Yunji Inc. Q1 FY2020 Earnings Call

Good morning, and good evening, ladies and gentlemen. Thank you, and welcome to Yunji’s First Quarter 2020 Earnings Conference Call. With us today are Mr. Shanglue Xiao, Chairman and Chief Executive Officer; Mr. Chen Chen, Chief Financial Officer; Mr. Hui Ma, Chief Strategy Officer and Chief People Officer; and Ms. Kaye Liu, Investor Relations Director of the company. Now I’d like to hand the conference over to your first speaker for today, Ms. Kaye Liu, IRD of Yunji. Please go ahead, ma’am.

Hello, everyone. Welcome to our first quarter 2020 earnings call. Before we start, please note that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations and current market operating conditions and related events that involve known or unknown risks, uncertainties and other factors affecting the industry. These forward-looking statements can be identified by terminologies such as will, expect, anticipate, continue or other similar expressions. For a detailed discussion of these risks and uncertainties, please refer to our related documents filed with the U.S. SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and expressly qualified entirely by cautionary statements, risk factors and details of the company’s filing with the SEC. We do not undertake any obligation to update this statement except as required by applicable law. With that, I will now turn over to Shanglue Xiao, Chairman and CEO of Yunji.

Hello, everyone. Welcome to Yunji’s first quarter 2020 earnings call. First, I would like to extend our gratitude to all the professionals and individuals combating the epidemic. In the first quarter, despite the epidemic's impact, we achieved a 2.9% year-over-year increase in our GMV to RMB7 billion, generating total revenues of RMB1.65 billion. Additionally, thanks to our updated membership enrollment system, we grew the number of transacting members on our platform to 11.8 million for the 12 months ending March 31, 2020. These positive results highlight the resilience of our supply chain and enhance our value proposition for members, as well as the progress we are making in executing our growth initiatives. Although the epidemic posed significant challenges for all market players, we managed to navigate these difficulties through strong collaboration with our partners. When the market faced substantial shortages of epidemic containment materials, our robust partnerships with leading emerging brands and publicly listed companies in the fast-moving consumer goods sector helped us maintain a reliable supply for our members. Furthermore, some quality factories and emerging brands adapted their production lines and working hours during this time to prioritize the manufacturing of essential goods. Our relationships with these partners allowed us to secure preferential access to their products. Additionally, our strong cooperation with logistics providers ensured that we could deliver goods to our members promptly. Despite the challenges posed by the epidemic, we continue to improve our gross margin and make headway toward achieving a stable level of profitability. This success is largely attributed to our collaborations with emerging brands, which showcase the effectiveness of our supply chain enhancements and differentiation strategy. On the supply chain front, we are focused on strengthening our partnerships with top emerging brands to accelerate our differentiation and drive long-term growth. We have formed partnerships with over 30 leading emerging brands across various sectors, selecting quality players—most of whom achieve annual sales exceeding RMB100 million, with some even being publicly listed. Our partner brands predominantly offer fast-moving consumer goods characterized by high turnover and repurchase rates. While we do value financial support from our brands, we also contribute in ways beyond financing. We direct platform traffic to the products of the emerging brands we've nurtured through our incubation system as joint venture brands. We believe this partnership strategy will enable us to secure better-quality Yunji-exclusive products, enhance platform sales, strengthen our competitive advantages, and stimulate the growth of our revenue streams over the long term. Additionally, we will focus on exploring more joint venture brands and Yunji-exclusive products to further differentiate our platform. Notably, due to years of investment and our incubation system, our private labels, social lines, and PMS have expanded to other online platforms like Tmall and JD, and we anticipate this trend will continue. We expect our private labels to actively extend their platform networks to reach more consumers and increase their sales. Beyond supply chain enhancements, we are also putting significant effort into promoting our products through social sharing. For instance, during the first quarter, we developed our local community services, which we previously shared with you. This integrated service system, combining online and offline elements, enhances neighborhood connections and allows users to conveniently access more products. When user location access was restricted during the outbreak, our product promotion efforts pivoted to focus on community-based targeting, taking advantage of our reliable supply of epidemic prevention products and essential goods from our partners. As a result of our dependable logistics network, we were able to support our members in reaching community users and consistently deliver essential goods throughout this period. We have also begun investing in e-commerce live streaming to boost sales. We recruited service managers with suitable sales skills for various streaming rooms on our platform. After setting up these rooms, we engaged other service managers experienced in social sharing to introduce them to our members. Crucially, when a member completes an order through these streaming rooms, both the streamer and the service manager will refer the member back to the room and earn a sales commission, enhancing our social sharing and community-based selection systems. I plan to host my online streaming sessions monthly alongside other streamers on our platform. In fact, prior to Yunji’s annual celebration on May 16, I made my live streaming debut, generating over RMB50 million in total transaction volume for that session. In summary, 2020 marks Yunji’s fifth year of operations. We are pleased to see the company committed to achieving its goals, continuously progressing toward a fully mature membership-based social sharing e-commerce platform. As we enter our sixth year, we will remain focused on meeting market demands while avoiding reckless investments that do not align with our long-term growth strategy. Moving forward, we plan to leverage our momentum to improve our inclusive, differentiated, and quality-driven platform offerings. These efforts will help us refine the Yunji experience for tens of millions of members and unlock the growth potential of our community to enhance long-term shareholder value. With that, I will turn the call over to our CFO, Chen Chen, to discuss our financial results.

Thank you, Shanglue. Hello, everyone. Before I go through our financial results, please note that all numbers stated in the following remarks are in RMB terms and all comparisons and percentage changes are on a year-over-year basis unless otherwise noted. In the first quarter, we experienced major challenges from the COVID-19 pandemic along with the rest of the world. This was particularly true in our operations' networks, which includes our suppliers, third-party merchants, third-party logistics providers, and other business partners. As a result of the temporary shutdowns, delays in operations and other challenges, our GMV growth was negatively impacted this quarter. Such impact was partially offset by the higher transaction volume of our marketplace business, which recognizes revenue on a net basis. In the first quarter of 2020, our GMV increased by 2.9% to RMB7 billion from RMB6.8 billion. Revenues in the first quarter of 2020 were RMB1.6 billion compared to RMB3.4 billion. Gross margin improved to 30.4% from 19.3%. Our non-GAAP net income in the first quarter of 2020 was RMB26.1 million compared to RMB43.1 million. These first quarter results are the product of the operational refinements we made for different suppliers and customers as well as our improved operational efficiency. Notably, we improved our operational efficiency by: first, concentrating our merchandise platform resources onto those products capable of enhancing our competitive differentiations, such as Yunji-exclusive products; and second, generally quality supplies to our marketplace platform to boost their product exposure. Let's now take a closer look at our financials. Revenue from net sales of merchandise in the first quarter of 2020 was RMB1.45 billion, accounting for 87.7% of our total revenues in the period, compared to RMB3.22 billion. This decrease was due to the transfer of our business to our marketplace business model, which was in line with our continuous efforts to improve our operational efficiency. Revenue from our marketplace business in the first quarter of 2020 increased to RMB158.1 million from RMB3.4 million. The increase was driven by an increase in the number of quality brands and merchants on our platform as well as higher take rates, which we secured with existing brands through stringent partnerships, notably since the second quarter of 2019. The take rate of our marketplace business has continued to grow for the past four consecutive quarters. Revenues from our membership program in the first quarter of 2020 were RMB25.1 million compared to RMB156.6 million. The decrease was due to the requirement of our membership enrollment system, which allowed users to register on our Yunji app as a member free of charge and enjoy membership benefits for one year. Gross margin in the first quarter of 2020 expanded to 30.4% from 19.3%. This expansion was mainly attributable to the increased sales of higher-margin products, the development of products from emerging brands, and our own private labels and the shifting the proportion of sales from a gross basis to a net basis, which was due to the increasing number of brands moving from merchandise sales to our marketplace business. Let's now move to our operation expenses. Fulfillment expenses in the first quarter of 2020 decreased by 49% to RMB138.1 million. The decrease was mainly attributable to decreased warehousing and logistic expenses resulting from our improved logistic efficiency and the shifting of brands from merchandise sales to our marketplace business. Sales and marketing expense in the first quarter of 2020 decreased by 4.4% to RMB251.7 million, which was attributable to the decrease in member management fees as we continue to improve the efficiency of our member management operations. The decrease was partially offset by the increase in business promotion expenses to attract more popular brands and merchants to our marketplace business. Technology and content expenses in the first quarter of 2020 decreased to RMB57.9 million from RMB58.7 million. The decrease was mainly due to our realization of better contract terms with our service providers, which helped to reduce our server costs, and was partially offset by increased personnel costs. We continue to invest in research and development of talent while further optimizing our staffing structure to enhance employee performance through share-based awards in the period. We expect personnel costs to decrease in the second quarter. General and administrative expenses in the first quarter of 2020 increased by 21.5% to RMB75.2 million, or 4.6% of our total revenues, from RMB61.9 million, which was mainly due to increased share-based compensation expenses resulting from new grants of share-based awards. After excluding the impact of share-based compensation expenses, general and administrative expenses in the first quarter of 2020 increased by 8.6% to RMB46.1 million from RMB42.5 million. Overall, our total operating expenses in the first quarter of 2020 decreased by 20.1% to RMB522.9 million from RMB654.4 million. This reduction was a result of our ongoing improvements to logistics efficiency and operational efficiency, which we achieved by improving our service manager relationships and subsidy allocation in support of those brands and suppliers meeting our criteria as well as our ability to secure better terms with our partners. Loss from operations in the first quarter of 2020 was RMB6.1 million, including share-based compensation expense of RMB39.3 million, compared with an income from operations of RMB10.7 million. Net loss in the first quarter of 2020 was RMB13.2 million compared with a net income of RMB16.9 million. Non-GAAP net income in the first quarter of 2020 was RMB26.1 million compared with RMB43.1 million. Basic and diluted net loss per share attributable to ordinary shareholders in the first quarter of 2020 were both RMB0.01 compared with RMB0.95 in the same period of 2019. Now let's also take a look at our cash and liquidity positions. In light of the COVID-19 outbreak, we continued to focus on maintaining a healthy level of working capital to meet our operational liquidity demands. As of March 31, 2020, we had a total of RMB2 billion in cash and cash equivalents, restricted cash, and short-term investments on our balance sheet. Looking ahead, we will continue to improve our platform operation efficiency. We'll leverage our strong cash position and differentiated merchandise offerings to bolster the competitiveness of our value proposition for users and connect our massive user base to quality supplies. During this period of uncertainty in the market, these efforts will help us sustain our competitive advantage, both in the quantity and the efficiency of transactions on our platforms, enhance our brand value to grow our user base and supply network, and continue to advance along the path towards healthy profitability. This concludes our prepared remarks for today.

Thank you. Participants are requested to first ask your questions in Chinese and then repeat them in English. Our first question comes from Andre Chang from JPMorgan. Please go ahead.

Thank you to management for addressing my question. I would like to inquire about the progress in the second quarter. Now that the COVID-19 pandemic has gradually subsided, I'm interested in understanding the business recovery trajectory in terms of GMV, revenue growth, and membership progress. Thank you.

Thank you, Andre. I will take this question. By the end of May, we see the trend of recovery in both GMV and revenue, but the growth rate is still not as fast as we forecast. This is because our focus this year is to provide more differentiated SKUs and products to our members. So we are more focused on the profitability and differentiated items we can provide. Because as you can see, all the other platforms offer a lot of products at low prices to compete with faster delivery. But as for why our members will come to Yunji, it is because we can provide our private label products with better quality at a reasonable price. And also, as our CEO just stated, we are focused on cooperation with the best emerging brands all over China. Most of these brands are in the faster-moving consumer categories. So we see recovery in GMV and revenue by the end of May, and our profitability continues to grow in Q2. I think this matches our CEO's statement that we will pursue healthy growth in the future.

Thank you. As there are no further questions, I'd like to hand the conference back to the management team for the closing remarks.

Thank you for joining us today. Please do not hesitate to contact us if you have further questions, and we look forward to talking with you next quarter. Thanks.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.