Yunji Inc. Q2 FY2020 Earnings Call

Good morning and good evening, ladies and gentlemen. Thank you and welcome to Yunji’s Second 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 second 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 certain terminologies such as will, expect, anticipate, continue, or other statements or expressions. For a detailed discussion of these risks and uncertainties, please refer to our stated documents filed with the US SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and are expressly qualified entirely by cautionary statements with factors and details of the company filings with the SEC. Yunji does not undertake any obligation to update these statements 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 second quarter 2020 earnings call. Despite the impact of the epidemic, we generated a total RMB 7.8 billion in GMV and RMB 1.49 billion in revenues during the second quarter as a result of our outstanding teamwork. In the second quarter, we also achieved a non-GAAP net profit for three consecutive quarters. Additionally, the upgrades we made to our membership enrollment system also helped us to ramp up the total number of transacting members on our platform to 12.2 million for the 12 months ended June 30, 2020. Ever since our IPO as a leading membership-based social e-commerce platform, we are committed to building our platform that benefits all participants by continuously investing in our supply chain upgrade and community network optimization. First, I would like to provide an overview of the current development of our supply chain. In the first half of 2020, many quality suppliers and leading manufacturers have found it difficult to adapt their business and grow their online traffic in the new business environment. Retail businesses are having a hard time promoting their quality products and generating sales, especially in comparison to those top e-commerce brands capable of producing engaging content and providing more differentiated products. Meanwhile, many users have experienced a consumption upgrade and are looking for an increasingly broader range of quality products that they can purchase at attractive prices. In light of these developments and in recognition of the pain points, we have established our long-term strategy of supporting private labels and joint-venture brands on the supply side, utilizing our resources to empower sales managers on the service side, and refining our platform experience and the user value proposition on the user side. This strategy is helping us achieve cost-effective business growth without compromising our margins, generating favorable returns for our suppliers and partners. Now, turning to our partnership, on the previous call, we discussed our commitment to establishing deep cooperation with top companies in the fast-moving consumer goods industry to further diversify our supply chain. As such, during the quarter, we continue to identify and resolve many of these companies' pain points. For example, one of our partner companies is a publicly traded skincare and cosmetic company with outstanding product design capability, patented technology, and affluent annual product sales. However, as a result of previously aiming its marketing efforts at the mid to low-end of the market, it has been unable to successfully market its high-end products. We are working with this company to jointly develop a new medical aesthetic brand at a high-end and provide targeted marketing solutions on our platform. These solutions have been quite effective at helping the company fill their marketing gap, allowing them to reach the higher-end of the market and providing the company with the resources necessary to reach its previous record in transaction value as well as profit margin. Our ability to deliver these outstanding results is largely a product of our service managers who are able to create and share highly engaging content with our targeted users by utilizing their product's effectiveness for beauty. This arrangement has also been quite beneficial for our service managers as these types of products produce a higher take rate, providing service managers with a good income. We have developed a three-line medical aesthetic product through this partnership to date. Moreover, as a result of our precision marketing capability, each of these products has achieved a positive user feedback rate of about 95%. Under our partnership program with top emerging brands and a publicly traded fast-moving consumer goods company, we also partner with some big brands that contributed RMB 2 million in annual sales. Through this partnership, we co-produced products that are of quality equal to that of their existing product line and then ultimately sent these products into our positive product distribution model, where we create more exposure for them through producing similar types of products. The introduction of these products at attractive price points has resulted in more profitable sales. Similarly, we recognize that selling those products provided by our incubated brands and a differentiated supply chain has a higher profit potential than simply marketing and promoting other products from third-party brands. Looking ahead as our supply chain continues to improve, we believe that this model will also help to boost our platform sales and materially improve our growth trajectory in return. Beyond these developments, we also continue to improve our community network and explore better social sharing product systems for promotion and marketing. In the second quarter, we began to explore developing a professional vertical community based on our insights on service managers and members’ interests and capabilities, which has already generated some favorable results. Currently, we have established two professional vertical communities for food and health supplement categories and achieved high user engagement in both communities. For example, one of our health supplement products generated over RMB 500 million in GMV in just two months. Going forward, we plan to develop more vertical communities for different categories based on business demands. In the meantime, we are also focused on improving the capabilities of our service managers and our vertical communities. For example, we cooperated with top training institutions to bring in lecturers experienced in marketing and training to provide our service managers with highly relevant training sessions. In addition to boosting service managers’ marketing skills, the training sessions also helped to improve the quality and authenticity of the products-related content produced by these service managers and increased engagement among members. In the same community with key service managers, we believe that this combination of service manager upgrades along with our promotion and marketing system implemented will serve to further enhance the core competencies of our business model going forward. As we advance throughout the remainder of 2020 and beyond, we remain confident that our highly effective marketing models will continue to drive long-term value through the integration of quality products, premium content, and efficient content distribution. With that, I will turn the call over to our CFO, Chen Chen, to go through 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 our comparisons and percentage changes are on a year-over-year basis unless otherwise noted. We continued to accelerate our business transformation and refine our membership enrollment system during the second half of 2020. In this quarter, an increasing amount of transactions were made through our marketplace business and recognized on a net basis. In addition, competition within China’s e-commerce industry continued to ramp up during the period as larger industry players increased spending on promotional campaigns and buyer subsidies during e-commerce mid-year shopping festivals. In line with our long-term goals, we decided to forgo the distractions of such short-term gains and instead focus our attention on refining our operational efficiency and bolstering our brand awareness. We continued to advance towards healthy profitability during the second quarter of 2020 as a result of these efforts as well as the progress made on other fronts including supply chain and product differentiation. GMV in the second quarter of 2020 was RMB 7.8 billion compared to RMB 8.2 billion. GMV related to marketplace revenues in the second quarter of 2020 increased by 122.7% to RMB 4.9 billion from RMB 2.2 billion. Revenues in the second quarter of 2020 were RMB 1.5 billion compared to RMB 3.1 billion. Gross margin in the second quarter of 2020 improved to 29.1% from 22.2%. Non-GAAP net income in the second quarter of 2020 was RMB 20.1 million compared with a non-GAAP net loss of RMB 39.2 million. Such results reflect the successful execution of our new strategy described by our CEO which is to improve profitability in the near term and drive high-quality growth in the long run. Let’s take a closer look at our financials. Revenues from net sales of merchandise in the second quarter of 2020 were RMB 1.3 billion compared to RMB 2.73 billion and accounted for 87.4% of our total revenues in the period. This decrease was due to the transfer of business to our marketplace business model, which was in line with our continuous efforts to improve our operating efficiency and that of our merchants. Revenues from our marketplace business in the second quarter of 2020 increased to RMB 159.6 million from RMB 53 million. This increase was driven by an increase in the number of quality brands and merchants on our platform, and was also due to the higher take rates we secured by strengthening our existing partnerships with brands and attracting new brands through our growing community influence. Revenues from our membership program in the second quarter of 2020 were RMB 12.3 million and wholly consisted of the deferred revenue from prior paying members compared to RMB 267.6 million. This decline was in line with our long-term growth plans and due to the refinement of our membership enrollment system, which allowed users to register on our Yunji app as a member, and the Yunji membership benefit is free of charge for a year. Gross margin in the second quarter of 2020 expanded to 29.1% from 22.2%. This expansion was primarily due to traditional sales of high-margin products, development of products from emerging brands, and our own private label products. Additionally, the increasing number of brands moving to our marketplace business from our merchandise sales format caused a shift in the proportion of sales from a gross basis to a net basis. Now let's move to our operating expenses. Fulfillment expenses in the second quarter of 2020 decreased by 56.5% to RMB 129 million. This decrease was mainly attributable to reduced warehousing and logistic expenses caused by lower merchandise sales and increased logistics efficiency. Secondly, reduced third-party payment transaction fees due to lower commission rates, and thirdly, lower personnel costs as a result of headcount optimization. Sales and marketing expenses in the second quarter of 2020 decreased by 32.7% to RMB 228.4 million, which was attributable to decreasing member management fees as we improved the efficiency of our member management operations. Technology and content expenses in the second quarter of 2020 decreased to RMB 58.6 million from RMB 91.6 million. This decrease was mainly due to our realization of better counter terms with certain providers, which helped to reduce our total costs, as well as partially due to the decrease in personnel costs resulting from headcount optimizations. General and administrative expenses in the second quarter of 2020 increased by 8.1% to RMB 70.7 million or 4.8% of total revenues from RMB 65.4 million. This increase was mainly due to increased share-based compensation expenses resulting from new grants of share-based awards and increased professional service fees including auditor and attorney fees, partially offset by reduced personnel costs due to headcount optimization. Overall, total operating expenses in the second quarter of 2020 decreased by 38.6% to RMB 486.6 million from RMB 792.9 million. This reduction was due to our ongoing improvements to logistics efficiency, increased member management efficiency as a result of enhanced service manager relationships, and our ability to secure better terms with our partners. Loss from operations in the second quarter of 2020 was RMB 45.2 million, including share-based compensation expenses of RMB 37.6 million compared to RMB 103.9 million. Net loss in the second quarter of 2020 was RMB 17.5 million compared with RMB 4.5 million. Adjusted net income in the second quarter of 2020 was RMB 20.1 million, compared with an adjusted net loss of RMB 39.2 million. Basic and diluted net loss per share attributable to ordinary shareholders in the second quarter of 2020 was both RMB 0.01 compared with RMB 0.28 in the same period of 2019. Now, let's also take a look at our cash and liquidity positions. During this quarter, our ability to maintain a healthy level of working capital despite the macro headwinds and uncertainties in the period enabled us to support our operational liquidity demand. As of June 30, 2020, we had a total of RMB 1.7 billion in cash and cash equivalents, restricted cash, and short-term investments on our balance sheet. Looking ahead, we plan to continue accelerating the development of both our marketplace business and merchandise sales business. At the same time, we aim to leverage our competitive value proposition for users, service managers, and quality suppliers in order to explore new initiatives and other partnerships with strong synergetic potential. Going forward, we believe that such efforts will enable us to not only enhance our core financials at a steady pace but also ramp up our overall profitability, setting the stage for high-quality growth in the long run. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

And your first question comes from the line of Ivy Liu from Credit Suisse. Ivy, the line is now open.

I will quickly translate myself. So, could management share more color in the current strategies on merchandising capabilities especially with regards to those self-owned brands and joint venture brands? Thanks.

Okay. Our commodity supply chain has more than contributed by the connection with B-end consumers and our member consumers. So, we’re going to see where labor force and resources are focused in the development of private labels and joint venture brands. For products with high margins and high repurchase rates, we’re going to promote more private labels in healthcare, cosmetics, and food. For products with medium margins and medium repurchase rates, we plan to cooperate with publicly traded companies to create more joint venture brands. One of the joint venture brands we promoted is ATM, it’s called the Yunji ID Facial Cream, and it has been quite popular among consumers with a repurchase rate of 50%. Today, we just launched a new product called Yunji ID Facial Cream, and GMV for today has reached RMB 1 million. This partnership model has been quite popular among our upstream partners like those joint venture brands and private labels. It also generates more value for our members who are seeking products that are both good in price and high in quality. This will generate more value for our service managers as they want to promote popular products that are high quality and also seek to increase their income. We can see that partnerships with China's high-quality manufacturing companies and mainstream consumer product companies will be the main strategy for our supply chain. That’s for your questions. Thank you.

There are no questions at this time. I’ll hand back to the management for closing.

Thank you for joining us today. Please do not hesitate to contact us if you have any further questions, and we’re looking forward to talking with you next quarter. Bye.

That does conclude our conference for today. Thank you for participating. You may all now disconnect.