momo.com Inc. (8454) Earnings Call Transcript

Good afternoon, ladies and gentlemen. Welcome to momo.com Conference call. Our Chairperson today is Terrisa. Terrisa, please begin your conference, and I'll be standing by for the Q&A. Thank you.

Thanks, operator. Thank you for joining momo's third quarter earnings conference call. I'm Terrisa from momo Investor Relations. Besides me, we have President, Jeff; and CFO, Gina, on the call as well. Today, we will update you our third quarter financial performance and major business operations. And then it will be followed by a Q&A session. We have uploaded the latest presentation and operating report on our website for your reference. Before we continue, I would like to remind you that the following discussion, including responses to your questions, may contain forward-looking statements. These statements are based on the current expectations and assumptions that are subject to risks and uncertainties and may not be realized in the future. We do not undertake any duty to update any forward-looking statements. With that, I'll turn the call over to Jeff.

Thanks, Terrisa. Thanks for joining us today. To start, I will give you some highlights of our third quarter operations. First, for this quarter, we continue our existing strategy, which is growth as the priority. However, facing a high base of last year and macro uncertainties and reopening of this year, it puts pressures on our margin. Second, in order to increase our data on logistics and pave the way for long-term competitive advantages, we have continued expanding the logistic infrastructure, including both warehouse spaces and our own delivery bridge. Third, on the cost side, among the rising labor costs, higher marketing expenses to stimulate the demand and overhanging inflation concerns, we have been carefully managing our cost structure to maintain a good long-term competitiveness. Finally, we are facing increased macro uncertainties with rising interest rates, ongoing inflation headwinds post reopening and a tough comparisons. With that, we are still pleased with our third quarter performance as we continue the trend of growing, and most importantly, scale up faster than the overall EC market in Taiwan than most of our competitors. With that context, you may turn to the presentation, Page 4. We achieved the third highest quarterly revenue of TWD 23.56 billion in quarter 3. Among them, B2C revenue grew 14.3% year-on-year, higher than Taiwan online retail market growth rate of 5.4% year-on-year. B2C take rate was recorded as the second highest at 13.15 percentage, just behind Q3 of last year, driven by a better product mix and increasing bargaining power with our suppliers. We have been adding new customers and the number of active users have also increased year-on-year. So despite the high base of last year, the customer acquisition momentum hasn't stopped. Compared to third quarter last year, we have added 12 warehouses, which has increased 20% of our total warehouse spaces. Now we move to Page 5. Of our customers, the average MAU among the number of users who visit momo in past months stood at 12.13 million higher than previous years. The number of active users, the average orders per customer and average ticket size, driven by strong product selections and competitive price and good services, all have shown healthy growth. Of our products, 3C, home appliance, kitchenware, growth rate has slowed down, mainly affected by macro uncertainties and the previous year's high base. However, healthcare products, fashion and beauty, sport and leisure continued to show strong revenue growth. The growth was primarily driven by larger customer base, repeated purchase and the new product introduced. While we have grown to be the largest B2C player in Taiwan, due to the wide coverage of product categories, we still have a lot of area with plenty of room to grow. For example, home care, fashion, apparel, even larger [ home clients ], et cetera. In order to increase our product selections quickly, particularly in the long-tail part, we are incorporating 1P+3P hybrid model. We have built a platform to support this model. We have started with apparel and we're gradually extending it to other product categories. The new hybrid model allows mid-small brands to leverage momo's traffic, payment, logistic infrastructure to grow their businesses. For momo, we can rapidly expand SKUs, tap into in-season retail and attract new customers. Last, I want to comment on our TV operation. The TV shopping market is on a downward trend for years. However, we are still able to manage it as a profitable business. With EC revenue rising fast, TV has been less significant in momo's operations. So [ instead ], leveraging TV shopping's program and the product presentation capabilities, we have turned a part of the existing TV resources to live streaming to complement our EC business, which have gained traction in the viewership. Now on logistics. The construction of Southern Distribution Center is on track and it should be ready by fourth quarter of next year. In the meantime, we have -- we are preparing for the Central Distribution Center, which we'll start constructing in the middle of next year. Let's turn to Page 7. There is information on the page showing that we are actively engaging in a series of ESG-related efforts and have been recognized by several organization's awards, such as ranked among Top 5% in Taiwan Stock Exchange corporate governance evaluation for 6 consecutive years. In closing, we are approaching the end of COVID-19 pandemic although there are still macro uncertainties and geopolitical tension. We believe the EC market will keep growing. Taiwan EC penetration rate will follow the other developed countries, and the EC market potential remains huge. Momo is now one of the strongest player on the market with other players, albeit different kind of challenges and difficulties. Therefore, with that, we are in the best one position to grab this growth opportunity. Now I will turn the call over to Terrisa to go through the financials in more detail.

Thanks, Jeff. Jeff has discussed some of our financial highlights. So I will focus my comments on the other relevant metrics from Page 8. Group revenue achieved the third highest in company history despite facing tough comparisons post-COVID reopening and increased macro uncertainties. We continue the trend of growing significantly faster than overall EC in Taiwan. Moving to Page 8 and 9. During the quarter, B2C increased 14.3% Y-o-Y to TWD 22.5 billion, much faster than Taiwan online retail sales growth of 5%. And again, we have further widening our revenue gap with [ #3 ]. That was primarily driven by our strengthening leadership in competitive moat. B2C take rate in third quarter was recorded the second highest at 13.15% on the back of a higher margin non-3C product categories and increasing bargaining power with suppliers as we scaled. In Page 10 through 12, third quarter group EBITDA was TWD 1.16 billion, decreased 3.2% on a Y-o-Y basis due to: first, higher logistic costs. including additional 12 warehouses rents and higher labor costs to reflect more headcount and rising cost of new hires in light of the national shortage of labor; second, a larger scale of marketing campaigns to increase active users and to drive user spend and engagements across more offerings. According to the latest government data, this quarter, momo's market share in EC and mail-order industry has increased to 33% versus last year's 31%. That said, higher marketing expenses was not due to increasing competitive intensity, but for reinvestment in market share gain. With that, higher B2C mix also attribute to the group EBITDA margin at 4.9%, lower than 5.7% in third quarter 2021. Net income to parent increased 8.3% Y-o-Y to TWD 756 million, and basic EPS achieved TWD 3.46, which also can attribute to the consolidated operating profit of TWD 878 million, together with non-op income of TWD 62 million, which we recognized one-time disposable investment gain during the quarter. In terms of the cash and the cash equivalents and the cash flow in Page 13 and 14, at the end of the third quarter, we had TWD 5 billion net cash. Operating cash flow for the first 9 months was around TWD 2 billion versus TWD 3.5 billion during the same period last year. The shortfall was given that we paid out higher corporate income tax for last year, while we have paid out TWD 2.4 billion for cash CapEx, including TWD 1.3 billion for Central Distribution's land and TWD 0.7 billion for construction expenses for Southern Distribution Center. Finally, moving to Page 15. We keep reinvestment to our core business for incremental growth. That's primarily for the purpose of gaining market share instead of just keeping pace with competition. Durable competitive moat allowed us to achieve high return on capital over a long time. The key to invest in this reinvestment moat lie in the conviction that our growth runway ahead is long. Momo's nationwide logistics infrastructure is a key differentiating factor versus other EC peers in Taiwan. Our asset-light model means, beside the 3 big distribution centers built by ourselves, our satellite warehouses and most of the main warehouse is rented and first booked under the write-off use assets. On near-term expansion, the number of satellite warehouses will reach 35 by year-end. That was mainly due to the stricter health and safety requirements by local government, which lead to more time for preparation before official launch. Operator, now we are ready to open the lines for questions. Meanwhile, investors are also welcome to send your question via a chat box on the webcast page.

[Operator Instructions] The first question comes from Chung Hsu with Credit Suisse.

I have 2 questions. My first question is on revenue or sales growth. Jeff, you mentioned that the macro environment is getting tougher with consumer spending kind of softened or slowed down. Can you give us some color about your upcoming Double 11 sales campaign -- marketing campaign, level of promotions? And is there any target sales growth for this Double 11? We know it's always a very important event for momo. And this year, given that your sales growth for the first 9 months is around 16%, 17% against a high base last year, just wondering if you're still targeting a full year sales growth of closer to 20% for the full year. And if you can have any updates for your growth target for 2023, given the increasing macro uncertainties in next year. Now my second question is on margin. I think there we see a third quarter margin down a good bit from a year ago. And that is due to both a moderating sales growth and also still a very [ attractive ] marketing campaign and expense increase. Should we think about an OPM margin level that we see in Q3 as a more normal level into 2023, meaning with the base now reset lower in Q3, is this a margin that we -- [indiscernible] a level of that is more normal into 2023 as well?

Okay. Thank you for your questions. Regarding the Double 11 campaign, certainly it's one of the most important campaign for us and I think for most of the e-commerce players in Taiwan. So as usual, we have prepared our product, we have arranged a serious marketing campaign and we will [ show out ] all the different incentives just to push customers to do the shopping. So I think it's -- that effort can compare with previous year and probably even with higher of the strengths. In terms of the revenue forecast for this Double 11, really have to really go back to the whole year because there are really a lot of things we didn't expect, which has happened and mainly on the macro environment. Although those factors haven't really been eliminated or be alleviated, but we still think with good promotion, we'll still be able to push customers into that shopping mode. So if you look at our revenue, Y-o-Y growth rate, you will find actually, mainly driven by the high base of last year. So we think it bottomed in May and June. And starting from [ later ], we just gradually increasing the Y-o-Y growth rate from May, was 6.12 percentage Y-o-Y. And now in September, we have reached 15.26% Y-o-Y. So the growth rate has continually increasing. We intend to keep that momentum. However, it's pretty difficult to give you a number what is actually growth rate or revenue amount we are expecting, although we have an internal target, but I don't think that's right to say in public, but which implies we still try our best to focus on our strategy, making the sales growth as the first priority. And then in the meantime, [ capital manager ] because we put in. So for the whole year, of course, you have already mentioned, the 20% now seems a little bit challenging. But as I said before, we still will try our best to make the fourth quarter as successful as before. And on the margin side, because of the high base and because of the macro environment, the customers tend to be more cost conscious. So we're happy to really put more of the resource to stimulate the spending, which you can see on the operating expenses side and the increase mainly caused by the marketing expenses and through the issuing of mobile coins. And on the cost side, since second half of last year, we have increased our speed of expanding our warehouse footprint. So through almost a year, so you can see we have added 12 warehouses and warehouse spaces increased more than [ 20 ] percentage. That means the cost. However, although our revenue so far below our warehouse expansion in terms of the percentage rate, we think that is going to be made up by if we continue to grow our revenue. So -- and because we have gone through this quicker expansion mode and soon when we enter to next year or even later this quarter, we are getting into -- we will switch from the expansion mode into the optimization mode because when we add so many facility in our logistic infrastructure, we really need to find the efficiencies. And through that effort, probably, we'll continue to increase our revenue. We think that pressure on the cost and the expense side will be easing with time. And so far, we haven't really done much -- we haven't completed our forecast and the budget for 2023. So really can't comment too much on that part.

Jeff, if I may just follow up with one quick question on your sales growth. Is it fair to say that your gross target -- aggregate revenue growth is a function -- is somewhat tied to the overall EC industry growth, meaning when the industry or e-commerce in Taiwan, it was growing at 8%, you were growing at 2 to 3x of EC growth in Taiwan, you're growing at 25% revenue. Now it's 5% in the EC growth, you're growing at mid-high teens. Is that a more appropriate way of thinking about it? Or you have a very fixed like 20% growth for 2022 or 2023?

Of course, we are constrained by the big market. If the market growth slow, we certainly will get affected. However, we always outperform the market and our peers. So we think, in the longer term, the trend will continue growing. And this year, because of those uncertainties, because of the high base over last year, and because of the reopening, which happened so faster than we expected, so that all affected the overall EC market growth rate in Taiwan. Just for example, because people are more cost conscious. And it happened -- the reopening happened before we expected. So people may reallocate their spending more towards outdoor, leisure, travel, restaurants. However, those are just like what we get benefited last year through COVID. Those kind of a bubble just will go away and will go back to that trajectory, which EC penetration will continue to grow. And that's the reason why we still believe that we have done the right thing and continue to seek for high sales growth and make our infrastructure ready to support our future growth.

[Operator Instructions] Next question is [ Casey with Allianz Global Investor ].

So my first question is on your labor cost. So can you share with us how much did the direct labor costs increase in third quarter on a Y-o-Y basis? And if you can break down by headcount and [ ROI rate ], that will be helpful.

Right. Headcount, if I remember correctly, by the end of quarter 3, we had around almost 500 new headcount year-on-year basis. Most of the headcount goes to the warehouses and the delivery fleet and probably only 20% goes into the headquarter operations. And mainly we've seen the labor cost increase on the warehouse side. And it's not easy to find enough labor, not to mention, of course, the salary you have to offer is higher than last year. I don't have the percentage with me. I think it's in single-digit range. However, because we have added so many warehouses, and although those warehouses haven't really provided 100% of the capacities, but you haven't really staffed the people first and they need to be trained. So that's the reason why I just stated in previous question, after this expansion mode, we are going to get into the optimization mode, which we will show out as efficiencies. So the next year, this part of the cost increase will be easing with the increase of the revenue.

So what I want to ask is the major cost hike is from warehouse rental rather than direct labor?

I think both are important factors, the rental and labor costs are the major factors. And the delivery cost, of course, is increased, but that is going through the revenue growth. So that's okay. It's not really a unique cost increase. So yes, you are right.

Okay. Sure. So if it's for warehouse then, I guess, going forward, when your revenue or as you uptrend, and you'll probably deliver some leverage there. But my sort of concern is, if the labor -- especially the [ ROI rate ] is more sticky, and those salaries are more fixed going forward then, do you think you can still -- when your revenue scale, you can still overcome the deleverage here in the [ third ] quarter?

I think in the longer term, I think the salary will go with the inflation rate. Fortunately, Taiwan inflation rate so far is okay compared to the worldwide level. But so far, no one can tell this inflation super cycle going to be end. But if that do happen, that is the overall economy [indiscernible], you probably -- the salary increase will trigger the product price increase and in the end may not affect that much to our margin in -- if you stretch the time lines. However, so far, I don't think that will be the case, and let's hope that would not happen.

Got it. And my second question is regarding customer stickiness. So if we look at retention and buying frequency, those metrics actually are holding up quite well even during the past quarter after COVID, sort of a tough time for you. So do you think it's -- because you probably benefit from more buying frequency during COVID, meaning maybe people are buying more groceries more frequently? And after that, starting right now, do you think buying frequency or stickiness will revert to sort of pre-COVID level?

I think it's -- our third quarter -- average order per active customer only increased 2%. So that probably tells the reason we just described. So when we -- I think because the past 2 years, all those numbers are affected by COVID. However, we are thinking -- I don't know whether that's true, only time will tell, if we add up those 3 years and divide it by 3 or add out this year and the previous is divided by 2, maybe that give us a more normalized growth, which means if this -- without COVID and that's going to be the grocery we're looking at. But so far, all the indicators so far are still very healthy, and we use all the different tools to attract more customers, and we're expanding our product selections to allow them to buy more, even, say, if they buy something more than the normal day during the COVID, then we just open a new line of the product, so that we move that purchasing behavior to normal. So that's the positive side of being an EC player because we just don't have limitation of the product shelf. We can always add the product to the shelf as long as we can provide a competitive pricing services. And we always had a view, if you look at the developed countries, all the EC penetration is more than 20%. So which means if any product category has EC accounting for less than 20% of market share, which means that you still have room to grow. So we -- based on that belief, we examine all the product category and decide where we should put our resources on and to drive out more revenue.

And a final question, if I may. Can you share with us more on that hybrid -- that 1P+3P in apparel? I mean, what's the growth there? And what kind of contribution to GMV you have right now? And any plans or target you can reach certain level GMV contribution in the next 1 to 2 years?

Well, so far, the numbers are not that significant in terms of absolute amount. However, the growth rate is large, but because it is the low base. And so far, we only tried out one product category, which is apparel. And which -- however, the significant part of that is we've proven that it's a working model, that's going to work and then that's going to solve our problems for the long-tail products. And we think we -- it's time for us to move to other categories. However, if we don't have a tool, we will not run that category efficiently. So 3P seems to be the answer. And that category can open new opportunities and many of those item with a lot of SKUs and may be lower unit price, and or it's just very tightly correlated with the fashion trend, so you have to really change the SKUs very frequently. Without that new class of capability and we call 3P model, we will just not be able to run that. So now we've proven we can run the apparel on that, and now we have to try to add other products to that platform gradually, and that's the trend we have started and are going to continue through the next year.

And any target you can share with us or how many categories you want to add?

So far, I don't have anything to share with you yet. However, for things like hand tools, electronic components, handset covers all these kinds of things between -- belong to those long-tail parts and can fit into that model.