Full Truck Alliance Co. Ltd. Q3 FY2023 Earnings Call

Ladies and gentlemen, good day and welcome to Full Truck Alliance's Third Quarter 2023 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 US 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 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. Additionally, a webcast replay of this conference 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, sir.

Hello everyone. Thank you for joining us today for our third quarter earnings conference call for 2023. As we enter the second half of the year, we celebrate the 10th anniversary of the YMM app's launch. Over the past decade, we have experienced a digital transformation in China's road transportation industry. As a market leader, we've consistently enhanced our products and services through the transition to online platforms, digitalization, and the incorporation of intelligent technologies, earning the trust of both shippers and truckers. Starting from nothing, we now operate in over 300 cities, offer more than 100,000 shipping routes, and have established tens of millions of shipping and receiving locations with a diverse range of over 200 types of cargo. This has led to a strong national network effect and a competitive advantage. Our core focus remains on delivering abundant, speedy, quality, and cost-effective services, aiming to empower over 30 million small and medium-sized enterprises in China by building a comprehensive logistics platform. Now, I’d like to share updates from the third quarter. We have made significant progress in five key areas: user scale, product operations, trucker supply, platform ecosystem, and user experience. Firstly, in user scale, we achieved 2.13 million monthly active shippers, representing a 15% increase compared to last year, which resulted in a 27% rise in fulfilled orders. The growth of direct shippers has been particularly noteworthy, with order volume increasing by 32% year-over-year among 688 members and non-member shippers, making up 45% of the total order volume. In product operations, our entrusted shipment model has attracted new users by meeting their needs with better pricing algorithms and enhanced fulfillment services. We are also preparing to launch an enterprise version aimed at professional shippers. Regarding trucker supply, we have improved our tiered trucker rating system, allowing truckers to enhance their fulfillment capabilities and support, which has ultimately led to an increase in available truckers and wallet share. Our strategies for managing transportation capacity and optimizing matches have greatly improved fulfillment efficiency. For example, our pre-priced transactions allow truckers to respond directly to order listings without needing to negotiate prices, and the volume of these transactions is growing faster than overall order volume. In terms of our platform ecosystem, we have increased user engagement with our value-added services like insurance and credit solutions, as well as freight brokerage services, leading to higher loyalty from both shippers and truckers. Moreover, we are committed to enhancing user experience; this quarter, we upgraded our customer service center to offer 24/7 support, ensuring prompt responses to users. We have also streamlined the process for collecting user feedback, enabling us to provide efficient service that truly addresses the needs of shippers and truckers, thereby enhancing user satisfaction. Now, moving on to our financial highlights, we achieved another record quarter in both revenue and profit, supported by the expansion of our business. Our revenues grew by 25.2% year-over-year to RMB2.26 billion, and our non-GAAP adjusted net income reached RMB827 million, reflecting a 67.6% year-over-year increase, both exceeding market expectations. As we continue to grow our revenue, we also focus on optimizing our revenue mix and improving monetization efficiency to create greater value for our shareholders. Looking ahead to the fourth quarter, recent government policies favoring the private economy have increased the significance and support for the logistics sector, which is vital for the real economy. We remain optimistic about sustainable growth in order volume and revenue, aided by positive macro trends. Our commitment to technological innovation and user experience will remain strong as we strive to provide effective, intelligent, and convenient logistics solutions for our users, aiming to simplify logistics processes. We are dedicated to advancing the entire industry in collaboration with our partners to foster an open ecosystem that benefits everyone. Thank you all for your attention. Now, I will hand the call over to our CFO, Simon, who will provide updates on our business progress and financial results for the third quarter.

Thank you, Mr. Zhang, and thanks, everyone, for making time to join our earnings call today. I will start with our operational highlights for the third quarter of 2023 and then provide a brief overview of our financial results before the Q&A session. We delivered another record-setting quarter with many operational and financial improvements. Our fulfilled orders increased by 27% year-over-year during the third quarter. On a monthly basis, the average daily fulfilled orders from July to September showed a sustained upward trend, hitting historical highs almost each month. The main drivers of this growth were the ongoing expansion of user scale and dual-end users' increased engagement. Our ability to continuously deliver both topline growth and margin expansion in the past three years in a highly volatile macro environment demonstrates an irreversible trend of online digitalization of the road transportation industry in China. Our average fulfillment rate for the quarter reached 29%, an improvement of more than four percentage points year-over-year. Among them, the average quarterly fulfillment rate of both 688 member and non-member shippers rose to roughly 50%, respectively. With the order contribution from these two types of low and medium-frequency shippers continuing to grow, the overall fulfillment rate of our platform will further increase. Furthermore, we continue to manage and educate users on their order cancellation behavior. For example, as of the third quarter, the trucker's status can be identified based on data collected from trucker punch-ins and trajectories. When a shipper tries to cancel an order that was dispatched, a reminder window will pop up on the app, reducing the chance of the shipper canceling the order by mistake. At the same time, we emphasize the importance of online fulfillment for shippers to accumulate credit, providing reminders when they show the tendency to transact offline and gradually cultivate their fulfillment habits. Looking ahead, we will continue to mitigate malicious order cancellations and reinforce the consciousness and behavior of closed-loop transactions for dual-end users through a series of incentives and control policies. By user type, the order contribution from 688 member and non-member shippers has increased alongside the number of direct shippers, reaching 45% during the quarter. More importantly, the contribution of pre-priced orders, such as tap-and-go and entrusted shipment models, mainly used by direct shippers, has also improved, while the proportion of negotiated orders fell further this quarter. In addition, we have further streamlined the transaction process and improved the user experience. For example, for users of our entrusted shipment model, we have greatly improved their shipping and fulfillment experience by creating real-time order trajectory visuals, which in turn is driving the rapid order growth for that service segment. We believe that the order contribution from direct shippers will further rise as we continue to optimize the accessibility of our apps. Moving on to our users. Our average shipper MAUs reached another record high of 2.13 million, up 15% from the same period last year and 6.7% from the previous quarter. The increase mainly came from the continued growth of 688 member and non-member shippers, the vast majority of which are direct shippers. During the quarter, we continued to provide more user-friendly products and services based on our core value proposition of plentiful, fast, quality, and value for money, comprehensively tackling users' pain points and meeting various shippers' diverse freight needs to bolster our shipper penetration rate in the long-haul transportation market. In parallel, we are pleased to see that trucker activities remained high since the third quarter, with the number of active truckers fulfilling orders through FTA over the past 12 months climbing to 3.79 million and the trucker user base growing steadily quarter-over-quarter. On top of that, our 12-month rolling retention rate of shipper members and next-month retention of truckers who responded to orders remained stable quarter-over-quarter, demonstrating that we continue to boost user engagement and stickiness. Lastly, our online transaction service sustained strong growth momentum in the third quarter, with revenues amounting to RMB602.1 million, up 54.3% year-over-year, mainly due to solid growth in the number of fulfilled orders and the increase in commissions per order. Our commission model covered approximately 58% of fulfilled orders and generated an average commission per order of RMB24.3 during the quarter. Going forward, we will continue to optimize the commission rate and extend our commission model coverage while providing more value-added services to our users. Before going over to this quarter's financials, I will quickly review the progress of our share repurchase program. From August 23rd to November 17th, we repurchased approximately 3.3 million ADS shares totaling approximately US$23 million. Since we announced the program, we have repurchased a total of around 22.8 million ADS shares from the open market, with a total value of approximately US$147 million. Looking ahead, we will continue to reward our shareholders through buybacks. Now, I would like to provide a brief overview of our 2023 third quarter financial results. Our total net revenues in the third quarter were RMB2,263.9 million, representing an increase of 25.2% year-over-year. The increase in revenue was primarily attributable to an increase in revenues from freight matching services. Revenues from freight matching services, including service fees from freight brokerage models, membership fees from listing models, and commissions from online transaction services, were RMB1,904.4 million in the third quarter, representing an increase of 25.8% year-over-year, primarily due to an increase in revenues from freight brokerage service as well as continued growth in transaction commissions. Revenues from freight brokerage service in the third quarter were RMB1,070.2 million, up 18.4% year-over-year, primarily attributable to the continued growth in transaction volume as a result of strong user demand. Revenues from freight listing service in the third quarter were RMB232.1 million, up 5.6% year-over-year, primarily due to an increased number of total paying members. Revenues from transaction commissions amounted to RMB602.1 million in the third quarter, up 54.3% year-over-year, primarily driven by an increased order volume as well as a higher transaction commission per order. Revenues from value-added services in the third quarter were RMB359.5 million, up 22.1% year-over-year, mainly attributable to an increase in revenues from credit solutions and other value-added services. Our cost of revenues in the third quarter was RMB1,142.1 million, compared with RMB953 million in the same period last year. 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 RMB1,032.5 million, representing an increase of 19.1% year-over-year, primarily due to a continued increase in transaction activities involving our freight brokerage service. Our sales and marketing expenses in the third quarter were RMB290.8 million, compared with RMB232.9 million in the same period of 2022. The increase was primarily due to an increase in advertising and marketing expenses for user acquisitions. General and administrative expenses in the third quarter were RMB290.4 million, compared with RMB206.6 million in the same period last year. The increase was primarily due to higher share-based compensation expenses and the settlement of the US securities class action, which was disclosed in the Form 6-K filed on September 18th, 2023. R&D expenses in the third quarter were RMB237.7 million, compared with RMB226.6 million in the same period last year. The increase was primarily due to higher share-based compensation expenses. Our income from operations in the quarter was RMB247.1 million, an increase of 74.4% from RMB141.7 million in the same period last year. Net income in the third quarter was RMB618.4 million, an increase of 56.4% from RMB395.5 million in the same period last year. Under non-GAAP measures, our adjusted operating income in the third quarter was RMB458.5 million, an increase of 88.8% from RMB242.8 million in the same period last year. Our adjusted net income in the third quarter was RMB826.6 million, an increase of 67.6% from RMB493 million in the same period last year. Basic and diluted net income per ADS were RMB0.58 in the third quarter, compared with basic and diluted net income per ADS of RMB0.37 in the same period last year. Non-GAAP adjusted basic and diluted net income per ADS was RMB0.78 in the third quarter, compared with RMB0.46 in the same period last year. As of September 30, 2023, the Company had cash and cash equivalents, restricted cash, short-term investments, long-term time deposits, and wealth management products of RMB27.4 billion in total, compared with RMB26.3 billion as of December 31st, 2022. In the third quarter this year, net cash provided by operating activities was RMB717.1 million. For our business outlook for the coming quarter, in the first quarter of 2023, we expect our total net revenues to be between RMB2.27 billion and RMB2.32 billion, representing a year-over-year growth rate of approximately 18.2% to 20.6%. This forecast reflects the Company's current and preliminary views on the market and operational conditions, which are subject to change and cannot be predicted with reasonable accuracy as of the date hereof. That concludes our prepared remarks. We would now like to open the call to Q&A. Operator, please go ahead.

We will now begin the question-and-answer session. The first question comes from Ronald Keung with Goldman Sachs. Please go ahead.

Thank you, Hui Zhang and Simon. In the third quarter, we've seen a healthy increase in fulfilled orders, up 27% year-on-year. What were the key drivers behind this growth in fulfilled orders? And what are your expectations for the trend in the fourth quarter? Thank you.

Thank you, Ronald. In the third quarter, we witnessed sustained growth in order volumes within the full truckload long-haul sector. And this growth can be primarily attributable to two key drivers. First, our growing shipper base and our further optimized product features have led to an increase in usage by our existing users. This trend stems from the nationwide shift towards more efficient matching and platform-based solutions gradually replacing traditional offline models, and users naturally choose to use platforms that offer competitive advantages. Additionally, our unique business model and exceptional network effects have also significantly contributed to our order growth. We selected a sample group of shippers who have been active since 2021, and we found that the volume of fulfilled orders for this group of users increased by about 15% year-over-year in the third quarter. This illustrates our platform's resilience and stickiness as well as our strong network effect and extremely high entry barriers we have established in the long-haul growth trade industry. Nationwide coverage and the robust defensive mechanism of our platform create an irreplaceable advantage in the market. Looking forward to the fourth quarter, we anticipate that in line with the continued expansion of our user base, the steady improvement in our user engagement and stickiness, coupled with the arrival of the peak freight season, the volume of fulfilled orders will continue to grow.

Thank you, Simon.

The next question comes from Eddy Wang with Morgan Stanley. Please go ahead.

Thank you, management for taking my question. I'm inquiring about the shipper monthly active users. In the third quarter, the average shipper monthly active users reached 2.13 million, indicating a 15% increase year-over-year and a 6.7% increase quarter-over-quarter. What were the main factors contributing to this growth? Additionally, how would you characterize the user structure? What is the anticipated growth rate for the fourth quarter? Thank you.

Thank you, Eddy. In the third quarter, we witnessed continued rapid growth in the average shipper monthly active user base. This growth can be attributed to two primary factors. First, our effective user acquisition strategy played a very important role. Through a combination of online promotions and offline on-the-ground field marketing, we have expanded the platform's brand exposure and recognition, effectively attracting more users to join the platform. For online, we primarily employed methods such as app store promotions, sponsored content, and information feeds as well as search engine marketing to reach out to potential users. Offline, our field marketing teams and vehicle stickers have played a substantial role in acquiring new users, especially direct shippers. Secondly, we have continually refined our product features and services, including the introduction of simplified shipping processes and optimization in our less-than-truckload services. These measures have significantly improved the conversion rate of new users and increased engagement and loyalty of existing users, making them more inclined to use our platform for shipping. From a user structure perspective, there has been a sustained increase in the proportion of direct shippers. The average shipper miles of direct shippers have experienced nearly 17% year-over-year growth. As we look ahead to the fourth quarter, we will continue to closely monitor changes in user activities and user structure changes. We will strive to execute proactive user acquisition strategies and explore new business and product models to attract more high-quality direct shippers.

Thank you, Simon.

The next question comes from Charlie Chen with China Renaissance. Please go ahead.

In the third quarter, revenue from the freight brokerage service increased by 18.4% compared to the same period last year, demonstrating robust growth. What is the current competitive landscape of the freight brokerage industry, and what is the Full Truck Alliance's position within it? Thank you.

Thank you, Charlie. In recent years, the freight industry has faced a series of challenges, particularly the impact of the pandemic. This led to the closure of several small freight brokerage platforms due to insufficient cash flows, resulting in a gradual reduction of players in the market. The major players in the industry are now predominantly medium to large-sized national freight platforms. However, these large platforms often provide relatively singular product offerings, which users who are highly price sensitive and expect low brand loyalty. Furthermore, such platforms typically have relatively weak freight matching capabilities and suffer from a lack of available orders, making it difficult to attract a large number of truckers. As a result, they primarily rely on invoicing or other services to generate profit. In contrast, FTA leverages its leading position in the industry and the nationwide network to establish itself as a prominent brand, enhance freight matching efficiency, and lower user acquisition costs while maintaining relatively high gross margins compared to competitors. Currently, in our freight brokerage service, nearly 50% of orders are completed through platform-assisted freight matching, meaning that shippers who use our freight brokerage service have genuine needs to get a match for truckers. Through cross-selling services such as closed-loop commission and value-added services, FTA has created a diverse and comprehensive product mix and monetization model. This comprehensive advantage has allowed FTA to stand out in a highly competitive market and maintain higher service fees, solidifying its market position. The company's capabilities and business model enable it to offer high-quality freight services to meet user demand and generate sustainable profit.

Thank you, Simon.

The next question comes from Brian Gong with Citi. Please go ahead.

I will translate myself. In the third quarter, membership fee revenue increased by 5.6% year-on-year, which was slower than the other segments. Could management please provide an update on the growth of shipper members in the third quarter? And what operational strategies and measures will be taken in the future to drive the growth of membership fee revenue? Thank you.

Thank you, Brian. Since 2018, we have been monetizing the freight yellow page service through the introduction of a membership system. Members enjoy more privileges than non-paying users, including the ability to post orders. Currently, there are two membership tiers. The first-tier members pay an annual fee of RMB688, allowing them to post up to 100 orders per year, primarily serving mid-to-low frequency direct shippers. The second-tier membership is designed for high-frequency shippers who pay an annual fee of RMB1,688, enabling them to post up to 1,688 orders per year. The platform occasionally introduces membership benefits to ensure that members receive additional order posting rights. From an operational synergy perspective for high-frequency shippers, FTA has achieved a high level of user penetration compared to the traditional model where shippers had to pay at least RMB10,000 for logistics park rental fees. FTA has gradually replaced logistics parks, and the cost per shipment is reduced to less than $1 per order. Membership fees are significantly cheaper compared to traditional logistics park booth rental fees for this user segment. FTA mainly monetizes through cross-selling, value-added services, and commissions, increasing the revenue scale of our other business. For mid-to-low frequency direct shippers, new shipper users entering the platform are mostly direct shippers. Hence, the number of 688 members has been steadily growing over the past few quarters. Looking at the market size of millions of small and medium-sized business owners in China, there's still considerable growth potential. However, we have observed that the number of orders corresponding to 688 members exceeds the usage needs of some low-frequency users. Based on this, our operation team is actively devising product strategies and attempting to develop packages that are more suitable for low-frequency shippers. Additionally, while the ARPU for direct shipper members appears relatively low, their freight rates are higher, and they exhibit better fulfillment rates, offering greater monetization potential through commissions and cross-selling value-added services. In the long term, direct shippers are not only the main driving force for future membership fee growth but also present opportunities for growth in other business lines.

Thank you.

The next question comes from Jiulu Li with CICC. Please go ahead.

Thank you for taking my questions. I observed that the penetration rate of the commission model in the third quarter was about 58%, which is a slight decrease from 59% in the previous quarter. Could you explain the main reasons for this? Thank you.

Thank you. That's a good question. In the past quarter, revenues from the commission model reached around RMB600 million, increasing by over 54% year-over-year. This strong growth was primarily due to the overall increase in order volume and continued improvement in commission rates. Operationally, we have primarily focused on scaling the platform as a whole with no additional city extension or significant adjustment to our commission strategy. Nevertheless, we have conducted stress tests with higher commission rates in certain cities to prepare for a potential future increase in commission rates and penetration rates. The penetration rate of a particular transaction type is defined as the number of commissioned orders for the transaction divided by the number of total order volume. At the time of our IPO back in 2021, our short-haul transaction commission business was very small. Hence, it was classified under the value-added services line of our revenue. The transaction commission revenue line does not include short-haul contributions. So when calculating the penetration rate, the numerator excludes fulfilled short-haul orders, while the denominator includes both long-haul and short-haul orders. In the past quarter, the penetration rate was approximately 58%, showing a slight decrease compared to the previous quarter, primarily due to the fast increase of short-haul fulfilled orders under our Shengsheng brand. The commission penetration rate for long-haul orders remained stable quarter-over-quarter. Looking ahead, our focus will remain on increasing the penetration rate of our commission model and adjusting commission rates. Both are critical metrics for our core business. We will achieve this through operational optimization and market expansion to ensure sustained rapid growth.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

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

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