent shopping behaviors. Although the second quarter tends to be seasonally impacted, we've taken a cautious stance regarding sales and marketing. The number of active buyers for our live video broadcasting grew by 20.7% year-over-year. Additionally, our social sharing and referral programs are effectively attracting more customers with targeted strategies and improved cost efficiency. We're continuously enhancing the mobile shopping experience, having recently introduced a short video detail page that showcases the best product presentations by our KOLs, differing from traditional static detail pages. This innovation allows customers to access KOL explanations, bidding insights, and matching suggestions, resulting in a more efficient live shopping experience. To foster a sustainable live e-commerce ecosystem, we will maintain our focus on nurturing new KOLs and empowering our supply chain. During the Double 11 promotion, our leading KOLs set new records, with two of them each achieving over 200 million in sales during a single live session, establishing their status as top KOLs in the industry. Our KOLs also deliver significant value to their followers across all live e-commerce platforms. Our supply chain empowerment is crucial in supporting KOLs and benefiting consumers. In early November, we held a live broadcast showcasing seven major apparel production zones in China, enabling local manufacturers to sell more in one session than they would typically sell over several months. MOGU Live enhances product circulation and improves efficiency for everyone involved, delivering greater value for our customers. We are committed to providing even more value and will continue to innovate MOGU Live to create a better fashion shopping experience for our customers.

Raymond Huang, Chief Strategy Officer

Thank you, Shark. Thanks, again, everyone. This is Raymond speaking. Thank you for joining our conference call today. Now I'll walk you through our second 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 that I'm going to give you will be on that basis. Let's review the financials first. Our GMV for the second quarter of fiscal year 2021 was RMB3,112 million, a decrease of 25.3% year-over-year. GMV for the 12 months period ended September 30, 2020, was RMB14,951 million, a decrease of 16.1% year-over-year. Our focus has been growing the GMV from live video broadcasting, which has increased by 42.2% year-over-year to RMB2,316 million. LVB associated GMV for the second quarter of fiscal year 2021 accounted for 74.4% of the total GMV. Active buyers of the LVB in the last 12 months period ended September 30, 2020, grew by 20.7% year-over-year to RMB3.5 million. Now let's turn to revenues. During this quarter, total revenues decreased by 43.1% to RMB112.5 million from RMB197.9 million during the same quarter of fiscal year 2020. Commission revenue decreased by 32% to RMB68.9 million from RMB101.3 million in the same period of fiscal year 2020, primarily due to the restructuring of the company's business towards an LVB-focused model. Commercial revenue from the LVB business grew year-over-year continuously and was in line with the continued year-over-year growth in the LVB-associated GMV. Marketing and services revenues, which are primarily generated from our marketplace business unit, decreased by 71.5% to RMB18 million from RMB63.1 million in the same period of the fiscal year 2020. The decrease was primarily due to the restructuring of the company's business towards an LVB-focused model. I will now walk you through our major costs and expenses. Cost of revenue decreased by 40.1% to RMB45.5 million from RMB76 million in the same period of fiscal year 2020, which was primarily due to a decrease in the cost associated with decreased online direct sales and IT-related expenses. Sales and marketing expenses decreased by 73.5% to RMB47.9 million from RMB180.8 million in the same period of fiscal year 2020, primarily due to optimized spending on user acquisition and user incentive programs, resulting from the restructuring of the company’s business and also as a measure we conducted to counter the adverse impact of COVID-19. Research and development expenses decreased by 45% to RMB27.7 million from RMB50.3 million in the same period of fiscal year 2020, primarily as a result of headcount optimization we conducted to counter the adverse impact of COVID-19. General and administrative expenses decreased by 37.4% to RMB24.7 million from RMB39.5 million in the same period of fiscal year 2020, primarily due to a decrease in payroll expenses. Amortization of intangible assets decreased by 1.4% to RMB75.8 million from RMB76.8 million in the same period of fiscal year 2020. Loss from operations was RMB100.5 million compared with a loss from operations of RMB223.6 million in the same period of fiscal year 2020. Net loss attributable to MOGU's ordinary shareholders was RMB93.7 million compared with a net loss attributable to MOGU's ordinary shareholders of RMB326.6 million in the same period of fiscal year 2020. Cash and cash equivalents, restricted cash, and short-term investments were RMB802.5 million as of September 30, 2020, compared with RMB1,095.4 million as of March 31, 2020. In summary, we also have a subsequent event. In October 2020, one of the company's investees repurchased the majority portion of the company's investment in the investees for a total cash consideration of approximately US$16 million, equivalent to RMB107.1 million, of which US$14.4 million was received in October 2020. As a result, the investment will be recognized in the quarter ended December 31, 2020. From a financial performance perspective, we are still in the process of business restructuring, shifting our growth engine from traditional e-commerce to live e-commerce. Looking forward, our product innovation and our dedication to supply chain development will deliver a very differentiated fashion shopping experience to our customers. MOGU Live will drive our growth going forward. With that, I would like to open the call for Q&A.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Your first question comes from Charlie Chen with China Renaissance. Charlie, you may go ahead.

Charlie Chen, Analyst

Thank you. At this time, we will be conducting a question-and-answer session. Your first question comes from the line of Charlie Chen with China Renaissance. Charlie, your line is open.

Qi Chen, Chairman and CEO

Thank you. At this time, we will be conducting a question-and-answer session. Your first question comes from the line of Charlie Chen with China Renaissance. Charlie, your line is open.

Raymond Huang, Chief Strategy Officer

Okay. Maybe I will just translate the question and answer for the benefit of the audience. So the question was about the slower growth rate of the GMV from the LVB-associated business over the last quarter. Shark's answer is that, number one, Q2 was actually a quarter with seasonality. And number two, we are still seeing some adverse effects from the COVID-19 situation, because a lot of apparel factories are not 100% prepared and sometimes they are running out of capacity as well as raw materials needed to produce the apparel. And number three, compared with the previous quarter, the previous quarter from 2019 was actually a quite strong quarter. So this quarter is actually compared with a stronger quarter of last year. These are the three reasons that Shark addressed regarding the slower growth rate. Going forward, I think we have achieved very good results on the Double 11 promotion and are seeing very strong performance from our live video broadcasting business. We’re very confident with this quarter and believe we achieve growth in the Double 11 promotion and see very good results from this quarter so far.

Operator, Operator

Your next question comes from Locky Lau with A.J. Asset Management. Locky, you can go ahead.

Locky Lau, Analyst

We have achieved very good results on the Double 11 promotion and are seeing very strong performance from our live video broadcasting business. We’re very confident for this quarter and believe we will achieve growth in the Double 11 promotion and see very good results from this quarter so far. Your next question comes from the line of Locky Lau with A.J. Asset Management. Locky, your line is open.

Raymond Huang, Chief Strategy Officer

So, Locky, I will translate the question and answer for you. The first question was about our performance during the Double 11 promotion, which took place about a month ago. The second question concerned the cash received from the repurchase of investments. Regarding the Double 11 promotion, it is a significant event for all e-commerce platforms in China. This year, our attention has been primarily on MOGU Live, our live video broadcasting service, and we have achieved impressive results. I want to highlight a couple of key points: firstly, our top KOLs have each generated over 200 million in sales during a single live session, which is highly competitive compared to other KOLs across various live e-commerce platforms. This reflects our long-standing commitment to the live business and our dedication to empowering our KOLs through our supply chain efforts. The second question pertained to the repurchase of investments. This action is unrelated to other share buybacks or capital market decisions we have made; it is solely a result of our investments in relevant companies and industries that we find suitable. One of our portfolio companies has seen substantial growth over the past few years, enabling us to consider reducing our stake. This is why we received cash from this company, which will be reflected in our cash balance at the end of December 31, 2020. However, we want to clarify that this is not connected to the timing of our own share repurchase. We bought back our shares last quarter because we believe the company's market capitalization currently does not fully represent the long-term growth potential of the MOGU Live business.

Locky Lau, Analyst

Okay. Thank you.

Operator, Operator

Your next question comes from the line of Veronica Shen with China Renaissance. Veronica, your line is open.

Veronica Shen, Analyst

Thank you, management, for taking my question. I'm inquiring about the number of active buyers. We've experienced a decline in active buyers over the past 12 months on a quarter-over-quarter basis. I would like to understand the reasons for this trend. How should we view user growth moving forward? I recognize that the third quarter tends to be a low season for us, so any insights regarding the fourth quarter and the upcoming year would be appreciated. Thank you.

Qi Chen, Chairman and CEO

Thanks, management, for taking the question. My question is regarding the number of active buyers. We have seen 12 months of active buyer decline on a quarter-over-quarter basis. I'm just curious about what is the reason behind this? How should we look at user growth going forward? Well, I understand the third quarter is low season for us. Any color about the fourth quarter and the coming year would be helpful? Thank you.

Raymond Huang, Chief Strategy Officer

Well, yes. I will just quickly translate Shark's answer. As you can see that we are actually going through a transition from traditional e-commerce to live e-commerce. We need to change our tactics as well. The live users tend to have much higher ARPU and frequency, along with very strong loyalty to the platform. We value these customers more than traditional e-commerce customers. Due to competition, you can see that the cost of customer acquisition has been increasing quite rapidly in recent years. We reduced our sales and marketing expenses in the traditional competition for e-commerce customers. We are actually more focused on the customers from the live video broadcasting channel. This change of tactics results in two outcomes: first, our total number of active buyers of LVB has been increasing; secondly, the total expense for sales and marketing has declined dramatically.

Veronica Shen, Analyst

My next question is about the take rate. I want to understand why take rates have shown a downtrend this quarter. Could you elaborate on this? Also, how do you anticipate the trend will progress in the upcoming quarters? Thank you.

Qi Chen, Chairman and CEO

My next question is about the take rate. I want to know why take rates show a downtrend in this quarter. Could you please elaborate more about it? And how's the trend going forward in the following quarters? Thank you.

Raymond Huang, Chief Strategy Officer

I will just quickly translate Shark's answer. The question was about the decline of the take rate last quarter. We are noticing a few reasons: first, during the restructuring process of shifting from traditional e-commerce to live e-commerce, the take rate for traditional e-commerce is usually much higher than live e-commerce. We see live e-commerce taking up a greater percentage of total GMV last quarter. Secondly, we think that the take rate from the live e-commerce part has room to improve because the KOLs are very loyal to the platform, and their fans are also very sticky. We have exclusivity agreements with them, so there is potential for improvement in our take rate going forward. Lastly, looking at the cost side, we can see that the platform cost has been decreasing over the last two years because KOLs are increasingly taking on organizational burdens from the platform, handling product curation, product selection, and quality control. This shift means that MOGU, the platform, doesn’t need to hire as many people as before, which is evident in our cost of revenue decreasing by 40% and R&D expenses down by 45% over the same period.

Veronica Shen, Analyst

Let me translate my question first. In this quarter, we can see we did a good job at cost control, and our non-GAAP net loss has narrowed. Should we expect breakeven within this year?

Raymond Huang, Chief Strategy Officer

Thank you, Veronica. I will just answer the question directly. I think breakeven is a very important goal for our company in fiscal year 2021. It is an important milestone. However, we won't limit our financial performance because of the breakeven point. From a long-term perspective, live video broadcasting e-commerce has a very long runway, and there's a lot we can do to grow this business further. While breakeven is an important milestone, we won’t provide a specific timeline. However, from a big-picture perspective, you can see that the loss from operations has been decreasing significantly, and the company's cash position is becoming increasingly healthy. We believe our financial positions are in much better shape than a year ago. We definitely want to make sure that breakeven is possible for the future, but we cannot provide a very specific timeframe. Nonetheless, we want to assure all investors that we are striving to capture all possible growth opportunities in the live e-commerce space in China.

Operator, Operator

Your next question comes from Charlie Chen with China Renaissance.

Charlie Chen, Analyst

We believe our financial positions are in much better shape than a year ago. We definitely want to make sure that breakeven is possible for the future, but we cannot provide a very specific timeframe. Nonetheless, we want to assure all investors that we are striving to capture all possible growth opportunities in the live e-commerce space in China. Your next question comes from the line of Charlie Chen with China Renaissance.

Raymond Huang, Chief Strategy Officer

The question was about the incubation of new KOLs. As we can see that the top KOLs on our MOGU platform are thriving, we want to know the company's strategy going forward regarding KOL incubation.

Qi Chen, Chairman and CEO

The question was about the incubation of new KOLs. As we can see that the top KOLs on our MOGU platform are thriving, we want to know the company's strategy going forward regarding KOL incubation.

Raymond Huang, Chief Strategy Officer

Thank you, Chuck. MOGU is extremely dedicated to KOL incubation. We have a very comprehensive tiering and empowerment training system to ensure that KOLs can grow and thrive on our platform. Our operations team's key KPI is to make sure that KOLs can thrive on our platform. KOLs contribute significantly to our GMV and will be essential growth drivers for us going forward. While we don't disclose specific numbers of how many KOLs make over 10 million sales over a given period, we see many new faces performing well on our platform, thanks to our strong supply chain team, enabling them to deliver affordable and differentiating products to customers. During the Double 11 event, we dedicated significant resources to our top two KOLs. However, as we approach the December promotional events, we will replicate our successful operational strategies with more long-tail KOLs to ensure they can also grow and sell more. That is our goal going forward and the key KPI for our operations team.

Operator, Operator

There are no further audio questions. I will turn the call back over to Mr. Rene Vanguestaine for closing remarks.

Rene Vanguestaine, Manager

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. Good night, all.

Operator, Operator

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