Full Truck Alliance Co. Ltd. Q3 FY2022 Earnings Call

Ladies and gentlemen, good day and welcome to Full Truck Alliance's Third Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mao Mao, Head of Investor Relations. Please go ahead.

Thank you, operator. Please note that today's discussion will contain forward-looking statements relating to the Company's future performance, which are intended to qualify for the Safe Harbor from liability, as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the Company's control and could cause actual results to differ materially from those mentioned in today's press release and discussion. A general discussion of the risk factors that could affect FTA's business and financial results is included in certain filings of the Company with the SEC. The Company does not undertake any obligation to update this forward-looking information, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures, for comparison purposes only. For a definition of non-GAAP financial measures, and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. Joining us today on the call from FTA's senior management side are Mr. Hui Zhang, our Founder, Chairman and CEO, and Mr. Simon Cai, our CFO. Management will begin with prepared remarks, and the call will conclude with a Q&A session. As a reminder, this conference is being recorded. In addition, a webcast replay of this call will be available on FTA's Investor Relations website at ir.fulltruckalliance.com. I will now turn the call over to our Founder, Chairman and CEO, Mr. Zhang. Please go ahead.

Hello, everyone. Thank you for joining us today on our third quarter 2022 earnings conference call. In the third quarter, under the gradual implementation of China's measures to ensure the smoothness of freight logistics policy and effective pandemic controls, China's road transportation industry saw a series of positive changes. We are pleased with the steady growth and strong financial and operational performance we delivered in the quarter as we continue to enhance our capabilities from product development to technology innovation, while also optimizing user experience and operational efficiency. All of these improvements have empowered us to navigate the challenging external environment and the highly dynamic market with great agility. Amid weak seasonal demand and strong macro headwinds, our solid third quarter results underscored the sustainability of our business model and our commitment to building and strengthening our industry-leading competitive edge. Looking at our operational performance with the full resumption of new user registration on our Yunmanman and Huochebang apps, we witnessed the rapid growth of our user base in the third quarter with an increasing number of high-quality users through a series of effective user acquisition strategies. Furthermore, we consistently strengthened and upgraded our products and functionalities for direct shippers, further enhancing both their fulfilment rate and retention. As a result, our GTV and the number of field orders grew by 5.7% and 20.2% quarter-over-quarter to RMB69.6 billion and RMB33.5 million respectively. Our average shipper MAU reached RMB1.85 million, representing a 15.2% increase year-over-year. Now turning to our financial results, our total net revenues came in above the upper boundary of our previous top line guidance, climbing by 45.7% year-over-year to RMB1.81 billion. Alongside our efforts to expand our monetization channels and improve monetization efficiency, we continue to streamline our operational workflow during the third quarter to enhance our profitability. Our approach has yielded positive results with the non-GAAP adjusted net income reaching RMB493 million compared with a non-GAAP adjusted net loss of RMB4.7 million a year ago. Building on this momentum, we will continue to explore and capitalize on our strengths, improving user experience and refining our operational capability while fulfilling the demand of our growing user base. Additionally, we will try to boost user engagement and retention rates, while also stimulating new user frequency and accelerating their conversion into frequent users, synchronizing an increase across the existing and incremental business to drive the sustainable growth of our overall business scale. We have also continually improved our operations to ensure full compliance with regulatory requirements. We are not aware of any ongoing government investigations or subject to any administrative penalties to date that would materially affect our business, financial position or results of operations. Looking ahead, China's road transportation industry will continue to transform and upgrade digitally. As the world's largest digital trade platform, we will focus on leveraging our platform scale, enhancing our big data capabilities and integrating with a vast transportation capacity and supply of goods nationwide. By taking this approach, we will facilitate the connectivity of the entire freight logistics network and benefit individual truckers while driving the industry's high-quality development and creating greater value for all of our stakeholders. With that, I will now turn the call over to our CFO, Simon Cai. He will go over our operational and financial results in more detail. Simon, please go ahead.

Thank you, Mr. Zhang, Mao Mao, and hello everyone. I will start by sharing some of this quarter's major initiatives and development and then walk you through our key financials. In the context of a challenging macro environment and a new wave of omicron clusters, we are glad to have delivered another quarter of solid financial and operational results. Our third quarter average fulfilment rate reached approximately 25%, an increase of four percentage points on a sequential basis, despite the weak demand in the third quarter and a particularly hot summer, which diminished truckers' willingness to take freight orders. These factors were partially offset by the gradual easing of the pandemic and the resumption of new user registrations. As expected, we experienced a surge in both new shipper and trucker members upon the full resumption of user registration on our Yunmanman and Huochebang apps at the end of June. In the third quarter, our average monthly active shippers and monthly active truckers responding to orders grew by more than 300,000 and 200,000 from the previous quarter, respectively. Almost all of our newly added monthly active shippers are low and medium frequency shippers, which include a large number of direct shippers, resulting in further changes to our overall shippers’ consumption. Furthermore, the contribution to GTV and fulfilled orders by low and medium frequency shippers, including 688 members and non-members, continue to increase over the past eight quarters. Notably, the proportion of the orders fulfilled by the shipper cohort has gradually increased from less than 30% two years ago to more than 40% now and we expect this number to continue to expand in the future. Meanwhile, driven by increasing dependence on our platform, user's transaction frequency and activity level also improved, as evidenced by average quarterly fulfilment per monthly active shipper and monthly active trucker fulfilling orders strengthening quarter-over-quarter. Thanks to our relentless efforts to improve the quality of our services, our continued user growth has not had a dilutive impact on our user retention. In the third quarter, the 12-month retention rate of paying shippers and next month's retention rate of truckers who responded to shipping orders on our platform remained high at around 85%, following the trend of previous quarters. We have also established a more effective communication channel during this quarter to re-engage users whose registrations have failed within the last year, mainly through a combination of manual outbound calls, text messages and precise information targeting. By the end of October, we had reactivated nearly two million new shippers and truckers from failed registrations, representing a significant rise in the reactivation rate. In the future, we will remain focused on optimizing the user experience, thereby converting and retaining more long-term users. We believe that offering a broader array of effective products and solutions to our expanding and increasingly diverse user base will be the key to our sustainable high-quality growth. To this end, we continue to optimize our platform's ecosystem during the quarter with upgraded functionalities designed to tackle shippers' and truckers' pain points. For example, we enhanced our algorithm model with more frequent updates going from daily to real-time in order to improve search efficiency and matching accuracy. Committed to continuous improvement in operation efficiency, we focused on our freight matching capabilities, reducing the rate of cancellations by imposing stricter restrictions on shippers who frequently cancel orders. While refining the matching of truckers with trustworthy shippers and prime orders, we extended our data analytical tools to cover more shippers, particularly those using virtual private numbers to place orders. We were delighted to see a lower order cancellation rate and an improved fulfilment rate on our platform in the third quarter as a result. Consequently, those ongoing efforts to improve operating efficiency, targeting better freight matching are driving an overall enhancement in user experience. Along with our continuous process refinement and product optimizations, we expect to support further improvements in cancellation and fulfilment rates and, importantly, reinforce users' positive experience on the platform going forward. During the quarter, we also made several advancements in user retention and engagement. For instance, in the third quarter, we introduced our trucker growth program in several pilot areas, through which truckers accumulate reward points as they complete transactions. The more points they accumulate, the higher their priority status with respect to having full access to others posted on the platform. The program incentivizes all truckers to increase transaction frequency and improve service quality, creating better user experiences for shippers and raising overall matching efficiency. Furthermore, we successfully implemented our shipper rating system on a national scale and iterated the system in the third quarter. Our upgrade enables truckers to more precisely evaluate shipper behaviors with operating indicators, including the number of fulfilled orders, fulfilment and cancellation rates, etcetera, empowering them to make more comprehensive evaluations of the quality of other postings. After six months of pilot operations, our enhanced shipper rating system has been widely recognized by shippers and truckers, leading to a 5.8% drop in the complaint rate against shippers and an 8.5% drop in the overall order cancellation rate. Finally, our online transaction service continues to deliver sustainable growth with a 114.1% year-over-year increase to RMB390.2 million in revenue, largely attributable to the continued ramp-up of commission transaction volume. This quarter, we continue to expand our commission model to additional cities, which raised the commission penetration rate to above 50%. As a result of the increasing scale of this commission model, our online transaction service has gradually become the foundation of our overall increase in revenue. In summary, thanks to our optimized products and user composition, our third quarter results reflected solid progress. We continue to expand, capitalizing on our core competitiveness to strengthen our industry-leading position over the long term. Looking ahead, we will remain committed to elevating the quality of our products and services, refining our highly efficient operations and protecting users' rights and interests, bearing no efforts to create more value for all of our users, investors and stakeholders. Now I'd like to provide a brief overview of our third quarter financial results. Given the limited time for today's call, I'll be presenting some abbreviated financial highlights. We encourage you to read through our press release issued earlier today for further details. Our total net revenues in the third quarter were RMB1.8 million, representing an increase of 45.7% year-over-year, primarily attributable to an increase in revenues from freight matching services. Revenues from freight matching services, including service fees, freight brokerage models, membership fees from listing models, and commissions from online transaction services were RMB1.5 billion in the third quarter, representing an increase of 39.5% year-over-year, primarily due to an increase in revenue from our freight brokerage services as well as rapid growth in transaction commissions. Revenues from freight brokerage service in the third quarter were RMB904.1 million, representing an increase of 31.2% year-over-year, primarily driven by continued growth in transaction volume as a result of improved user penetration. Revenue from freight listing service in the third quarter was RMB219.7 million, up 2.8% year-over-year, primarily attributable to an increase in total paying members. Revenue from value-added services in the third quarter was RMB294.5 million, an increase of 88.2% year-over-year, mainly attributable to increased revenues from credit solutions. Cost of revenues in the quarter was RMB953.0 million compared with RMB842.1 million in the same period of 2021. The increase was primarily due to an increase in VAT-related tax surcharges and other tax costs, net of tax refunds from government authorities. These tax-related costs, net of refunds, totaled RMB866.7 million, representing an increase of 12.7% from RMB768.9 million in the same period last year, primarily due to an increase in transaction activities involving our freight brokerage service. Sales and marketing expenses in the third quarter were RMB232.9 million compared with RMB190.6 million in the same period last year. The increase was primarily due to an increase in salary and benefits expenses driven by higher sales and marketing headcount. General and administrative expenses in the third quarter were RMB206.6 million compared with RMB190.0 million in the same period last year. The increase was primarily due to an increase in professional service fees as well as an increase in salary and benefits expenses driven by higher G&A headcount. R&D expenses in the quarter were RMB226.6 million compared with RMB202.9 million in the same period last year. The increase was primarily due to an increase in salary and benefits expenses driven by higher R&D headcount. Income from operations in the third quarter was RMB149.7 million compared with a loss from operations of RMB201.7 million in the same period last year. Net income in the third quarter was RMB395.5 million compared with a net loss of RMB178.3 million in the same period last year. Under the non-GAAP measures, our adjusted operating income in the third quarter was RMB242.8 million compared with an adjusted operating loss of RMB81.1 million in the same period last year. Our adjusted net income for the third quarter was RMB493.0 million compared with an adjusted net loss of RMB4.7 million in the same period last year. Basic and diluted net income for ADS were RMB0.37 in the third quarter compared with basic and diluted net loss for ADS of RMB0.17 in the same period last year. Non-GAAP adjusted basic and diluted net income per ADS were RMB0.46 in the third quarter compared with non-GAAP adjusted basic and diluted net loss per ADS of RMB0.0 in the same period last year. As of September 30 this year, the company had cash and cash equivalents, restricted cash, and short-term investments of RMB26.8 billion in total compared with RMB26.0 billion as of December last year. For the third quarter of 2022, net cash generated by operating activities was RMB398.3 million. Looking at our business outlook for the fourth quarter of this year, we expect our total net revenues to be between RMB1.79 billion and RMB1.88 billion, representing a year-over-year growth rate of approximately 25.2% to 31.5%. I want to emphasize that these forecasts reflect the company's current and preliminary views on the market and operational conditions. The COVID outbreaks are associated with substantial uncertainties, including the geographic scope and duration of the outbreaks, the additional restrictive measures that government authorities may take and a further impact on the business of shippers, truckers, and other ecosystem participants, all of which are subject to change and cannot be predicted with reasonable accuracy as of the date hereof. That concludes our prepared remarks. Now, I'd like to open the call to Q&A. Operator, please go ahead.

Our first question comes from Ronald Keung from Goldman Sachs. Please go ahead.

Thank you, management. I want to ask about our new user registration, once this has resumed. Can you share some color on the user profile behavior? Have you seen any change in the platform's activity, with the pickup in GTV and all the structure resulted from these new users? Thank you.

Since the resumption of new user registration, both our shipper and trucker user base have grown significantly. In terms of newly registered shipper user profiles, the majority of them are relatively medium- to low-frequency direct shippers. As of now, the daily average number of new registrations has achieved normalized growth with both new shippers and truckers basically returning to their levels before the substantial legislation. As for the GTV mix, the contribution from our member and 688 member shippers to GTV and fulfilled orders continues to rise during the quarter. Our number of member shippers also increased, thanks to additional enhancements to our pricing strategy and the optimization of our free order posting policy for the members. On a related note, I want to emphasize that the conversion rate from a new user to a 688 member subscriber is typically higher than that from a new user to a 1688 membership subscriber, mainly because these new users are mostly direct shippers who tend to ship less frequently while also exhibiting greater strength and higher retention. The new user's contribution to GTV and our order volume will accumulate gradually as time goes by. Typically, we notice that our overall transaction volume growth month-over-month in July, August, and September. The contribution of medium-to-low frequency shippers to GTV and order volume also increased gradually. This proves again that direct shippers' reliance on our platform grows over time, laying a solid foundation for us to further refine our user competition and create and optimize user ecosystem in the longer run.

The next question comes from Violet Yi from China Renaissance. Please go ahead.

Thanks management for taking my question. My first question is on the first. So the platform fulfilled GTV increased year-over-year in the third quarter, but the number of fulfilled orders declined on a quarter-over-quarter basis, which implies a year-over-year increase in average freight rate. What are the main reasons behind the fluctuation in freight rates? And my second question is how do you see the fulfilled GTV and orders trending going forward? Thank you.

Thanks for your question. The year-over-year increase in freight rates was primarily due to an increase in fuel prices in the past year. If we look at the composition of transportation costs for truckers, we see that fuel costs account for the majority at around 40% of the freight rate followed by highway toll fees. Also, over the last few quarters, our business has witnessed a supply-demand imbalance between shippers and truckers due to pandemic control measures, which also led to a spike in freight rates during certain periods. Compared with the number of fulfilled orders, our overall GTV along with the average freight rate will fluctuate more in the face of shifting external factors such as fuel prices, highway toll fees and pandemic resurgence. Because of this, we believe the volume of our fulfilled orders better reflects our overall operating capabilities, and going forward, we will encourage investors to focus more on this.

Our next question comes from Jiulu Li from CICC. Please go ahead.

Hey, thank you. Thanks for taking my question. Against the backdrop of a weak macro environment, do you see any impact on your overall shipment volume and what is the trend of this quarter in terms of the number of orders posted?

Thank you. Overall, order postings were basically flat on a year-over-year and quarter-over-quarter basis in the third quarter. We didn't see a material negative impact from the changes in the macro environment. Notably, other postings from building materials related to the real estate sector also remained stable year-over-year. Despite rapid growth in shipper MAU in the third quarter, overall order postings remain flat year-over-year, partially because our newly registered monthly active shippers are low- and medium-frequency shippers and their contribution to order volumes remain relatively small when they were first onboarded. Aside from that, we have implemented two operational strategies in the third quarter to boost shipping volume. First, for non-member shippers, we lowered the free postings from 10 postings per month to five postings per month, which promoted conversion of shippers into member users and improved the user experience. The second is for our existing member users. We fine-tuned our operating strategy, shifting our focus from shipment incentives last year to a stricter focus on fulfilment incentives this year. So on a monthly basis, our overall order postings accelerated in September, offsetting the impact of hot weather in July and August. In the long run, we believe that the volume of shipments will continue to climb as our user base expands.

The next question comes from Cherry Leung from Bernstein. Please go ahead.

Could you please provide an update on the progress of your transaction commissions in the third quarter? In terms of penetration, how far we add to our long-term goal and what we will do to increase the penetration rate in the future and also what is the current commission rate and what is our plan to raise the commission rate going forward? Thank you.

Thank you. The revenue from transaction commissions amounted to roughly RMB390 million in the third quarter, primarily driven by the year-over-year increase in transaction volume. At the same time, our broader product offerings also stimulated an increase in transaction commission revenues. As of the end of September, we had launched the commission program in 201 cities, where the commission penetration rate exceeded 50%. Since the end of last year, we have been rolling out a tiered commissioning strategy based on matching time. We developed this strategy mainly to cater to users' needs, having observed that users are only willing to pay for service when the platform generates enough value to make it worthwhile for them, through features like fast matching and high order quality. In addition, we have seen from historical transaction data that the probabilities of disputes between shippers and truckers is still relatively high. So our tracking data algorithm, including the use of fulfilment capability and dispute judgment, has played an important role. To that end, we are allocating more resources to developing such tools to bring more value to our users and enhance our platform's overall fulfilment efficiency. At the same time, we are also exploring new user acquisition initiatives and promoting more value-added services such as entrusted shipment and connecting more direct shippers to truckers, which we believe will gradually improve the user ecosystem for both shippers and truckers. We remain confident that the revenues from transaction commissions will continue to be the main driver for our platform's revenue growth and monetization improvement in the future.

Our next question comes from Brian Gong from Citi. Please go ahead.

Thank you management for taking my question. Congratulations on solid results. Management mentioned our efforts to improve user experience to support user growth and enhance engagement, can management elaborate a bit more on your progress on this improvement in the third quarter? Thank you.

In the third quarter, we continued to increase our focus on user experience. Each of our business divisions has established a dedicated user experience team to systematize business rules, optimize product functions and resolve user experience issues internally, which has once again improved the user experience as well as our reputation. As of the end of the third quarter, we have seen a significant decrease in user complaint rates across all of our business segments. Moving forward, we will keep striving to improve user experience with a particular focus on building a customer service Q&A database and standardizing our operating mechanism for handling customer service requests.

Our next question comes from Ivy Ji from Credit Suisse. Please go ahead.

Thanks, management for taking my question. I have a question on the OpEx spending. So in Q3, we see the sales and marketing increase year-over-year and just wanted to ask, what was our kind of focus area of investing and how should we think about the outlook for the sales and marketing spending and overall OpEx into the fourth quarter? Thank you.

Yes, our sales and marketing has been stemming from employee compensation, welfare expenses, and marketing-related costs. On a non-GAAP basis, our sales and marketing expenses increased year-over-year, primarily due to the increase in personnel costs as a result of increased sales headcount, while the quarter-over-quarter increase was attributable to higher marketing expenses for new user acquisition since the normalization of user registration at the end of June. Going forward, we expect sales and marketing expenses to continue to rise as we further extend our new businesses. However, as the scale of our platform revenues and operating leverage increase accordingly, sales and marketing expenses as a portion of revenue will gradually decline.

And that concludes the question-and-answer session. I would like to turn the conference back over to Mao Mao for any additional or closing comments.

Thank you for joining us today. If you have any further questions, please feel free to contact us at Full Truck Alliance directly, or TPG Investor Relations. Our contact information for IR in both China and the U.S. can be found in today's press release. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.