Uxin Ltd Q2 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Uxin’s Earnings Conference Call for the Quarter Ended September 30, 2020. And at this time, all participants are in listen-only mode. And after management’s prepared remarks, there will be a Q&A session. Today’s conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Nancy Song, Investor Relations Director of Uxin. Please go ahead.

Thank you, operator. Hello, everyone. Welcome to Uxin’s earnings conference call for the quarter ended September 30, 2020. On the call today are D.K., our Founder and CEO; and Zhen Zeng, our CFO. D.K. will review business operations and the company highlights, followed by Zhen, who will discuss financials and guidance. They both will be available to answer your questions during the Q&A session that follows. Before we start, I would like to remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements are made based on management’s current knowledge and assumptions about future events that involve known or unknown risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. Uxin does not undertake any obligations to update any forward-looking statements, except as required under applicable law. For more information about the potential risks and uncertainties, please refer to our filings with the SEC. With that, I will now turn the call over to our CEO, D.K. Please go ahead.

Thank you, Nancy. Hello, everyone. Thank you for joining our earnings conference call today. The September quarter marked our transition to an inventory-owning model. Now we are pleased to report that we have successfully made the transition, which gives us better control over our supply chain management with our online projects and the service offering being continuously optimized. We are also very pleased with the progress we made in better serving our customers as a nationwide online car dealer. Not only have we raised the bar in delivering an enhanced customer experience, but we also validated our efforts by receiving improved customer satisfaction feedback during the quarter. The completion of our shift to an inventory-owning model, coupled with our unique offering of an online used car buying experience, strengthens our ability to maximize customer value with our dedicated approach, offering quality, value-for-money used cars alongside the best-in-class pricing services. In fine-tuning our products and services, we focused on three initiatives during the September quarter to deliver a better customer experience. First, we improved used car quality by adopting stricter standards in selecting and inspecting cars and enhancing the car conditions by introducing standard and wheel-rounding reconditioning services. In terms of car quality, by leveraging the massive used car data we gathered from our historical car inspections and our experience in working with our car insurance clients over the past three years, we have developed an extensive understanding of car performance from certain makes and models in relation to manufacturing data. This data-driven know-how allows us to effectively exclude cars with manufacturing defects and relatively high failure rates. In addition, we raised the standards for inspecting cars to ensure that all components are in excellent shape. These standards enhance the quality of our overall used car inventory and allow us to gain greater customer satisfaction and trust. Second, we implemented highly effective online communication methods. We conducted and continue to refine the process of serving our customers online throughout the lifecycle of our pricing and delivery costs. Let me explain. When a customer places an order with us, there will be a dedicated service team assigned to them. The service team consists of an online sales consultant who is responsible for handling the purchase order and an online service consultant for all paperwork related to title transfer and licensing, alongside an auto financing specialist who processes loan applications. After sales managers are also responsible for addressing any inquiries regarding car incentives for insurance clients post-purchase. By standardizing our service delivery at each key sales and after-sales point, we significantly increased the responsiveness of our service personnel, which in turn improved customer satisfaction. Third, we shortened the waiting period between the initial order and final car delivery. We further improved the entire fulfillment process, including optimizing logistics and car delivery, as well as enhancing timely title transfers. We also introduced new policies entitling customers to compensation for delays in delivery. As a result of these enhancements, we saw our net promoter score (NPS) significantly increase to 30 in the reported quarter, up from just 10 in the June quarter. It's worth mentioning that our NPS exceeded 45 in September, indicating increasing traction for our products and services as well as growing customer loyalty. As we benefit from improved customer satisfaction and a greater willingness to recommend Uxin to others, we are confident that we can secure approximately 1,400 deposit-required purchase orders each month. Our dedication to offering quality, value-for-money used cars and best-in-class purchasing services, which are our key growth drivers, significantly contributes to satisfying the increasing demand from a new group of customers who are more willing to pay a premium for high-quality cars and services. Catalyzed by these drivers, the expansion of our customer base and increase in transaction volume present different growth paths for us. We believe this customer type can consistently contribute to our long-term growth as we are already beginning to receive more purchase orders from customer referrals. Once we reach critical mass and expand our new customer base, we believe that customer trust and word-of-mouth referrals will translate into solid and sustainable long-term volume growth, further solidifying our brand and market position. We are confident that this will provide a firm foundation for our future business development and generate more long-term value for shareholders. With that, I would like to turn the call over to our CFO to walk you through the financial results. Zhen, please go ahead.

Okay. Thanks D.K. Hello everyone. Thanks for joining us today. As we made the transition to an inventory-owning model, we continue to enhance our operational efficiency across the board. Our focus on handpicking used cars now enables us to allocate our inspection resources to only specific qualified cars and helps to optimize inspection costs. Additionally, we are able to reduce sales and relevance administrative expenses as we streamlined our sales process by migrating every sales step online. With a fundamentally optimized cost and expense structure in place, we believe that we will achieve better operating leverage in the long term as we achieve scale, strengthen trust in the Uxin brand, and benefit from positive word-of-mouth referrals among customers. Now, let me walk you through our financial details for the quarter ending in September. Please note that the results I will discuss relate to continuing operations only. All numbers are in RMB unless otherwise stated. Also, please note that some numbers I refer to are non-GAAP numbers. You can find a reconciliation of these numbers at the bottom of our earnings release. In the three months ended September 30, 2020, total revenues were RMB76 million compared with RMB397 million in the same period last year. The decrease was primarily due to the decline in the 2C transaction volume and GMV, as a result of our business model transformation. We operate our entire used car inspection and transaction process online. Beginning in June 2020, we are building our customer base using online sales staff instead of an offline sales team. Our total 2C revenue was RMB61 million compared with RMB334 million in the same period last year. Our online used car transaction volume was 2,653 units, with the corresponding 2C GMV being RMB293 million. This figure includes 308 units sold from our old inventory, corresponding to 2C GMV of RMB36 million. In comparison, 2C used car transaction volume was 23,566 units with the corresponding GMV being RMB2,828 million in the same period last year. Let's now look at the three revenue streams of our 2C business. Commission revenue was RMB13 million compared with RMB176 million in the same period of last year, primarily due to the decrease in transaction volume and GMV. Our commission rate decreased to 5.2% for the three months in September 30, 2020, down from 6.2% in the same period last year. The decrease in the commission rate was mainly because we lowered the transaction fees across the board since August 2020 to offer more competitive prices to customers. Value-added service revenue was RMB12 million compared with RMB158 million in the same period last year, primarily because of decreases in transaction volume and GMV. VAS decreased to 4.7% from 5.6% in the same period last year as a result of our reduced service fees since August 2020. Vehicle sales revenue was RMB36 million compared with nil in the same period last year. Vehicle sales revenue is recognized on a gross basis when we sell our own inventory. We shifted to an inventory-owning model from September 2020, as we disclosed in last quarter's earnings release. Looking at other business, our other revenue was RMB15 million for the three months ending September 30, 2020, compared with RMB62 million in the same period last year. This decrease was mainly due to the divestiture of our salvage car-related business in January 2020. Cost of revenue decreased by 45% year-over-year to RMB93 million. The decrease was primarily due to a reduction in salaries and benefits for employees engaged in car inspection, quality control, customer service, and after-sales services, as well as a reduction in fulfillment costs due to lower transaction volume. This was partially offset, however, by an increase in vehicle acquisition costs as we began to build our inventory since September 2020. Gross Margin was negative 22.4% for the three months ending September 30, 2020, compared with a gross margin of 56.9% in the same period last year. Total operating expenses were RMB319 million. Non-GAAP operating expenses, which exclude the impact of share-based compensation, were RMB354 million. Sales and marketing expenses decreased by 74% year-over-year to RMB76 million. The decrease was primarily due to reductions in salaries and benefits and lower marketing expenses. Sales and marketing expenses excluding share-based compensation were RMB76 million. G&A expenses decreased by 18% to RMB56 million, mainly due to a reduction in share-based compensation expenses. General expenses, excluding the impact of share-based compensation, were RMB71 million. R&D expenses decreased by 45% to RMB19 million, primarily due to reductions in salaries and benefits as a result of headcount reductions. Our R&D expenses excluding share-based compensation were RMB20 million. Loss from guarantee liabilities was nil for the three months ended September 30, 2020. We incurred guarantee liabilities associated with our historically-facilitated loans, which were not transferred to Golden Pacer. We adopted Accounting Standard Update 2016-13, Financial Instruments - Credit Losses, on January 1, 2020, under a modified retrospective method. Before this adoption, gains or losses related to guarantee liabilities were recorded based on specific accounting standards. After this adoption, expected credit losses of contingent guarantee liabilities are accounted for separately from the stand-ready guarantee liabilities recorded in the income statement. Provision for credit losses, net was RMB168 million for the three months ended September 30, 2020. To settle our remaining guarantee liabilities, on April 23, 2020, we entered into a supplemental agreement with one of our major financing partners regarding our historical loan facilities. Pursuant to this agreement, this partner agreed to cap the amount of cash we would use to fulfill our guarantee obligations from 2020 to 2022. As a result, a release of contingent guarantee liabilities of RMB86 million was recognized for the quarter ended June 30, 2020, representing the time value of the potential cash outflow. Subsequently, on July 23, 2020, we entered into another supplemental agreement with the same financing partner to settle all our remaining guarantee liabilities associated with these loans. This new agreement amended and restated the April agreement. We are entitled to settle all our remaining guarantee liabilities under the condition that we will pay the settlement amount in installments from 2020 to 2025 based on an agreed schedule. Consequently, the previously recorded time value of the contingent guarantee liabilities amounting to RMB84 million was reversed, based on the time value determined up to August 8, 2020, the closing day of the July agreement. Loss from continuing operations was RMB163 million compared with RMB188 million in the same period last year. Non-GAAP adjusted loss from continuing operations, which excludes the impact of share-based compensation, was RMB178 million compared with RMB190 million in the same period last year. Net loss from continuing operations was RMB259 million compared with RMB202 million in the same period last year. Non-GAAP adjusted net loss from continuing operations was RMB275 million in the quarter, compared with RMB204 million in the same period last year. Turning to our cash position, as of September 30, 2020, we have cash and cash equivalents of RMB219 million. Additionally, we completed a new round of financing of USD25 million in October 2020, which supplemented our cash position. That sums up our results for the three months ended September 30, 2020. Now, moving on to our guidance. With the adoption of the inventory-owning model, we expect our average selling price to remain at similar levels as before. We expect our total revenue to be in the range of RMB275 million to RMB290 million and the gross margin to be positive and in a single-digit percentage range for the December quarter 2020. As we continue to improve overall operating efficiency, we also expect our adjusted loss from operations to narrow slightly from the September quarter. This forecast reflects our current view on market and operational conditions, which are subject to change. That concludes our prepared remarks.

Thank you, Mr. Zhen. Operator, we would like to open the call for questions now.

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. We have our first question coming from Eddy Wang from Morgan Stanley. Please go ahead.

Hi, D.K., Michael. Thank you for taking my question. I have two questions. The first is about the outlook of the used car industry for next year. The second is regarding your efforts to enhance the overall NPS goal and user experience. Moving forward, what specific actions will you take to further improve the user experience in relation to NPS? Thank you.

Okay. Thank you, Eddy. All right. I will take these two questions. So, first of all, regarding the industry outlook, the China Auto Dealer Association has recently promoted and implemented several used car policies this year. In this industry environment, I think it will be a new start for the used car industry next year. The entire sector should move forward fully compliant with relevant used car policies that have been further implemented and upgraded. This will enhance the industry to develop from a used car brokerage model to a more organized business model. We are participating as a more regulated entity. Currently, the used car VAT tax has already been reduced from 2% to 0.5%. In addition, there have been enhancements in policies related to vehicle temporary registration and title transfer. We can expect that Beijing will introduce specific plans in response to these policies this month. The developments in regulatory compliance and implementation of these policies will bring positive change for the used car industry, including higher engagement among industry players and customers' acceptance of buying used cars. However, these changes will take time to manifest. From what we are seeing currently, all these three policies will benefit Uxin as we now operate as an online used car dealer. First, our adoption of the inventory-owning model will be fully supported by these policies. Also, the reduction in the used car tax will help to lower our tax expenses. We will be operating under an inventory-owning model that promotes temporary property registration and digitalizing the title transfer process. This will significantly simplify the fulfillment process as customers purchase used cars online from us, leading to improved delivery efficiency. The relevant fulfillment costs can also be optimized accordingly. Therefore, based on the impact of these policies, we think the used car total transaction volume could increase by around 10% to 15% next year. That answers your first question. Regarding the second question about NPS improvements, we have found very efficient ways to enhance NPS. We are mainly focusing on two aspects: quality and condition of used cars, and best-in-class purchasing services. These two factors are most sensitive in improving NPS. Next year, we will continue to enhance our capabilities and invest in these areas, as we believe we can keep improving customer satisfaction and NPS. Additionally, we plan to strengthen our ability to recondition cars. Next year, we will establish our own reconditioning center to enhance our refurbishment capabilities and ensure that we deliver 'like new' condition used cars to our customers. Yes, that answers your second question. Thank you, Eddy.

Thank you. Thank you, D.K. Thank you. Very clear. Thank you very much.

Thank you.

Thank you. I would now like to turn the call over to Nancy Song for any closing remarks. Thank you.

Thank you again for joining our call today and for your continuous support of Uxin. We look forward to speaking with you soon in the future. Thank you.

Thank you. That concludes the conference for today.

Thank you.

Thank you for your participation. You may all disconnect your lines now. Thank you.