Earnings Call Transcript - YMM Q2 2021

Operator, Operator

Ladies and gentlemen, good day and welcome to Full Truck Alliance's Second Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference call 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 these forward-looking statements 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'll now turn the call over to our Founder, Chairman, and CEO, Mr. Zhang. Please go ahead, sir.

Peter Hui Zhang, Founder, Chairman and CEO

Hello everyone, and thank you for participating in the Full Truck Alliance inaugural earnings conference call today on June 22, 2021. FTA successfully listed on the New York Stock Exchange, marking the start of our new journey as a public company. On behalf of FTA's employees and myself, I would like to extend our sincerest gratitude and appreciation to all our long-term and new shareholders for their unwavering support. I believe many of you are joining us today not only to hear about our second-quarter earnings results and achievements but also to learn more about our response to the regulatory developments that occurred in early July. We wanted to assure you that we have attached great importance to the cybersecurity review initiated by the Cybersecurity Review Office (CRO) of the Cyberspace Administration of China and have cooperated fully with the CRO during the review process. In addition, we also conducted a comprehensive self-examination of any potential cybersecurity risks, and are committed to continuously improving our cybersecurity system and technological capabilities. New user registration for our Yunmanman and Huochebang apps remains suspended in China, but the apps are operating normally for existing users. In line with our commitments to safeguard national security and public interest, we will spare no effort to fulfill our corporate and social responsibilities and actively promote the implementation of relevant cybersecurity policies. Now, turning to our second-quarter earnings results. As we present our results for the first time as a public company, we are pleased to report a solid second-quarter performance positioning us for a promising year. Our total net revenues doubled from the same period last year to RMB1.12 billion. We continue to prove our platform's ability to generate profit on a non-GAAP basis, as our adjusted net income reached RMB99.5 million compared with a net loss of RMB39.14 million in the same quarter last year. These results were driven by an 87.9% year-over-year increase in fulfilled orders, which came in at 36.0 million during the quarter, coupled with continued improvements in user engagement, where average shipper monthly active users (MAUs) grew by 40.3% to 1.53 million, bringing our gross transaction value (GTV) to RMB74.0 billion, 57.8% higher than what we had in the same period of 2020. The quick growth and consistent strength across our business attest to our ability to successfully manage our rapid expansion as we lay a solid foundation for long-term profitability. With that overview, I would like to update you on the scale of our platform, user behavior, new initiatives, and certain trends we are seeing in our core business and how they fit into our long-term strategy. Starting with our platform, our cutting-edge logistics infrastructure and innovative proprietary technology are becoming increasingly advanced, as proven by our fulfillment rates in the second quarter reaching approximately 30% compared with 17% in the same period last year. These remarkable improvements demonstrate our ability to quickly and seamlessly analyze and process data on both the shippers' and truckers' ends, our deep understanding of supply and demand, and our steadily improving matching efficiency. During the second quarter, we witnessed an increasing proportion of direct shippers on our platform, which enhances our ability to improve freight matching efficiency and provide high-quality solutions, among other things. Going forward, we expect direct shippers to contribute more significantly to our increasing traffic as we benefit from the powerful network effects amid continued growth for our platform. As previously mentioned, the average shipper MAUs reached 1.53 million during the second quarter, increasing 40.3% year-over-year. We also experienced sustained growth in the number of truckers fulfilling shipping orders and truckers actively negotiating or bidding on orders in the second quarter. Shippers and truckers have diverse, complex, and often highly non-standard needs, and we cater to that by providing comprehensive logistics and value-added services that contribute to better service quality and higher transaction rates, helping us achieve a strong record of shipper retention. For example, the 12-month retention for our paid members remains stable at about 85%. We believe our long-term success depends on our ability to continuously improve service quality and address users' pain points, capabilities that also form the cornerstone for fulfilling our corporate and social responsibilities. We're committed to protecting the interests of all our staff and users and are continuously refining features and functions on our platform to improve and promote transparency, trust, and efficiency across the industry. Now, let's take a deep dive into our business. We generate revenue primarily from freight matching services, which include freight listing, freight brokerage, transaction commissions, and various value-added services. First of all, our online transaction service is a testament to our diverse and evolving monetization capabilities. Following excellent customer acceptance in 10 cities, we have extended this commission model to 60 cities as of June 2021. During the second quarter, we collected commissions worth RMB160.9 million, up 88.1% from the previous quarter. Commission to GTV as a percentage of total GTV generated on our platform continues to increase from the previous quarter. Truckers' retention rates in the 60 cities remain stable at approximately 9%. The stable volume growth in commission areas and high trucker retention both demonstrate the sustainability of our closed-loop commission business model and indicate great promise for future expansion. Moving onto our freight listing service, membership fees from shippers remain one of the most stable revenue streams. In the second quarter, our refined marketing strategy and optimized operations yielded positive results as our membership fee revenue grew in tandem with the number of users on the platform. We believe our ongoing efforts to increase gross transaction value, improve matching efficiency, and enhance user experience will ultimately boost membership fees. Our freight brokerage service remains one of our core service offerings. Management aims to provide end-to-end freight matching services with a higher level of service quality assurance to shippers and address significant pain points for many shippers when contracting with truckers, making shippers more dependent on the use of the service. Skill and transaction volume remain our primary focus and core strategy going forward, and we believe this will spur more shippers to repeatedly use our platform to address their shipping needs. Lastly, to increase stickiness and engagement on our platform, we provide a comprehensive range of value-added services to shippers and truckers, catering to diverse and complex needs, including less-than-truckload, intracity, and special goods shipments in addition to full truckload services, as well as various value-added services. As of June 2021, about 2.67 million users have used at least one of our value-added services. We expect our value-added services to continue to improve user engagement and stickiness, which in turn will attract more industry participants to cooperate with us, forming a virtuous cycle that drives constant growth. We have a clear path for advancement and expansion while also proactively pursuing strategic investments, acquisitions, and collaborations both domestically and overseas. This will expand our service offerings to further consolidate our leading market position, improve our core platform capabilities, attract new ecosystem participants, and manage our business's explosive growth. Now I'd like to review some of our recent activities and upcoming initiatives for 2021 and beyond. In the second quarter, we completed our investment in Plus AI, a developer of automated driving systems for trucks, along with global investors raising a total of $350 million. We began our investments in Plus AI in June 2018 as part of our strategy of holding equity interests in complementary businesses and entered a strategic partnership with them to develop autonomous truck driving technology. We believe autonomous trucks could potentially transform the logistics industry and result in significant savings in labor and fuel costs. Speaking of fuel costs, the volatility of fuel prices presents a material challenge for the road transportation industry. In the second quarter, Sinopec Group Capital completed its investment in FTA. We look forward to exploring the possibilities of more in-depth cooperation with Sinopec as we seek to improve overall operational efficiency in the logistics industry while bringing greater value to more truckers and logistics companies. With respect to the road transportation ecosystem, we are also exploring software-as-a-service solutions for logistics to enhance our problem-solving capabilities while strengthening ties with shippers and truckers from different sectors. In addition, in the second quarter, we built an open platform and started collaborating with leading logistics companies, product merchandising platforms, and other industry practitioners to better serve the industry with integrated services including switching options, logistics management, and other value-added services. Furthermore, we continue to expand our interest in less-than-truckload shipping services during the quarter and we plan to test our model in several cities before launching nationwide. Our solid and steady growth would not be possible without our innovative technology and the unique data generated by our day-to-day operations, including rich and structured data on routine matching, pricing, and order fulfillment. By analyzing and leveraging this valuable data, we have developed several proprietary technologies, which we apply to freight matching, pricing, and truck navigation. Such data and technologies enable us to increase fulfillment rates and freight matching efficiency. Our R&D team continued to grow in the second quarter, and our talent structure will further optimize with the number of core R&D experts more than doubling year-over-year. Going forward, we will continue to recruit and retain top talent in artificial intelligence, engineering, logistics, and other disciplines to build a team that can support our long-term growth. In summary, we had another strong quarter, and we are well positioned to proceed along this growth trajectory. Building on this positive momentum, we plan to grow our logistics network, expand the scale of our platform, and widen our service offerings in the coming quarters to further drive user engagement and enhance our winning capabilities. Moreover, we will make additional investments in infrastructure, technology innovation, and data analysis to improve matching efficiency and accelerate the digital transformation. In closing, I would like to reiterate that China's logistics industry has enormous potential waiting to be unleashed. Our user-centric value proposition, cutting-edge digital transaction platform and ecosystem, and strong R&D capabilities uniquely position FTA to play a leading role in the country's evolving logistics industry. Looking ahead, with a mission to make logistics better and smarter, we remain committed to shaping the future of the industry with technology. We are confident that our strategic initiatives will further support our top-line extension and yield considerable returns in the long run as we continue to build value for our company, investors, and our growing communities of users. With that, I will now turn the call over to our CFO, Simon Cai, to discuss our financial performance.

Simon Chong Cai, Chief Financial Officer

Thank you. I'd like to provide a brief overview of our second-quarter 2021 financial results. Before I get started, I'd like to clarify that all financial numbers presented today are in RMB amounts and all percentage changes referred to year-over-year changes unless otherwise noted. As Mr. Zhang stated, our total net revenues, mainly consisting of revenues from freight matching services and value-added services, were RMB1,118.8 million in the second quarter of 2021, representing an increase of 100.9% from RMB556.9 million a year ago, primarily attributable to an increase in revenues from freight matching services. Revenues from freight matching services in the second quarter of 2021 were RMB937.6 million, representing an increase of 109.8% or RMB446.9 million compared to the same period last year. As part of our freight matching services, we generate service fees from freight brokerage models, membership fees from the listing model, and commissions from online transaction services. Revenues from freight brokerage services in the second quarter of this year were RMB601.3 million, increased by 88.6% from RMB318.9 million in the same period last year, primarily due to a significant increase in transaction activities amid a substantial recovery in both transportation in China post the COVID pandemic, but was partially offset by a decrease in our average fee rate to attract more users to use our service. Revenues from our freight listing service in the second quarter of 2021 were RMB175.4 million, up 37% from RMB128 million a year ago, primarily due to an increase in total paying members and increased shipper demand for our services as our business continues to expand. We started monetizing online transaction services by collecting commissions from truckers on selected types of shipping orders in three cities in August last year. In the second quarter of this year, we collected commissions in a total of 50 cities, and our total transaction commission amounted to RMB160.9 million in the second quarter, an increase of 88.1% from RMB85.5 million in the first quarter of this year. As we continue to grow our platform, we expect to achieve higher monetization efficiency while bringing more value to both our truckers and shippers. Revenues from value-added services in the second quarter of 2021 were RMB181.2 million, an increase of 64.8% from RMB110 million in the same period last year, mainly attributable to higher revenues from credit solutions and other value-added services. Cost of revenues in the second quarter of this year was RMB627 million, compared with RMB378.2 million in the same period of 2020. The increase was primarily attributable to an increase in VAT-related tax surcharges and other tax costs, net of tax refunds from government authorities, which was RMB572.4 million, an increase of 73.7% from RMB329.5 million in the same period of 2020, primarily due to an increase in transaction activities, evolving our freight brokerage service. As a percentage of total revenues, the cost of revenues for the second quarter of 2020 decreased to 56% from 67.9% in the same period last year. Sales and marketing expenses in the second quarter of this year were RMB236.8 million compared with RMB71.5 million in the same period last year. The increase was primarily due to higher advertising and marketing expenses to promote new initiatives, and an increase in salary and benefits expenses due to increased headcount in sales and marketing personnel, as well as increased share-based compensation expenses. General and administrative expenses in the second quarter of this year were RMB2.123 billion compared with RMB347.1 million in the same period last year. The increase was primarily due to an increase in share-based compensation expenses. R&D expenses in the second quarter of this year were RMB165.1 million compared with RMB87.9 million in the same period last year. The increase was primarily due to an increase in salary and benefits expenses driven by higher headcount in R&D personnel, as well as an increase in share-based compensation. Our operational leverage steadily improves in the second quarter of 2021. Excluding share-based compensation and expenses resulting from share repurchase, adjusted operating expenses, which included sales and marketing expenses, general and administrative expenses, and research and development expenses, accounted for 41.7% of total revenue in the quarter compared to 45.9% in the same period last year. The improving operating leverage was driven by economies of scale of our platform. Many expenses, including labor costs, are closer to fixed expenses in nature and do not increase proportionately with the growth of the platform's GTV. Loss from operations in the second quarter of 2021 was RMB2,040.4 million compared to RMB345 million in the same period last year. The net loss in the second quarter of this year was RMB1,958.2 million compared with RMB297.3 million in the same period last year. We achieved profitability under the non-GAAP measures during the second quarter of 2021. Our non-GAAP adjusted operating income in the second quarter of 2021 was RMB20.1 million compared with a non-GAAP adjusted operating loss of RMB84.1 million in the same period last year. Non-GAAP adjusted net income was RMB99.5 million compared with a non-GAAP adjusted net loss of RMB39.1 million in the same period last year. We believe that further improvement in our profitability proves the operational capabilities of our platform. Basic and diluted net loss per ADS were RMB7.34 compared with RMB1.72 in the same period last year; adjusted basic diluted net loss per ADS were RMB0.49 compared with RMB0.23 in the same period last year. As of June 30, 2021, the company had cash and cash equivalents, restricted cash, and short-term investments of RMB26.9 billion compared with RMB18.9 billion as of December of last year. For the second quarter of 2021, net cash used in operating activities was RMB48.8 million. Looking at our business outlook for the third quarter of 2021, we expect our total net revenues to be between RMB1.04 billion to RMB1.15 billion, representing a year-over-year growth rate of approximately 42% to 56.2%. This forecast reflects our current and preliminary view on the market and operational conditions and the impact of ongoing cybersecurity reviews and new COVID outbreaks in certain areas of China, which are subject to change. We will fully cooperate with the cybersecurity review and facilitate its process while we are closely monitoring these developments, and we will provide more updates when possible. Looking ahead, we remain committed to continuous improvement of our service offerings to better meet the diverse needs of truckers and shippers, as we continue to grow our logistics network and develop a smarter logistics infrastructure across the value chain. We're confident we will further enhance our monetization capability, deliver sustainable growth, and generate value for our shareholders in the long run. That concludes our prepared remarks. We would now like to open the call to Q&A. Operator, please go ahead.

Operator, Operator

Ladies and gentlemen, we will now begin the question-and-answer session. Our first question today comes from Ronald Keung from Goldman Sachs. Please go ahead with your question.

Ronald Keung, Analyst

Thank you, management. I have two questions. First is, could you share what is the latest progress in your closed-loop model and how it advanced in the second quarter of 2021? What is the fulfillment rate? And how do we plan to further improve its fulfillment rate in the future? And my second question is, given the recent extreme weather, including floods, typhoons, and the recent outbreak of COVID, particularly in Nanjing, has that affected the business volumes and operations of the business and our third-quarter revenue guidance? Thank you.

Peter Hui Zhang, Founder, Chairman and CEO

In the second quarter, our closed-loop model was further enhanced, and our fulfillment rate continued to increase, reaching approximately 30%. This remarkable improvement was mainly attributable to our deep understanding of both supply and demand and the steady improvements in our matching efficiencies. In the future, we will continue to generate more structured data through our advanced big data technology, improve the standardization of order entry and requirements of data analysis, and launch a recommendation-based model to constantly enhance demand and efficiency while improving user experience. We expect the overall rate on our platform to continue increasing over the next few years. Since late July, the typhoons and floods have impacted our road transportation in some areas, including Hunan, Changzhou, and parts of Shanghai. The extreme weather has affected our business in those areas in the third quarter, but given the short duration of the extreme conditions, our operations in the affected areas have gradually recovered after the disaster. We believe that extreme weather will not significantly impact our overall business and financial performance in the third quarter. With regard to the pandemic impact, in the third quarter, based on our current assessments, areas like Changzhou and Hunan province have been impacted due to the ongoing pandemic. We will continue to monitor the impact on our business. Our employees from the Nanjing office have been working from home and have been able to function efficiently with the support of our internal communication tools. Overall, operations are running smoothly at the moment, and all business departments are progressing as expected with no disruption to daily operations. We are committed to prioritizing employee health and welfare, and we encourage employees to work from home and return to the office once the pandemic is over.

Ronald Keung, Analyst

Understood. Thank you, management. Take care.

Operator, Operator

Our next question comes from Wang from Morgan Stanley. Please go ahead with your question.

Unidentified Analyst, Analyst

I have two questions. First, what's the impact of the ongoing cybersecurity review on our user growth? What measures have we adopted to improve user retention and increase the engagement level of existing users when we are not able to bring in new users? And the second question is, do you see any impact on the transaction flow and trucker retention in the pilot cities since the commission model was put in place in the second quarter? What is the rollout plan for your commission model in the second half of this year, and has any regulatory environment impacted your take rate? What is the outlook for the take rate for the second half of this year? Thank you.

Peter Hui Zhang, Founder, Chairman and CEO

Regarding the first question on the cybersecurity review, yes, the suspension of new user registration for our Yunmanman and Huochebang apps in China has impacted our business. The extent of the impact depends on how long this situation persists. Although there will be no direct impacts on the existing users of FTA's mobile app, we will continue to monitor and evaluate the impact on our overall GTV and revenue in the second half of the year while the reviews are in progress. Given the uncertainty around the timeline, we are adopting operational initiatives to boost the activity of existing users. These initiatives include activating and stimulating certain users through targeted marketing and enhancing the user experience of registered users by streamlining the delivery processes. We believe the impact of the cybersecurity review on our business growth is temporary, and our overall business strategy will not be affected in the long run. In terms of transaction commissions, during the second quarter, we collected commissions of RMB168.9 million in 60 cities, and commission GTV as a percentage of total GTV continues to increase from the prior quarter. Key operating indicators show our business is growing steadily in the 60 cities, with truckers' retention rates around 9%. This signals truckers' willingness to pay a commission, reflecting the recognition of our value for both shippers and truckers, providing confidence for our nationwide rollout in the future. Compared to intermediary fees charged by middlemen, we believe our commission is too low. We are committed to not infringing on truckers' best interests and providing them with a series of additional benefits through the closed-loop transaction. We believe this added value provided by our platform is recognized by the truckers. FTA has been paying close attention to the relevant regulatory guidelines. We believe our current commission rate is in line with these requirements, and with the continuous enhancement of the value of our platform and services, we still see room for improvement in our take rate. We will continue to communicate with regulators, conduct self-examinations periodically, and embrace the changing regulatory environment.

Unidentified Analyst, Analyst

Operator, Operator

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

Charlie Chen, Analyst

I have two questions here, and thanks for your time to take my questions. The first is regarding the new initiatives that the company has taken, specifically the intracity and LTL business. How is the progress in the second quarter? What is the investment going forward? Will there be more investments? And also, how do you position this new business in your service portfolio? And my second question is, how are the recent trends in the competitive landscape in the full truckload business, especially since the second quarter? Thank you very much.

Peter Hui Zhang, Founder, Chairman and CEO

Regarding the first question on our new initiative, progress in the intracity and LTL business during the second quarter was in line with our expectations; both are still in the trial period across more areas. We will only consider extending coverage after carefully testing the economic model. We believe we will continue our investments in these initiatives over the next two to three years. Our aim in the intracity and LTL fields is to build a one-stop logistics service platform to meet the diversified needs of our existing shippers. In terms of competitive advantage, compared to LTL and intracity shipments, we believe that FTL shipments demand higher requirements for automating trucker management, monitoring the fulfillment process, and offering value-added services. We believe we have accumulated rich experience in this area and have entered these new business sectors with a significant competitive edge. Importantly, the LTL and intracity segments are highly correlated with FTL, which helps save additional user acquisition costs. Therefore, from the perspective of client coverage and operational efficiency, we believe this is a natural extension of our existing FTL business. Regarding the competitive landscape since the second quarter, we haven't seen any significant changes yet. We are a leading worldwide digital freight platform and a pioneer in the FTL market. In terms of GTV, we are the largest digital freight platform in the world, and our business maintained strong momentum in the second quarter. From the very beginning of our freight listing service, we have deepened our roots in digitization. Currently, our platform covers more than 70% of heavy-duty and medium-duty truckers in China. The road transportation market in China is larger than 6 trillion in 2020, while the penetration rate of digital freight platforms was only 4%. Our FTL shipments rely on a nationwide network and involve complex logistics. Therefore, it is challenging to replicate and forms a natural barrier of entry for us. Our platform has a clear competitive edge, and we do not foresee any substantial substitutes for our offerings in the market from potential competitors. Currently, our real competition arises from traditional offline truckers. Looking ahead, we will continue to enhance our platform capability to bring more value to both shippers and truckers while gradually replacing the traditional offline trucker model and increasing online penetration. The overall market for logistics transformation is massive, and the current penetration remains very low. Thus, we don't think the emergence of potential competitors will change the existing industry landscape. With the gradual improvement of our closed-loop model, we are confident that our online transaction fulfillment rates will further increase, and the network effect of our platform will become more evident. Through our ongoing efforts, we believe we can further increase the digital freight platform's penetration rate in the future.

Charlie Chen, Analyst

Thank you very much.

Operator, Operator

Our next question comes from Xin Yang from CICC. Please go ahead with your question.

Xin Yang, Analyst

My question is about the cybersecurity review. What exactly will this cybersecurity review cover? How secure is the company's data security protection system? How long will the cybersecurity review take? What actions should be taken or rectified to successfully complete the review? Thank you.

Simon Chong Cai, Chief Financial Officer

The main purpose of the review is to prevent national data security risks and safeguard national security and public interest. We have established a comprehensive data and network security protection system regarding structure, technology, and internal processes. Based on our preliminary self-assessment, we have not found any situations or issues that would lead to a direct removal of our forming apps. We will also cooperate with regulatory authorities to review and maintain close communication with them to minimize the impact on the company's business. Given that there is no precedent for this review, the actual review period and any necessary rectifications will depend on the regulator's timetable. We will fully cooperate with regulators to complete the review as soon as possible. In the future, we will continue to improve our internal operations systems and safeguard the security of our data and network. Meanwhile, we are committed to continually improving our cybersecurity systems and technological capabilities under the guidance of the authorities.

Xin Yang, Analyst

Thank you.

Simon Chong Cai, Chief Financial Officer

Thank you.

Operator, Operator

And ladies and gentlemen, with that we will conclude today's question-and-answer session. I'd like to turn the conference call back over to Mao Mao for any closing remarks.

Mao Mao, Head of Investor Relations

Thank you again 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. Have a good day.

Operator, Operator

Ladies and gentlemen, that does conclude today's conference call. We thank you for joining. You may now disconnect your lines.