Token Cat Ltd Q3 FY2020 Earnings Call

Good morning and good evening, ladies and gentlemen. Thank you for standing by to welcome to TuanChe Limited Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After prepared remarks by the management team, there will be a question-and-answer session. Today's conference call is being recorded. I would now like to turn the call over to your host today, Ms. Cynthia Tan, IR Director of the company. Please go ahead, ma'am.

Hello, everyone, and welcome to TuanChe’s third quarter 2020 earnings conference call. We have released our earnings results earlier today and it is now available on our IR website, as well as on Newswire services. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our future results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our earnings release and our Registration Statement filed with the SEC. TuanChe does not assume any obligation to update any forward-looking statements, except as required by law. Today, you'll hear from Mr. Wei Wen, the company's Chief Executive Officer, who will provide an overview of our growth strategies and business developments. He will be followed by Mr. Chenxi Yu, our Deputy Chief Financial Officer, who will provide additional details on the company's financial results and discuss the financial outlook. Following management's prepared remarks, we'll open up the call to questions. With that said, I would now like to turn the call over to our CEO, Mr. Wei Wen. Please go ahead, sir.

Hello and thank you everyone for joining us today on our third quarter 2020 earnings call. We are pleased to report third quarter results that demonstrate our momentum in rebuilding revenues and reducing net losses, both in the wake of the severe market conditions brought about by COVID-19 earlier in the year. While our net revenues were RMB100 million, or 26.2% lower compared with the same quarter last year, we exceeded the top end of our guidance range by 5.3% and improved 82.7% over the second quarter. This was primarily driven by recovery in offline marketing services as the gradual resumption of our offline auto shows that began in May is making steady progress. In addition to the sequential quarter-over-quarter recovery of revenue, we further exited on our rigorous cost containment measures, mitigating our net loss attributable to the company’s shareholders to RMB41.2 million, compared with RMB46.8 million in the same quarter last year. Let’s take a closer look at the third quarter performance of our business segments, while also providing additional detail on our strategic and operational priorities. First, our offline marketing services. As we’ve talked on our second quarter earnings call, with the COVID-19 pandemic increasingly under control in China, we started to progressively resume our offline events in late May, while keeping in accordance with local and national regulatory guidelines on COVID-19 prevention and control. We organized 152 auto shows in 107 cities in the third quarter compared with 212 auto shows in 150 cities in the same period of 2019, but improving from 61 auto shows across 56 cities in the second quarter. As a result, we delivered RMB82.6 million in net revenues, down 33.2% year-over-year, but an increase of 147.6% quarter-over-quarter. Our quarterly number of special promotion events decreased by 66.7%, to 64 from 192 in the third quarter last year, while its revenue declined 67.1% year-over-year. As we resumed our operations, auto sales in China also rebounded. In the third quarter, China's auto retail sales increased by 7.9% year-over-year, marking the first quarter of year-over-year sales growth in two years as a broad economic recovery bolstered consumer confidence. The robust third quarter was followed by continuous strength in October and November, with 8% auto retail sales growth in both months, giving us further confidence in our recovery and momentum in the fourth quarter and beyond. Strategically for offline marketing services, we will continue to focus on generating higher ROI, while also further leveraging our deep insights in automotive transactions and developing, optimizing, and targeting special promotional events for each auto dealer and OEM. Next, let me move on to our growth initiatives in virtual dealership and online marketing services. Our revenues from virtual dealerships, online marketing services, and others reached RMB15.4 million, increasing 168.9% year-over-year. This was primarily driven by successful online promotion events that were held during the third quarter, our strategic collaboration with Baidu Youjia and Webank, and the revenues generated from our acquisition of Longye International Limited in January 2020. If there is a silver lining to the ravaging caused by the pandemic, it has been the phenomenal growth in the digital economics of online services, including streaming events that are benefiting from this trend, and we have seen sustained positive revenue contribution from this segment. A key factor in this success has been the collaborative partnerships we've established with TMall and Baidu Youjia, the auto segment of the giant Baidu portal. In our cooperation with Baidu Youjia, we have expanded our sales network to over 80 cities across China, where we have served operations aiming to improve sales efficiency and conversion rates for OEMs and the dealers. We have also made solid progress in live streaming promotional events as we look to accelerate the full digitalization of automotive marketing with online retail platform partnerships, such as the one we have with TMall. Through these engagements, we not only become an integral part of the ecosystem that contributes value through strong OEM and dealer relationships, but we also gain significant exposure for our own events through their extensive reach, as well as gain valuable user data and insight. In further developing our digital offerings within the area of automotive marketing, we see a clear and defined pathway to increasing opportunities that play to our strengths in multi-channeled automotive transaction facilitation. Core to our value proposition is assisting automotive OEMs and dealers in optimizing their marketing efforts, user acquisition strategies, and conversion rates in order to create a shopping and buying experience for customers that is smooth, natural, and effortless. With the multitude of dynamic forces that are now rapidly reshaping the industry, we are confident that drawing on our years of honed expertise and executing on our multi-pronged strategies will position us to deliver sustained shareholder value in the long term. Now I will turn this call over to Chenxi Yu, our Deputy CFO, for a closer look at our financial performance in the third quarter.

Thank you, Mr. Wen. Hello, everyone. Thank you for joining us. As our CEO, Mr. Wen just mentioned, against the backdrop of a recovering consumer market, we are pleased with the recovery in our top line revenues versus the second quarter and the moderation in the year-over-year decrease, which was supported by growing offline market activities and the robust performance of our online segments. Maintaining the strength in the prior quarter, net revenues from virtual dealerships, online marketing services, and others grew 160.9% year-over-year. Furthermore, we continue to execute rigorous cost and expense control measures. By doing so, we were able to register an increased gross margin of 72.1% and a reduction of total operating expenses by 21.4% year-over-year, leading to a bottom-line improvement. As we look ahead to the end of the year, we are building on this performance momentum and further strengthening the service capabilities that serve as the foundation of our unique omni-channel platform. We have a solid foundation to capture long-term prospects in the changing industry and provide real benefits to all in our value chain. Now, I would like to walk through our third quarter 2020 financial results. Before I start, please note that all numbers stated in my following remarks are in RMB terms, unless otherwise noted. Our total revenues in the third quarter were RMB100 million, decreasing 26.2% from RMB135.6 million in the same period last year. This was a result of the continued adverse impact of the COVID-19 pandemic. The decrease was partially offset by the year-over-year revenue growth of virtual dealerships, online marketing services, and others. Compared with the second quarter of this year, total revenues increased by 82.7% as our offline services recovered and our online services maintained solid performance. As we progressively resumed our offline auto shows, our offline marketing services revenues generated from these auto shows decreased by 33.2% to RMB82.6 million from RMB123.6 million in the third quarter of 2019. The offline marketing services revenues generated from auto shows increased by 147.6% over the second quarter of 2020 of RMB33.4 million. Revenues generated from special promotion events in the third quarter of 2020 were RMB2.0 million compared with RMB6.0 million in the third quarter of 2019 and RMB1.5 million in the second quarter of 2020. Revenues from our virtual dealership, online marketing services, and others increased by 160.9% to RMB15.4 million during the quarter compared with RMB5.9 million in the third quarter 2019, primarily due to our continuous expansion of our online marketing services, including live streaming promotion events and collaboration with Baidu Youjia and Webank. The year-over-year growth was also helped by revenue generated from the completed acquisition of Longye International Limited in January 2020. Our gross profit in the third quarter decreased by 22.6% to RMB72.1 million from RMB93.2 million in the third quarter of 2019, but increased by 67.5% quarter-over-quarter. Our gross margin increased to 72.1% from 68.7% in the same period last year, primarily due to the change in the revenue mix. In the third quarter, selling and marketing expenses decreased by 15.8% to RMB91.6 million from RMB108.8 million in the third quarter of 2019 and increased by 88.6% compared with the second quarter of 2020. As our operations continue to recover, the year-over-year decrease was primarily due to the decrease in promotion expenses and staff compensation expenses as a result of cost control measures taken by the company and reduced number of offline events. General and administrative expenses were RMB15.9 million, significantly lower compared with RMB25.0 million in the third quarter of 2019 and RMB28 million in G&A expenses in the second quarter of 2020, primarily due to the decrease in stock compensation expenses. Research and development expenses decreased by RMB7.1 million from RMB12.2 million in the third quarter of 2019 and RMB8.3 million in the second quarter of 2020, primarily due to the decrease in stock compensation expenses. Our loss from continuing operations was RMB42.6 million in the third quarter, lower compared with RMB52.8 million in the same period last year, and slightly higher compared with RMB41.8 million in the second quarter of 2020, respectively. Excluding the effects of share-based compensation expenses, adjusted net loss attributable to the company's shareholders was RMB38.3 million in the third quarter of 2020, compared with RMB36.9 million in the same period last year. Adjusted basic and diluted net loss per ordinary share were both RMB0.13 in the third quarter compared with RMB0.13 in the same period last year. Adjusted EBITDA was a loss of RMB37 million in the third quarter compared with a loss of RMB37.9 million in the same period last year. Now turning to our balance sheet. At the end of the third quarter 2020, we had cash and cash equivalents, time deposits and short-term investments of RMB183.0 million. For the fourth quarter of 2020, we expect our net revenues to be between approximately RMB145 million and RMB155 million, representing a year-over-year approximate decrease of 20.7% to 15.2%. This is primarily attributable to the estimated declining number of offline events that is expected to be held in the fourth quarter of 2020 due to the COVID-19 pandemic. This forecast reflects the company's current and preliminary views on the market and operational conditions, as well as the influence of the COVID-19 pandemic, which are all subject to change. This concludes our prepared remarks today. Operator, we are now ready to take questions. Thank you.

The first question today comes from Jack Vander Aarde with Maxim Group. Please go ahead.

Hi. Good evening to you guys and good morning for me. Thanks for taking my questions. I'll start with just hoping you can provide some perspectives on what you're seeing in terms of consumer purchase appetite for big ticket items such as new cars. And then just an update on the overall financial health of your various auto partners and virtual dealers and easy home stores. Just a general update there from the financial health and appetite from consumers. Thank you.

Yes. Nice to meet you again, Jack, and let me translate the question first. We can identify a strong recovery of consumers' confidence in big-ticket item consumption like autos, which can be reflected by some market data we observe right now. The auto market is recovering at the same speed as the macro market, and the consumer confidence is recovering simultaneously. This recovery is a continuous trend and not just short-term momentum. Our major operating partners are the OEMs and dealers, and from our knowledge, the acceleration is continuing to improve throughout this past few quarters of 2020.

Thank you, Cynthia, for explaining that. It's good to hear, and it certainly seems to be the case. My next question is about the COVID recovery in the economy. In the U.S. and Europe, two vaccines have recently been approved for COVID. I'm curious about the impact of vaccines in China and the overall state of the economy as the COVID vaccines are being distributed. Are businesses still closed, or have things opened up fully?

Okay. Let me translate first. The vaccine has just been invented and it's still a long run for everybody to get a vaccine in the future, just as in the U.S. and Europe. The Chinese people are still very cautious in public areas and most still keep their masks on. The offline consumption has been strongly recovered, as we can see in most of the malls in Beijing. However, the pandemic is hitting a few cities in China too due to outbreaks in the U.S. and Europe. So, we are still expecting that may still impact our auto shows in certain cities.

Okay. Thank you. That's helpful. Yes, yes, it's great. And then, I guess just one more question from me. Another update I found interesting that you guys provided in your numbers from the press release was the number of cities that TuanChe has sales operations in, that number slightly declined Q-over-Q relative to the Q2 level. It was a slight decline, but it sounds like this may have been somewhat intentional, so I'm wondering if that is correct. Then are you exiting certain areas that may have less potential positive ROI?

Let me translate the question first. That is a great question. Regarding the cities we operate in, we have maintained those cities with higher ROIs and higher frequencies in auto shows. For those more remote cities with lower ROIs that may even lead to a loss while holding long-term auto shows, we would turn to our new online auto shows and online special promotion events to cover those areas, which would be a more cost-effective way. Does that answer your question?

That’s interesting. Yes, it does sound like a good move. I'm pleased to hear that as well. It seems like a bit of a strategic repositioning. Congratulations on your revenue this quarter; you exceeded your guidance and my estimates. It's encouraging to see things turning around, and I wish you the best. Thank you.

Thank you very much, Jack. Operator, is there any further questions?

I'm sorry, there are no further questions. I'd like to turn the call back over to management for closing remarks.

Okay. Thank you once again for joining us today. If you have further questions, please feel free to contact TuanChe Investor Relations through the contact information provided on our website or the Piacente Group Investor Relations. Thank you.

This concludes the earnings conference call. You may now disconnect your lines. Thank you for attending.