Earnings Call Transcript - MOGU Q3 2021

Operator, Operator

Thank you all for being here, and welcome to MOGU's financial results for the third quarter of fiscal year 2021. I will now turn the conference over to our speaker today, Mr. Roger Hughes. Please proceed.

Unidentified Company Representative, Unidentified Company Representative

Thank you. Hello, everyone, and thank you for joining us today. MOGU's earnings release was distributed earlier today, and it's 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. These forward-looking statements are based upon management's current expectations in 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 risks 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; Mr. Le Li, Investor Relations Director; and Ms. Huiqing Ellie Wang, Financial Controller. Mr. Chen will review the business operations company highlights, followed by Mr. Huang, who will discuss the 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

Thank you for joining us today. I am pleased to introduce our Chairman and CEO, Mr. Chen. Please proceed.

Raymond Huang, Chief Strategy Officer

Hello, everyone. Thank you for joining us on the third quarter results announcement for the fiscal year 2021 today. We acquired MOGU 10 years ago in 2011. For the last 10 years, we have been very persistent in our mission to make fashion accessible to everyone. We have been continuously innovating towards the new format of fashion shopping, transitioning from curation to e-commerce, from live e-commerce to short video e-commerce. At our 10th anniversary, we also achieved positive EBITDA for this quarter on a non-GAAP basis, reflecting our operating efficiency improvement and disciplined capital allocation in this severely competitive environment. This turning point made our development more sustainable and provides a stronger foundation for our new business incubation. We continue to see a high growth rate in MOGU Live. MOGU Live GMV increased by 20.9% year-over-year to RMB4.1 billion in the third quarter. MOGU Live continues to maintain a leading position in user experience innovation, KOL incubation, and supply chain development since we innovated live e-commerce in 2016. The contribution to our overall GMV also jumped to 80.3% this quarter. MOGU Live continuously drives our future growth opportunities. MOGU is a shopping inspiration platform and a vibrant community. Inside and outside of our live showrooms, people connect, interact, and influence and support each other. Because of this vibrant community, our users have attracted more users to join MOGU. Our active buyers in the live video broadcasting business have achieved a year-over-year growth of 9.4%. During the 11.11 and 12.12 promotion, two KOLs on our platform each achieved over RMB 100 million in sales during these two festivals, respectively, marking them as top-tier KOLs in the live e-commerce industry. In the future, we will explore new business opportunities, including cross-border e-commerce and offline business. We will ensure that we can leverage all the strategic assets we have built over the last 10 years, and seize opportunities that emerge from the changing industry landscape. Let's stay tuned for the next 10 years. Thank you. Thank you, Shark. Thanks again, everyone. This is Raymond speaking. Thank you for joining our conference call today. So now I'll walk you through our third 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 provide will be on that basis. Let's review the financials first. Our GMV for the third quarter fiscal year 2021 was RMB5.046 billion, a decrease of 19.9% year-over-year. GMV for the 12-month period ended December 31, 2020, was RMB13.698 billion, a decrease of 25.1% year-over-year. Our focus has been growing the GMV from live video broadcasting, which has increased by 20.9% year-over-year to RMB4.051 billion. LVB-associated GMV for the third quarter of fiscal year 2021 accounted for 80.3% of the total GMV. Active buyers of the LVB in the last 12 months ended December 31, 2020, grew by 9.4% year-over-year to 3.5 million. Now, let's turn to revenues. During this quarter, total revenue decreased by 45.6% to RMB146.5 million from RMB269.5 million during the same quarter of the fiscal year 2020. Commission revenue decreased by 29.8% to RMB99.2 million from RMB141.2 million in the same period of fiscal year 2020, primarily due to the restructuring of the company's business towards an LVB-focused model. Marketing services revenue, mainly generated from our marketplace business unit, decreased by 75.9% to RMB17.4 million from RMB72.5 million in the same period of fiscal year 2020. The decrease was primarily due to restructuring of the company's business towards the LVB-focused model. Now I will walk you through our major costs and expenses. Cost of revenue decreased by 48.3% to RMB51 million from RMB98.6 million in the same period of fiscal year 2020, primarily due to a decrease in costs associated with reduced online direct sales and IT-related expenses. Sales and marketing expenses decreased by 63.4% to RMB76.5 million from RMB209.3 million in the same period of fiscal year 2020, primarily due to optimized spending on branding and user acquisition activities. R&D expenses decreased by 14.5% to RMB27.2 million from RMB31.9 million in the same period of fiscal year 2020, primarily due to decreased share-based compensation expense. General and administrative expenses decreased by 32.4% to RMB29.1 million from RMB43 million in the same period of fiscal year 2020, primarily due to a decrease in share-based compensation expenses. Amortization of intangible assets increased by 10.3% to RMB113.5 million from RMB102.9 million in the same period of fiscal year 2020. Loss from operations was RMB123.2 million compared to a loss from operations of RMB1.594 billion in the same period of fiscal year 2020, primarily attributable to goodwill impairment incurred in the third quarter of fiscal year 2020. Gain from investments was RMB91.2 million compared to a loss from investments of RMB33.9 million in the same period of fiscal year 2020, primarily due to one of the company's investees repurchasing a majority portion of the company's investment in October 2020. Net loss attributable to MOGU's ordinary shareholders was RMB36.7 million compared to a net loss attributable to MOGU's ordinary shareholders of RMB1.634 billion in the same period of fiscal year 2020. Adjusted EBITDA was RMB1.2 million compared to a negative RMB86.7 million in the same period of fiscal year 2020. Cash and cash equivalents, restricted cash, and short investments were RMB820.1 million as of December 31, 2020, compared with RMB1,095.4 million as of March 31, 2020. The stock market in 2020 has been very volatile, and we believe that MOGU's share price does not reflect the fundamental growth potential of the company. We have successfully repurchased 8 million shares for approximately US$17 million, representing 7% of the company's outstanding shares over the course of the last fiscal year. Looking forward, we are very confident that our product innovation and our dedication to a KOL-centric system will deliver a very differentiated fashion shopping experience to our customers. So with that, I would like to open the call for Q&A.

Operator, Operator

Your first question comes from Charlie Chen with China Renaissance.

Charlie Chen, Analyst

During the last fiscal year, we repurchased shares for about US$17 million, which accounts for 7% of the company's outstanding shares. Looking ahead, we are optimistic that our focus on product innovation and a KOL-centric approach will provide our customers with a unique fashion shopping experience. Now, I will open the call for questions. Your first question comes from Charlie Chen with China Renaissance.

Raymond Huang, Chief Strategy Officer

So Charlie has two questions. The first question is about the EBITDA. It seems that EBITDA has turned positive for this quarter. What is the company's strategy going forward? Do we focus more on revenue growth, GMV growth, or do we want to expand the margins and improve the EBITDA margin? The other question is about user growth. The 3.5 million user number seems to be more conservative. What is the company's strategy going forward regarding user acquisition?

Qi Chen, Chairman and CEO

Charlie has two questions. The first question is about the EBITDA. It seems that EBITDA has turned positive for this quarter. What is the company's strategy going forward? Do we focus more on revenue growth, GMV growth, or do we want to expand the margins and improve the EBITDA margin? The other question is about user growth. The 3.5 million user number seems to be more conservative. What is the company's strategy going forward regarding user acquisition?

Raymond Huang, Chief Strategy Officer

Basically, we think that, yes, the growth potential for the live e-commerce sector is very high. However, it appears to have reached a relatively mature stage. Most of the key players in the industry have been settled. Going forward, we will see more brands and business partners entering the live e-commerce space. Instead of focusing solely on KOL live streaming, we will see more merchants and brands joining live e-commerce as well. Therefore, we will continue to invest in the live e-commerce segment of our business to maintain and enhance our competitive advantage over our competitors. We will continue to innovate and optimize our user interface. However, we will also consider the monetization strategy, as we are on track for stronger monetization in our live e-commerce business. We aim to achieve a balance among different roles in the live e-commerce space, including KOLs, merchants, brands, and other supply chain partners. Since we have continuously innovated in the live e-commerce arena, we have accumulated a vast amount of knowledge and expertise that we would like to apply in other areas, including cross-border e-commerce and offline commerce. We believe that our experience and know-how can be leveraged to capture future business opportunities. As we noted in previous earnings calls, retaining existing users is extremely important for us. The average ARPU for live e-commerce users is significantly higher than that of traditional e-commerce users. That is why, as reflected in our quarterly results, our sales and marketing expenses decreased by 63%. We can maintain growth with much lower sales and marketing expenses. Moving forward, given the scale of the company, we will not be employing a cash-burning strategy to acquire customers. Instead, we will leverage our knowledge and innovations to acquire customers more efficiently.

Operator, Operator

Your next question comes from Locky Lau with AJ Asset Management.

Locky Lau, Analyst

Our sales and marketing expenses decreased by 63%, which reflects our ability to maintain growth with significantly lower expenses. Going forward, we will not use a cash-burning strategy to acquire customers due to the scale of the company. Instead, we will utilize our knowledge and innovations to acquire customers more efficiently.

Raymond Huang, Chief Strategy Officer

The question from Locky is congrats to the company on the positive EBITDA this quarter. He has two questions. One is about the company's strategy going forward for category expansion. The other question is whether we can elaborate a bit more on the KOLs other than the top two.

Qi Chen, Chairman and CEO

The question from Locky is congratulations to the company on the positive EBITDA this quarter. He has two questions. One is about the company's strategy going forward for category expansion. The other question is whether we can elaborate a bit more on the KOLs other than the top two.

Raymond Huang, Chief Strategy Officer

Regarding category expansion, we always want to expand categories. Our tactic in this regard is to focus on higher-margin categories. Traditionally, apparel has been a good category for customer retention as customers frequently return to check out the latest fashion brand releases. However, the margins for this category have not been as high as we desire. Going forward, we plan to expand into higher-margin categories such as cosmetics, skincare, and nutrition, which allow us to monetize more effectively. Regarding our strategy for KOL incubation, as Shark mentioned, last year the live e-commerce space was extremely competitive. That is why we dedicated more time and resources to our top KOLs, ensuring they remain competitive with KOLs from other platforms. Consequently, we witnessed the top two KOLs achieving RMB100 million in sales overnight during the 11.11 and 12.12 promotion days, respectively. These KOLs have proven to be influential sales figures in the Chinese market. Their strong sales power attracts more merchants, supply chain partners, and even more KOLs to join the MOGU platform. Therefore, they play an essential role in expanding our live e-commerce platform. As we observe in 2021, the market has stabilized, and KOLs and their teams are becoming more mature. We will not need to invest as much effort on the same scale as before, allowing us to dedicate more resources to other KOLs and aid their growth. We also mentioned that category expansion is a priority this year. We intend to recruit more KOLs, particularly those who can help us expand categories. We've devised extensive strategic plans to recruit KOLs before and after the Chinese New Year, and we hope you will notice our efforts in the coming months. So Locky, do you have other questions?

Operator, Operator

We do have another question. This comes from Sabrina Hu, Jefferies. Your line is open.

Sabrina Hu, Analyst

We also mentioned that category expansion is a priority this year. We intend to recruit more key opinion leaders, particularly those who can help us expand categories. We've devised extensive strategic plans to recruit key opinion leaders before and after the Chinese New Year, and we hope you will notice our efforts in the coming months. So Locky, do you have other questions? We do have another question. This comes from Sabrina Hu, Jefferies. Your line is open.

Qi Chen, Chairman and CEO

We are making category expansion a priority this year. Our plan is to recruit more key opinion leaders, especially those who can assist us in this expansion. We have created detailed strategic plans to engage these leaders before and after the Chinese New Year, and we hope you will see the results of our efforts in the upcoming months. So Locky, do you have any other questions? We do have another question from Sabrina Hu at Jefferies. Your line is open.

Raymond Huang, Chief Strategy Officer

Sabrina has two questions. One is about the competitive landscape of live e-commerce in China, and the other is about the cross-border e-commerce opportunity. For the competitive landscape in China, we have observed many companies extremely focused on live e-commerce across different segments. As the innovator of live e-commerce back in 2016, we have proven ourselves to be a pioneer in product innovation, and we will continue to lead in this area. Our strength lies in our ability to innovate, ensuring that our customers experience the latest and most cutting-edge features in live e-commerce. This differentiates us from other platforms. Additionally, MOGU is a dedicated live e-commerce platform, distinguishing us from others who have various revenue streams. Our model is fundamentally KOL-driven, differentiating our platform even further. We do not believe the market is primarily budget-driven or defined by cash-burning capabilities. It is really driven by those who can innovate and cater to users' needs through new features and engaging products to deliver a compelling shopping experience. Regarding cross-border e-commerce, it has always been a significant opportunity we are closely examining. Having conducted e-commerce in China for the last 10 years, we have amassed knowledge, experience, and human capital. Our KOLs in China are exceptionally skilled and can offer substantial supply chain capabilities. They possess world-class fashion curation abilities that we can tap into to influence customers and audiences abroad. That is why we aim to leverage our expertise and partner with our KOLs to expand into international markets.

Operator, Operator

There are no further questions. I will turn the call back over to Roger Hughes for closing remarks.

Unidentified Company Representative, Unidentified Company Representative

Thank you, 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.

Raymond Huang, Chief Strategy Officer

Okay. Thank you.

Operator, Operator

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