Earnings Call Transcript - YMM Q2 2023

Operator, Operator

Ladies and gentlemen, good day, and welcome to Full Truck Alliance's Second 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.

Mao Mao, Head of Investor Relations

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 are Mr. Hui Zhang, our Founder, Chairman and Chief Executive Officer, and Mr. Simon Cai, our Chief Financial Officer. 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 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.

Hui Zhang, Founder, Chairman and CEO

Hello everyone. Thank you for joining us today on our second quarter 2023 earnings conference call. In the second quarter, we continued to accelerate the industry's digital and intelligent evolution while maintaining our user-centric, value-oriented vision to strengthen our businesses and increase our market share. These efforts have significantly reinforced our market-leading position and enabled us to achieve important advancements. During the quarter, our strong focus on the long-haul full truckload business allowed us to further improve this segment's market penetration. By centering on our core value proposition of better, faster, and more economical shipping, we helped enterprises reduce logistic costs and enhance efficiency, which strengthened our users' competitive advantage in logistics. Additionally, we made significant strides in expanding our user base through continuous product upgrades and effective online and offline operations, driving our revenue growth to new heights. These accomplishments stem from our commitment to advancing the industry's digitalization, our distinct business model, and our team’s exceptional execution capabilities. As a result of our dedication, we achieved several new milestones in the second quarter. Regarding our user scale, both our professional shipper users and direct shippers experienced remarkable growth, with the average shipper monthly active users reaching a historic high during the quarter, increasing by 30.5% year-over-year to 2 million. The rise in high-quality direct shippers enhanced our overall fulfillment rate. We also introduced a range of new product features, including a more efficient shipping process, standardized entrusted shipment services, a comprehensive truckers' rating system, and improved order recommendation strategies for truckers. These developments greatly enhanced the shippers' experience, especially for direct shippers, and increased truckers' commitment, resulting in 40.2 million fulfilled orders, a 44.5% year-over-year increase. In addition to our impressive operational highlights, we saw strong growth in both our revenue and profit, which rose by 23.5% and 170.8% year-over-year, respectively, generating revenue of RMB2,062 million and non-GAAP adjusted net income of RMB722.7 million, once again exceeding market expectations. However, considering the millions of SMEs in China and the trillion-RMB logistics sector, our online penetration rate remains relatively low in terms of user and order scale. Moving forward, as we continue to gain market share in full truckload, we expect to enjoy further benefits by consistently improving our monetization and operational efficiencies through digital and intelligent advancements. Looking to the second half of the year, we firmly believe that by leveraging our strategic position as the leading one-stop freight platform powered by innovative technologies, we are well-positioned to continue delivering value for our users and the industry as a whole. With our users at the center of FTA's growth, we are dedicated to our user-focused value proposition, continually optimizing our services across all aspects while enhancing user satisfaction with superior services and products that meet users' needs and preferences. In line with this dedication, we are increasing our investment in technology to advance FTA's transition to a more digital platform, enabling us to efficiently manage our teams and achieve greater operational efficiency. Going forward, we are actively responding to changing market dynamics and accelerating growth across our platform through innovative solutions. We will also seek potential growth opportunities that align with FTA's one-stop business model and explore more effective methods to acquire and retain users. As we further broaden our user base and revenue, we aim to create additional value for our stakeholders. Thank you, everyone. Now, I will pass the call over to our CFO, Simon, who will discuss our operational progress and financial results for the quarter.

Simon Cai, Chief Financial Officer

Thank you, Mr. Zhang, and thank you to everyone for joining us today. I will first go over our highlights for the second quarter of 2023 followed by a brief overview of our operational and financial results before opening the call to questions. For the past quarter, we delivered an impressive year-over-year growth in fulfilled orders of 44.5%. Despite challenges from high temperatures and extreme weather in June, there was no clear sign of a slowdown in order volume. Average daily order volume during the quarter surged to a historical high, benefiting from improving dual-end user scale and activity, as well as enhanced matching efficiency. In addition, the recovery from the pandemic, combined with a series of new structural changes in the industry over the past two years, contributed to a larger number of users meeting their shipping needs through online platforms, which is faster, safer, and more convenient. Building on this momentum, we continued to expand our market share in the quarter. With the industry continuing to normalize, our average fulfillment rate grew by roughly 10 percentage points year-over-year and 2 percentage points quarter-over-quarter in the second quarter to 30%. It is worth mentioning that the average fulfillment rate of our 688 members exceeded 50% this quarter. This continued improvement in matching efficiency was driven by both sustained growth in dual-end user scale and the ongoing optimization of shipper composition. We also successfully improved our products by strategically integrating technologies and using algorithms along with strengthening our efficiency and accuracy of freight matchings. Looking at the transaction types, with rising demand from direct shippers, the proportion of non-negotiation-based transactions, such as tap-and-go and entrusted shipment models, continued to increase, reflecting our platform's pricing power and users' enhanced reliance. In regard to our users, we have made remarkable strides in broadening our user base with our average shipper MAUs exceeding 2 million for the first time, increasing by 30.5% year-over-year. The increase was mainly from 688 members and non-member shippers, which were up 25% and 40%, respectively, the majority of which are direct shippers. The continued growth of shipper MAUs year-to-date is mainly driven by the increasing stickiness and activity of existing users, as well as effective new user acquisition strategies. During the second quarter, as the supply of truckers increased, our average trucker MAUs responding to orders increased quarter-over-quarter, with 3.78 million active truckers fulfilling orders through FTA over the past 12 months. This shows that more truckers are choosing our platform for finding cargo, rather than relying on offline modes of trading. Meanwhile, our 12-month rolling retention rate of shipper members and next-month retention of truckers who responded to orders remained stable quarter-over-quarter, once again confirming our platform's high user stickiness. Going forward, we will continue to focus on the livelihoods of truckers and shippers, as well as local industry developments across different regions nationwide for further market penetration by verticals. We will also explore and capitalize on our platform's benefits, in addition to strengthening our connection with the real economy and SMEs. By refining our user composition and increasing the fulfillment rate and user retention, we are successfully building a thriving platform ecosystem that generates long-term value. As Mr. Zhang just commented, we have built our foundation by creating value for shippers and truckers. Since our inception, we have been committed to cracking down on maliciously low-priced shipments and maintaining a fair and normal transaction order in the market. Recently, the platform has launched a targeted product that utilizes big data and algorithmic technology to predict, identify, analyze, and automatically judge low-priced offers. This has significantly improved truckers' efficiency in finding cargo and enabled shippers to dispatch their goods faster. In addition to addressing control and governance of malicious low prices and other behaviors, we have also carried out a series of measures on the product functions, and are actively guiding the freight rate. For example, when the shipper's bid is low, the user page will automatically remind the shipper to increase the price before placing an order. It will also send a reminder of the price increase in case there is no transaction within a certain period of time. In order to help some of the new shippers offer reasonable prices, the platform will also display around 90 days of similar sources of historical transaction prices for the shippers' reference. Although, currently, there is an oversupply of truckers, we still strive to find a dynamic balance between truckers and shippers through the combination of providing price range control and pricing guidance. This approach is gradually addressing the industry's pain point of low freight rates. Before going over the quarter's financial results, I will quickly review the progress of our transaction commission model. We are delighted to report revenue from online transaction services surged 59.6% to RMB555.2 million. This is driven by our solid increase in the number of fulfilled orders and commission per transaction. With our user base and order volume continuing to grow, we expanded our commission model's coverage. In the second quarter, around 59% of the transactions fulfilled through us were closed under our commission model, as compared with roughly 53% a year ago, generating an average commission per transaction of RMB23.4. As we further optimize revenue streams, transaction commission will remain a major growth driver of our revenue. Now, I would like to provide a brief overview of our 2023 second quarter financial results. Our total net revenues in the second quarter were RMB2.062 billion, representing an increase of 23.5% 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 RMB1,731.2 million in the second quarter, representing an increase of 22.8% year-over-year, primarily due to an increase in revenues from freight brokerage services as well as continued growth in transaction commissions. Revenue from freight brokerage services in the second quarter was RMB948.9 million, up 11.6% year-over-year, primarily attributable to continued growth in freight volume as a result of expanded user coverage. Revenues from freight listing services in the second quarter were RMB227.1 million, up 7.3% year-over-year, primarily due to an increase in total paying members. Revenues from transaction commissions amounted to RMB555.2 million in the second quarter, up 59.6% year-over-year, primarily driven by an increase in order volume as well as an improvement in the take rate. Revenues from value-added services in the second quarter were RMB330.8 million, up 27% year-over-year, mainly attributable to an increase in revenues from credit solutions and other value-added services. Cost of revenues in the second quarter was RMB975.3 million, compared with RMB925.9 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 RMB879.3 million, representing an increase of 4% year-over-year, primarily due to a continued increase in transaction activities involving our freight brokerage service. Sales and marketing expenses in the second quarter were RMB281.8 million, compared with RMB196.2 million in the same period last year. The increase was primarily due to an increase in advertising and marketing expenses for user acquisitions. General and administrative expenses in the second quarter were RMB201.7 million, compared with RMB344.8 million in the same period last year. The decrease was primarily due to lower share-based compensation expenses. R&D expenses in the second quarter were RMB223.7 million, compared with RMB216.4 million in the same period last year. The increase was primarily due to higher salary and benefits expenses. Our income from operations in the second quarter was RMB333.8 million, compared with a loss of RMB46.4 million in the same period last year. Net income in the second quarter was RMB609 million, compared with RMB12.7 million in the same period last year. Under non-GAAP measures, our adjusted operating income in the second quarter was RMB450.7 million, an increase of 113.4% from RMB211.3 million in the same period last year. Our adjusted net income in the second quarter was RMB722.7 million, an increase of 170.8% from RMB266.9 million in the same period last year. Basic and diluted net income per ADS were RMB0.57 in the second quarter, compared with basic and diluted net income per ADS of RMB0.01 in the same period of 2022. Our non-GAAP adjusted basic and diluted net income per ADS were RMB0.68 in the second quarter, compared with RMB0.25 in the same period last year. As of June 30, the company had cash and cash equivalents, restricted cash, short-term investments and long-term investments of RMB27.4 billion in total, compared with RMB26.3 billion as of December 31st last year. In the second quarter of 2023, net cash provided by operating activities was RMB707.7 million. For our business outlook for the third quarter this year, we expect our total net revenue to be between RMB2.16 billion and RMB2.2 billion, representing a year-over-year growth rate of approximately 19.2% to 21.6%. This forecast reflects our 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. Lastly, I would like to provide a brief update on our share repurchase progress. From May 22nd to August 22nd, we have repurchased approximately 13.8 million ADS shares, amounting to approximately US$87 million. Since the announcement of our repurchase program, we have repurchased a total of around 19.4 million ADS shares from the open market, with a total value of approximately US$124 million. In the future, we will continue to utilize prudent repurchase methods to reward our shareholders. That concludes our prepared remarks. We would now like to open the call to Q&A.

Operator, Operator

Thank you. Today's first question comes from Ronald Keung with Goldman Sachs. Please go ahead.

Ronald Keung, Analyst

Thank you, management. I want to ask about the strong fulfillment order growth of 44.5%, which has been much faster than the overall freight market. Could you share the reasons for this? Additionally, how should we expect order growth to trend into the third quarter? Thank you.

Simon Cai, Chief Financial Officer

Thank you, Ronald. As you know, we're a leading digital freight platform. We continue to gain market share in the full truckload market since the beginning of the year, driving significant growth in our freight volume. Excluding the low base effect from last year's lockdown in Eastern China and the impact of the Chinese New Year in the first quarter, the main reasons for the substantial year-over-year and quarter-over-quarter growth in order volume in the second quarter are as follows: First, enhancing our transportation supply was crucial in driving growth. In addition to lifting last year's travel restrictions, our operations, marketing, and product teams worked extensively on various operational activities. We refined the rules in the trucker rating system and introduced incentives to improve engagement and fulfillment rates for truckers. These efforts ensured transportation capacity and quality, leading to a continuous increase in order volume. The second point is the expansion of our user base. Our average shipper monthly active users exceeded 2 million for the first time, marking a significant milestone for us. This achievement was driven by two key strategies: firstly, enhancing user acquisition through targeted promotional campaigns to boost brand awareness, which helped us gain traction with new users, especially high-quality direct shippers, resulting in increased order volume and expanded market share. Secondly, we focused on improving product experience by refining operations and providing customized services centered on speed, quality, and cost-effectiveness, further enhancing shippers' recognition and dependence on our platform. These initiatives led to increased frequency and activity among shippers of various types, reaching new levels compared to the previous quarter. Looking ahead to the coming quarter, we maintain an optimistic outlook for growth in order volume, despite potential impacts from extreme weather conditions. We expect that any effects will be limited in June in terms of duration, and the provinces affected in August contribute relatively less to our overall order volume. Thus, we are confident that through ongoing enhancements in operations and services, we will continue to improve our market share and sustain our position as a market leader.

Ronald Keung, Analyst

Thank you, Simon.

Operator, Operator

Thank you. And our next question comes from Eddy Wang with Morgan Stanley. Please go ahead.

Eddy Wang, Analyst

Thank you management for taking my question. In the second quarter, the fulfillment rate has exceeded 30% for the first time with significant year-over-year and quarter-over-quarter growth. What are the main driving factors behind this growth? And how do you expect the trend in fulfillment to continue in the future? Thank you.

Simon Cai, Chief Financial Officer

Thank you, Eddy. The improvement in the fulfillment rate is mainly due to the enhancement of our transportation capacity. We have significantly reduced the shortage of truckers as the pandemic is behind us, leading to a complete recovery in matching efficiency. To build on this momentum, we've implemented various operational strategies, including a trucker rating system introduced in the first quarter to boost engagement and retention of high-quality truckers, which has consequently raised the overall fulfillment rate. In the second quarter, the number of daily active truckers looking to take orders increased at a high teens rate year-over-year and surpassed 1 million, providing the platform with substantial quality carrier capacity. Additionally, the improvement in the fulfillment rate also stems from ongoing optimization of our shipper composition. In the past quarter, we attracted a significant number of high-quality direct shippers to our platform. Among approximately 2 million shipper monthly active users, around 1.7 million are low and medium frequency members and non-member shippers. The average fulfillment rate for these shippers exceeded 50% in the second quarter, with many being direct shippers who inherently exhibit higher fulfillment rates, thus contributing to the overall improvement. Looking ahead, we expect a gradual increase in the fulfillment rate, primarily driven by the growth of direct shippers. While we may face challenges from extreme weather, such as high temperatures and heavy rain in the third quarter, we will continue optimizing our operational strategies, enhancing our transportation capacity management, and providing incentives and support to high-quality truckers to maintain our efficient and high-quality supply. Furthermore, we will remain focused on improving user-oriented products and services to enhance user satisfaction and engagement.

Eddy Wang, Analyst

Thank you.

Operator, Operator

Thank you. And our next question today comes from Charlie Chen at China Renaissance. Please go ahead.

Charlie Chen, Analyst

Can you provide an update on the progress of shipper membership in the second quarter, which has shown strong growth? What are the main factors contributing to this growth? Additionally, how do we anticipate the growth of member users and membership fee revenue in the future? Thank you.

Simon Cai, Chief Financial Officer

Thank you, Charlie. Since our new user registration only resumed last year, we have been consistently attracting more shipper users, particularly those direct shippers to join our platform. Through a combination of online branding efforts, multichannel promotions and offline campaigns, we have successfully converted a portion of these accumulated new users into new shipper members. Simultaneously, our existing shipper members showed high retention rates and stickiness, with 12-month retention rates surpassing 80% this year. For us, the primary advantage of the shipper membership mechanism lies in enhancing user stickiness and engagement, which in turn attracts more truckers and fuels healthy growth in both user members and order volumes. Monetization through membership fees comes as a secondary benefit. The majority of our new shipper users are direct clients, characterized by their high engagement, low frequency and higher service expectations compared to professional shippers. As a result, our membership conversion strategy focused on optimizing user experience and providing value-added services that appeal to direct clients, such as priority matching, expedited shipping and discounts of freight insurance to incentivize new shipper users to become members. In the future, we will continue to refine our user acquisition and membership conversion strategies. We believe that China's extensive community of small- and medium-sized enterprises will contribute to our potential user pool and thus further increasing the number of shipper members. From a monetization standpoint, there's still room for improvement in membership conversion rates. Taking into account the impact of new user subsidies, we anticipate a single-digit year-over-year increase in membership fee revenue for this year.

Operator, Operator

Thank you. Our next question today comes from Brian Gong at Citigroup. Please go ahead.

Brian Gong, Analyst

I will translate it myself. I have a very good question on our margin. Our gross margin for the second quarter improved significantly, increasing to 53% from 45% a year ago and also from 50% in the first quarter this year. Could you please elaborate more on the main drivers behind the GP margin improvement? Thank you.

Simon Cai, Chief Financial Officer

Thank you, Brian. On a year-over-year basis, the improvement in our gross margin primarily stems from the ongoing optimization of our revenue structure. Notably, the contribution from commission-based and value-added services to total revenue continues to rise, and these two segments tend to have a much higher gross margin compared to that of the freight brokerage business, driving the improvement in the company's overall gross margin. In the second quarter, after excluding the impact of the freight brokerage business, the approximate gross margin increased to 85.6% compared with 84.4% in the same period last year. On a quarter-over-quarter basis, the change in gross margin is mainly impacted by the timing difference in tax rebates due to the and due to variations in the processing time of tax procedures and different tax rebate policies in various regions. This factor could lead to short-term fluctuations in the gross margin. However, it is important to clarify that the timing difference in tax rebate does not affect the company's overall profitability. It simply causes slight variations in the gross margin within a certain timeframe.

Brian Gong, Analyst

Thank you. That's very helpful.

Operator, Operator

Thank you. And our next question comes from Jiulu Li with CICC. Please go ahead.

Jiulu Li, Analyst

Thank you for taking my question. I would like to ask about the recent announcement from several freight platform companies regarding the reduction of maximum commission fees or membership fees for businesses. What is your opinion on the potential impact of this announcement? Thank you.

Simon Cai, Chief Financial Officer

Thank you. Throughout our whole operational history, we have maintained a very prudent approach and attitude towards commission rates. Our current commission rate is still low and far from reaching any limits. The recent regulatory guidelines issued by authorities like Ministry of Transportation can be seen as more of a positive development for our platform instead of suppressing commission fees. These regulations are intended to encourage platforms to adopt a more transparent and reasonable practice in their commission structures. We welcome these regulatory measures and view them as a positive step towards providing a stable and sustainable operating environment, enabling us to operate with greater confidence in the future. In regard to our business, the recent adjustments to the maximum commission fee has not had a negative impact on the platform. For instance, the upper limit of commission for our entrusted shipment model has been lowered by roughly 10% from the original RMB199 per order, yet it still remains significantly higher than the actual average commission per order we charge at the moment. In the future, we will introduce various types of products and value-added services for shippers, thereby diversifying our revenue streams. We believe that by optimizing fee composition and expanding service offerings, the platform economy will embrace more opportunities as well as creating more room for growth. Additionally, our ecosystem and strategic positioning in the industry provide us with inherent competitive advantages. We'll continue to strengthen the development of our ecosystem, introduce innovative services and solutions to bring greater value to our users, and this approach will further drive the development and advancement of the freight transportation industry as a whole.

Operator, Operator

Thank you. And ladies and gentlemen, that concludes the question-and-answer session. I'd like to turn the conference back over to Mao Mao for any closing remarks.

Mao Mao, Head of Investor Relations

Thank you, operator, and thank you, everyone, 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 U.S. can be found in today's press release. Have a great day.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines, and have a wonderful day.