Yunji Inc. Q1 FY2021 Earnings Call

Hello everyone. Welcome to our first quarter 2021 earnings call. Before we start, please note that this call will contain forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995 that are based on our current expectations and current market operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors of Yunji and its industry. These forward-looking statements can be identified by terminology 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 US SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and are expressly qualified in their entirety by cautionary statements, risk factors and details of the company's filing with the SEC. Yunji does not undertake any obligation to update these statements except as required by applicable law. With that, I will now turn over to Shanglue Xiao, Chairman and CEO of Yunji.

Hello everyone and welcome to Yunji's first quarter 2021 earnings call. We celebrated our sixth corporate anniversary on May 16th, 2021. During this year's celebration, themed 'Prime to Perform,' we introduced our newly elevated business strategy to our employees and service managers. In the competitive e-commerce industry in China, the leading players have already gained advantages through economies of scale with a focus on being faster, better, and more cost-effective. As a leading membership-based e-commerce platform, we continue to enhance our focus on product selection and refinement to better implement our supply chain differentiation strategy and provide customers with a more convenient shopping experience. We prioritize cultivating a megahit product flow by introducing quality products that appeal to our members. To support this new aspect of our strategy, we formed a working group for our megahit product supply chain, led by our Executive President, Wei Ye. This team aims to utilize their expertise in business development, content creation, and product presentation to curate popular products, present them effectively to consumers, and create related content for a targeted sales approach. By the end of 2021, our goal is to develop a portfolio of megahit products across various categories with economical and premium quality offerings. We see significant opportunities in our primary vertical markets of health, cosmetics, and food products, which align well with our user base's demands and add value to their membership. We train our service managers to be knowledgeable in these areas, equipping them to attract more customers through professional service. We also plan to continue developing new products targeted at our key markets via our private label and joint venture brands. Some of our private labels include cosmetic brands Solo Life and P&X, food brands Li Ba Tian, and health supplement brands like SmartLife and Unibeauty. As of March 31, 2021, our weight loss supplement SmartLife reached RMB 975 million in total sales, growing to RMB 1 billion in just one year since its launch. Our private labels have successfully developed numerous popular products endorsed by our members. Through these megahit products, we aim to provide a more innovative and enhanced e-commerce experience. We are also extending the lifecycle of successful products in health, cosmetics, and food by releasing new versions with improved features. Additionally, we will intensify efforts in product review and development for categories with significant user demand, such as maternal and infant care and household products. Our household products brand, The Meaning of Home, offers daily necessities like paper towels and cleaning supplies, while we hold periodic promotions for these fast-moving consumer goods. Regardless of the product category, quality and safety are paramount when selecting products for our platform. Many of our users are mothers responsible for their families, so we will continue to offer products safe for all family members. We recognize that today's consumers face information overload, which shapes our content development approach to ensure we deliver concise, valuable product information that captures attention effortlessly. Our next step is to assist our service managers in optimizing the production of product content and sharing e-commerce experiences using a variety of formats, such as images and short-form videos. This will ensure a steady stream of content is available on external platforms to promote our differentiated supply chain and products, enhancing our brand influence. We consider our service managers among our most valuable assets. Our training programs aim to help them enhance their marketing skills, build their own brand influence, and improve their financial situations. We will continue to diversify educational content offerings, providing service managers more opportunities for growth. We envision a future where our service managers become versatile professionals capable of driving sales, attracting new users, and effectively managing customer relationships. Now, I will turn the call over to our CFO, Rex Chen, to share our financial results for the first quarter.

Thank you, Shanglue. Hello, everyone. Before I go through our financial results, please note that all numbers stated in the following remarks are in Renminbi terms. And for the first quarter of 2021, while all comparisons and percentage changes are on a year-over-year basis unless otherwise noted. Starting in 2021, we committed to enhancing our supply chain differentiation strategy to include our new megahit products through this strategy and the further development of our private label products. We are focusing on the lifetime value of our customers and no longer emphasize GMV. We also remain committed to effective cost control and we further refined our membership management system and enhanced our employee structure. While our decision to forgo short-term sales gains in favor of more sustainable growth caused fluctuations in our quarterly sales, we believe these efforts will further drive our progress towards healthy profitability in the long run. Now, let's take a closer look at our financials for this quarter. In the first quarter of 2021, our total revenue was RMB 675 million compared to RMB 1.649 billion a year ago. Revenues from sales merchandise were RMB 572 million, and the revenue from the marketplace business was RMB 95 million. As previously mentioned, the decline in total revenue was mainly due to our decision to improve our product curation strategy by implementing our megahit product pool initiative. The initiative focused on introducing products with stronger repurchase potential and greater customer appeal. Gross margin in the first quarter of 2021 was 35% compared to 30% a year ago. The improvement in gross margin was due to our supply chain differentiation strategy. Turning to our operating expense: Fulfillment expense in the first quarter of 2021 was RMB 65 million compared to RMB 178 million a year ago. The decrease was mainly attributed to reduced warehouse and logistics expenses, which resulted from our improved logistics efficiency, lower merchandise sales, and reduced personnel costs from staffing structure refinements. Sales and marketing expense in the first quarter of 2021 were RMB 96 million compared to RMB 251 million a year ago. As a percentage of total revenue, sales and marketing expense in the quarter decreased to 14% from 15% a year ago. This decrease was in line with our long-term growth strategy and was mainly due to our reduction in membership management fees, as we improved our member management efficiency and decreased promotion expenses. Technology and content expense in the first quarter of 2021 was RMB 38 million or 5.6% of total revenues compared to RMB 58 million or 3.5% of total revenue a year ago. The decrease was mainly due to the decrease in personnel costs, as we further refined our staffing structure. General and administrative expense in the first quarter of 2021 was RMB 74 million compared to RMB 75 million a year ago, mainly due to the decrease in share-based compensation expenses. Overall, in the first quarter of 2021, total operating expense decreased to RMB 273 million and the loss from operations was RMB 20 million. Net loss was RMB 4 million compared to RMB 13 million a year ago. Adjusted net income in the first quarter of 2021 was RMB 17 million compared with RMB 26 million a year ago. Basic and diluted net loss per share attributable to ordinary shares in the first quarter of 2021 were both RMB 0.002 compared with RMB 0.01 in the same period of 2020. Finally, let's take a look at our cash and liquidity position. As of March 30, 2021, we had a total of RMB 1.2 billion in cash, cash equivalents, restricted cash, and short-term investments on our balance sheet. We will actively explore further investment opportunities in high-potential emerging brands. Looking ahead, we will commit to executing our supply chain differentiation strategy by upgrading our megahit product curation system and developing private label products to widen our economic moat and improve our profitability. At the same time, we will remain disciplined in our cost control and allocate resources to areas that align with our long-term growth objectives. While we recognize the intense level of competition in the industry, we also believe that the strategies we now have in place will serve as a solid bedrock for our sustainable growth and expansion going forward. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Your first question comes from the line of Ethan Yu of First Trust Group Incorporated. Please ask your question.

Hi, good evening. Thanks for taking my question. I have two questions. The first question is about our private label business. In connection with the rapid growth of our marketplace business, what's the distinct market strategy for our private label products? Additionally, could you provide some insights on how we differentiate ourselves from other private label e-commerce brands like NetEase and Jingdong? My second question pertains to the membership system. We have noticed that the membership fee has been adjusted from CNY 398 to CNY 199 recently. Beyond this, the company also has various enrollment incentives and new metrics for our membership system. We are curious about the company's explorations or innovations regarding the membership enrollment system and what our strategy is to enhance the quality of our members. Thank you.

Thank you for your questions. I'm Mr. Xiao Shanglue, the CEO of Yunji, and I will take your questions. For your first question regarding our private labels, we will be more focused on health products and cosmetics. These categories require more user sharing and recommendations. When people want to buy health products, they may not know what to choose without shopping curators. For cosmetics, most purchases happen offline at department stores, where people can find curated options, even for luxury brands. This highlights the necessity of shopping curators. We aim to leverage our service managers' expertise within our community, which sets us apart from competitors like Yanxuan or Jingdong, who focus mostly on daily necessities and face stiff competition with low net profits. We hope to further utilize our community marketing advantages and improve our service managers' professional knowledge. In the future, we plan to strengthen our presence on our own platform as well as on major e-commerce platforms such as Tmall and other video e-commerce sites. As we increase traffic on our platform, we will expand our efforts to other major e-commerce platforms. And thank you for your second question. It is a very good question. We believe that we still have much room to explore to further enhance the value of our members. After our evaluation, we found that we decided to lower the benchmark for becoming a member of Yunji because we want to attract more target users. Based on that, we will devote more time and energy to ensure that our users can receive the best product recommendations, encouraging repeat purchases. Compared to enhancing the quality of members, we believe that enhancing the value of our members is more critical. After reflecting on the value of our members, we previously regarded Costco and Sam's Club as our examples. We also tried to select over 5,000 SKUs to recommend to our members. However, after two to three years of practice, we found that our consumers need more refined recommendations. So from this year, we plan that in the next five years, we will recommend products to our consumers in a more targeted and refined manner. We will launch daily recommendations and select the top product from 1,000 products so that our consumers can receive a more tailored recommendation. We will also learn from good practices from other platforms, such as live streaming. We hope that we will quickly introduce products shared by the top streamers to our members, helping them save time and offering more economical and quality choices. I believe this will further enhance the value of our members and attract more quality members. That's all.

Thank you for joining us today. Please do not hesitate to contact us if you have any further questions. We look forward to talking with you next quarter. Bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.