Yunji Inc. (NASDAQ:YJ) Q1 2019 Results Earnings Conference Call June 4, 2019 7:30 AM ET
Shanglue Xiao - Chairman and Chief Executive Officer
Chen Chen - Chief Financial Officer
Conference Call Participants
Eddie Wong - Morgan Stanley
Monica Chang - Credit Suisse
Good morning and good evening ladies and gentlemen. Thank you and welcome to Yunji’s First Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. We will be hosting a question and answer session after management's prepared remarks.
With us today are Mr. Shanglue Xiao, Chairman and Chief Executive Officer, Mr. Chen Chen, Chief Financial Officer and Miss Gay Liu [ph] Investor Relations Director of the Company.
I would now like to hand the conference over to our first speaker today, Miss Gay Liu [ph], IRD of Yunji. Participants, please go ahead Ma’am.
Unidentified Company Representative
Hello, everyone, welcome to our first quarter 2019 earnings call. Before we start, please note that this call contains forward-looking statements. These forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest documents filed with U.S. SEC.
Any forward-looking statement that we make on this call, are based on assumptions as of today, and we do not undertake any obligation to update these statements, except if required under applicable laws.
These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors that are not under the company’s control which may cause actual results, performance or achievement of the company to be materially different from the results, performance or expectations implied by these forward-looking statements.
All forward-looking statements [Indiscernible] entirely by this cautionary statement, risk factors and details of the company’s filing with the SEC. Yunji undertakes no duty to revise or update any forward-looking statements for select events or to commensurate after the date of this conference call.
On today's call, I would speak on behalf of our Chairman and CEO, Shanglue Xiao.
Hello everyone, and thank you for joining our first earnings call as a public company. After our successful listing on the NASDAQ, we are truly grateful for the public attention and investor endorsement we have garnered for our achievement today. We are confident that Yunji can leverage its strong growth to further pursue our mission to make a much simpler and people's lives better.
As we continue a journey of [Indiscernible] and post move [ph] commerce network and cumulating collaborative community of more members, better value and more productive connections, we counter pass our excitement towards Yunji’s growth potential.
We started 2019 with strong first quarter results as we achieved success in three areas; first, extended our membership base by launching a new membership model. Second, increase our GMV’s through a better merchandising mix and the big data analysis, and third, optimize our supply chain network.
First, we launched a new membership model; as a result, we were able to expand our membership base substantially. Previously, a user had to purchase a membership package in order to become a member, to enjoy member benefits. Currently, we are expanding our membership base by allowing individuals that meet certain requirements to become members without purchasing membership package.
Under this model user’s recommended by existing members who have accumulated purchase of more than RMB598 within three months automatically upgrade to members. On the current new membership model, the barriers entry for users to become members is lowered significantly. More importantly, users are enticed to makes repeat purchase to attend their member benefit, thus paving the way to becoming active and lobbying members on our platform.
In addition to growing our membership base, we will also be able to increase our member engagement and social sharing through innovative gamification, improved product duration, optimized product price and enhance user appearance. With a growth of traffic and user activities on our platform, key opinion leaders such as the service managers were able to promote more products and facilitate more transaction, thus growing personal income for themselves, increasing social engagements, both on our platform at the same time.
As we explore new initiatives, in group [ph] buying and new features in social sharing, and as we introduce a more unique merchandise mix with greater membership value, we are optimistic that those key opinion leaders will be able to attain a steady and increasing stream of income from our platform.
Secondly, through big data analysis and the better merchandising mix, we were able to increase our GMV by 93.7% in the first quarter. We continuously analyze a vast quantity of high quality data to assess member behavior and preference. In addition, we gathered real time user feedback to enhance our merchandise mix.
For example, during this process, we discovered that fresh sales alone could not satisfy all aspects of our member demands. Consequently, we lodged two new sales formats, namely the marketplace model and the supermarket sales to significantly enhance our merchandise mix.
Under the marketplace model, we partner with third-party retailers to provide users with a broader range of product selections such as apparel. On the supermarket sales model, we provide users with fast moving and more SKU products such as food to meet their daily needs. Both the marketplace and supermarkets sales formats have broadened these categories of products available on our platform, which in turn drove our GMV growth.
Also, big data analysis and real time user feedback help us identify, which brands our users prefer and source our product accordingly. For example, we identified that the apparel category, especially women's apparel is very attractive to our member base. 95% of which are women, because of the apparel category carries a large variety of brands, style, color, material and size, a lengthy sale [Indiscernible] sharing and a intensive user generated content.
Consequently, we leverage our marketplace sales roadmap for partnership with online and offline well-known brands such as [Indiscernible] group and made a concerted effort in increasing the apparel products that are actually available on the platform so that we can increase our member value and increase our user sickness.
From a profitability perspective, apparel is also a worthwhile endeavor, price point, open margin and purchase order value are all higher in the apparel category than other product categories, thus ensuring a good ROI of our base business.
In addition, through data analysis and user feedback, we have discovered that the food category is conducive to cultivate our user loyalty, induce repeat purchase and increase user sickness because food consumption is paranel, regular and frequent.
As a result, we enhance the supermarket sales format and partner with our reliable food supplier. For example, we forge a strategic partnership with Sanxiang [ph] Food which has a track record of providing fresh and abundant food selections to consumers throughout the country to advance the supply chain management.
Besides this improvement, we also partner with additional innovative brands and quality manufacturers to upgrade our merchandising mix and drive our GMV growth. During the quarter, we utilized our quality evaluation system to identify on the recognized, but innovative brands. The primary results brands leverage of credible social sharing, introduce their products robust member base and then grow results, cultivating their product into highly sought after bestseller on our platform.
For example, Apple [ph] introduced its skincare products EGF on our platform, the cumulative GMV of EGF alone reached RMB160 million. Another example is that we formed a type of partnership with Uniform, a non-invasive cosmetic surgery company to design and produce exclusive products available on the Yunji platform.
A third example is that we've formed a partnership with Nestle Nutrition to be the exclusive platform of planning, launching and promoting one of its new baby formula products. Last, but not least, we achieved substantial improvement in Sargent [ph] optimization during the first quarter. Such treatment is manifesting our efficient sourcing and distribution of agricultural products.
Through our quality evaluation system, we identify reliable but small regional agricultural producers, consolidating their distribution, streamlining their supply chain, certify their quality with our land of plenty label, unify their disparate brands into one reputable name and promote their products nationwide. For example, we conceive the [Indiscernible] radish product category on our platform, so such noble foods won 22 oranges and sold them to around 280 destinations.
In summary, by launching a membership model to extend our membership base by leveraging big data analysis and partnering with merchant brands to improve merchandising mix and by optimizing our supply chain network, we were able to grow on GMV, increase our revenue and generate income for operations.
More importantly, we were able to provide our users with a wide variety of products, offer our members with greater value and augment our unique and value for price market positioning. Going forward, we seek to become a global leading membership base, e-commerce platform, and a one stop shop for millions of households, as an enterprise of the new era, with fluidly on hold our social responsibility to helping people to live better and to make the world a better place through continued innovation.
With that, I will now turn the call over to our CFO, Chen Chen for a closer review of our financials.
Thank you, Shanglue. Before I go through all the financial results with you, please note that all numbers stated in the following remarks are in RMB terms unless otherwise noted. Our GMV in the first quarter of 2019 increased by 93.7% year-over-year to RMB6.8 billion from RMB3.5 billion during the period of 2018.
Our revenues in the first quarter of 2019 increased by 53.2% year-over-year to RMB3.4 billion. Revenue from the net sales of merchandise accounted for 95.1% of our total revenues and it increased by 16.8% to RMB3.2 billion from RMB2 billion in the first quarter of 2018.
During the first quarter of 2019, we promoted our marketplace model, which contributed an increasing portion of our product sales, because of marketplace model recognizes the revenue on our net based basis, our GMV growth outpaced our total revenue growth, as we seek to provide our members with more products of greater value at a reasonable prices, we may further increase revenue contribution from our marketplace model going forward.
We achieved our revenue growth during the first quarter of 2019 primarily through increasing the number of orders and there's a number of transacting members, so increasing net revenue from merchandise sales was partially offset by the decrease in revenue from membership program.
Our original membership program stipulates that the users had to purchase a membership package in order to achieve membership status and its associate’s benefits. During the first quarter we were able to expand our membership base substantially through a new model under which a user can assume membership status by meeting certain requirements, rather than purchasing a membership package.
Our gross profit in the first quarter of 2019 increased by 91.1% year-over-year. This growth was mainly due to our strategic expansions through our marketplace sales format and through selling more high margin products from a wider range of private label and emerging brands.
During the first quarter, we made more investments in marketing and technology, which allowed us to increase our platforms ability and improve our user experience as a Discover Shop and Shop [ph] products.
As a result, total operating expenses were RMB654.4 million in the first quarter of 2019 compared to RMB420.4 million in the first quarter of 2018, such increase was primarily due to two factors; first, more brands in its promotion activities during the first quarter, and second, a higher sales volume, which resulted in increasing warehousing and the logistics expenses, personnel costs, so the party payment transaction fees and a member management fees were generated and RMB0.2 million of income from operations in the first quarter of 2019 compared to a loss of RMB77.8 million in the first quarter of 2018.
We reported a net income of RMB16.9 million in the first quarter of 2019 compared to a net loss of RMB81.7 million in the first quarter of 2018. We also generated a GAAP net income of RMB43.1 million in the first quarter of 2019 compared to a GAAP net loss of RMB70.1 million in the first quarter of 2018.
Basic and net diluted net loss per share attributable to the ordinary shareholders was RMB0.95 in the first quarter of 2019 compared to RMB0.86 in the same period of 2018. As of March 31, 2019 we had a total of RMB2.3 billion in cash and cash equivalents restricted to cash and short term investment on our balance sheet.
Our sizable cash holdings allowed us to expand our membership program, deepen our member engagement investing in our platform improvements, and forge additional strategic partnerships with value added merchants and suppliers as a volume of products so as the platform increases, we should be able to secure more competitive deals with our partners, provide more attractive product offerings to all users, and then facilitate more transactions between our U.S. and our partners.
So this concludes our prepared remarks for today. So operator, we are now ready to take questions. And our CEO will respond to questions in Chinese and we will do the translation.
Certainly sir. [Operator Instructions] We have our first question from the line of Eddie Wong from Morgan Stanley. Please go...
Thank you for taking my question. I have three questions. Firstly, it’s about the competition. We noted that Alibaba in last month launched a socially membership base, a social e-commerce [Indiscernible]. Just wanted your view on the competition after such leading e-commerce platform tapped into the membership of the e-commerce industry, this is the first question.
And second question, is that you mentioned the proportion of private label and emerging brands in first quarter of this year, actually improved year-over-year. So what's your target for this proportion of private label in a major brand in terms of GMV in second quarter this year, and onwards? And third question is about the second quarter, you know so far, can you give us some more color about what the GMV or member growth in the second quarter so far this year?
Let me translate first. Shanglue Xiao, our CEO will answer the first question and then our CFO who will answer second, third questions. Firstly, we welcome this competition which is high quality and we notice that Ali had this approval. And -- but we think the mainstream e-commerce platform, their connection with customers and the reaction is a lack of reaction. Also their connection is one compares to other servers and centralized. And so we think it was not be doing a lot of competitions. Also the traditional e-commerce platform cannot efficiently meet their customers. That’s why although Ali – Ali discovering this social incumbent stage, we think the impact is not so big. And also we will to do ourselves and create more and better values and also we have 95% of our customer are women’s and they are very like food and [Indiscernible].
And in the first quarter we enhance our market sales for to meet the high frequency daily needs of our members and for more quality partnership and increase interactions with our member. And let’s take an example. In 2019, we worked very close relationship with the second biggest food manufacturer [Indiscernible] we show them our efficiency, logistics network and in different season to serve the foods nationwide.
And the second example and third example, it maybe -- and we transfer and promote their product -- food through Tier 1 to Tier 5 cities. And then -- and also for apparel in the first quarter, we have partnership with online/offline and lot of apparel manufacturers and so on.
So, when I say chosen brand, so, online/offline now need new channels for their sales in order to meet their challenges of different channels this brand are willing to create different product depending on this different sales environment. And for the demand side is more concern about style and other factors such as discoverability and whether price is okay. Our efficient and low cost channels are welcome by the supply side and also the demand side.
At the same time closing allow us to promote high-frequency product on a weekly basis. In the past, we were only able to promote high-frequency product on monthly base. Through closing, we will introduce – continuously introduce high-frequency product and it create addition competitive barrier. And now, with the supply side face a lot of pressure and use limited – reputation [ph] promotion. We can provide them high efficiency and low cost. And we can show you the examples, like in men and [Indiscernible] we help them to achieve for single day, tens of millions of sales and also for the men suits also we work with GfG [ph].
Also we want to provide our members more and better value. So we commit to working with women brands, quality factories and merchant brands to develop exclusive offers and create the unique member value. These exclusive items can cumulatively increase member commissions and have less – and have a positive impact on our gross margin. And also in Q1 we have good result on this, which maintain our member values. And let’s take Uniform like as an example, the key sales of units is 116 million sales and we work with Uniform to have exclusive products called SCH product, also the new product of Uniform achieved 114 million sales.
And although we are continuously discovering the perfect model that’s most suitable for us. And the value we provide is sufficient enough we may start charging members annual fees to shop in different product categories, and provide them value add service. Also we are also exploring how to charge our merchant advertising fees to have a better traffic distribution mechanism.
Thanks for your question and we think what we will do is to create more value to our members and create more efficiencies and more fusion [ph] to our merchants.
Okay. So, let me take the second further questions. So, gross margin in Q2 increased compared to Q1, 2018 and also our operating margin increased compared to Q1 last year. This is due to we sell more private label and the emerging brands product. The average margin for the private label product is around 60% to 70% and the emerging brand is in average is 30% to 40% of the gross margin. So our target is to keep increasing the exclusive partnership with certain emerging brands, to ask them to provide us more exclusive products cost-to-sale.
So, and for the Q2, GMV and the members, we find both the GMV and the member in Q2 do increased quickly compared to post Q1, 2019 and Q2, 2018. And at current stage we are more interested in expanding the number of products category, our platform in order to satisfy its growing demand of our membership base. So we are committed to selecting and working with the better supply as possible. So by focusing on these different areas, we are confident in our ability to increase membership value going forward as our CEO just stated. And by doing that we are also very confident that we can change our leading position in social ecommerce industry.
Thanks. Shall we move to next question? Thank you, sir. Can we move to the next question now?
Unidentified Company Representative
Okay, Ma’am. We have our next question from the line of Monica Chang from Credit Suisse. Please go ahead.
I will translate my questions. So, I have two questions. Number one is about the member of growth target for this year. And within Q1 we added 1.6 million new members. So within that how many are from purchase member package? How many are from the new model? And for the full year, do you have more initiatives, more social features to drive the member growth?
My second question is about the margin profitability. So we see, we have delivered a good – perfect for Q1 and then with improved business model mix and more contribution from the marketplace business model. So should we expect to kind of achieve a full year profit for 2019? And why should we think about their long-term normalized in their margins for our membership-based of e-commerce model? Thank you.
Thanks Monica. I will take these questions first and Mr. Xiao can make a further responses. And for your first question, during the Q1 we increase our members-to-members increase to 1.6 million, so within that 1.6 million, 30% of them are from the purchase of membership package. The other from the other invitation mechanism such as to become the -- member further than reach certain spending requirement and convert to the member. And the other members are directly invited by the members who have already met certain spending requirements and will give you some certain free permanent member invitation code and they can send this code to their friend to convert their friend to become the member.
So 30% of them are through the purchasing the membership of package. And going further and we expect that within this year; supportive of our new members who purchasing the membership package will be – will also be around 30% and the remaining 70% will through the new member conversion approach including the two [ph] member converted to the permanent member and we’ll still have some certain new approach, but we cannot discuss now. So we will disclose it later in Q2 and Q3 earnings calls.
And for your second question for the margin, for the net margin, for the industries, so, as you can see achieved the net profit and also the positive operating margin in Q1; but currently we are still focusing on to narrow our operating losses and eventually breakeven over the next few quarters. So, we believe we’ll keep increasing the value to our members and by doing that we can check to more members and the more surprise to come to reach and by doing that we believe current year our net loss will be smaller than our original forecast. And I think the long-term margin for the industry will be around 3%.
And for the long-term progress, we think to provide better value is our key strategy. And we target to let them by to meet their 60% or 70% of household selling and so like education, travel and food we will rightly introduce more merchant practice. And for the middle-class we only have around 7, 9 million members, but our target is around 30 million even more maybe 100 million. And our mission and our further discovery is also based on this. I think it is our chance to have efficiency connection in this environment and we will also continuously strengthen our merchandize mix.
Thank you management for the answer.
Thank you. We have our next question from the line of Andre Chang from JPMorgan. Please go ahead.
My question is about after the recent listing the company will have more resources. So I wonder whether there will be more spending investment in the marketing and sales etcetera to drive the growth in the next few quarters. Also following Rex’s [ph] answer to Monica’s question, whether that means that the growth and profit will be more delicate balance in the next few quarters, so that’s why the company will not be in hurry to make a profit in the short term? Thank you.
Okay. Thank you. So I will take this question. So for the [Indiscernible] I feel -- we may spend some of them on the advertising to increase our brand recognition, but within our present budget not to buy additional CapEx. So we will remain prudent in our spending while cap rate judging investment to maximize and we believe our net margin will not be adversely impacted by doing these advertising activities to increases our brand recognition. And also another capital spending for us is to – our current stage is to invest this money in the emerging brands to secure some -- to sign the exclusive cooperation with us. So we would do some active investment in the good emerging brands to secure some to work with us.
So by doing that we believe to do the equity investments in certain good emerging brands; we can get more good private label in the emerging brands product to increase our gross margin. And also as I just stated, also we will do some advertising. We can do [Indiscernible] total amount. So we do not think the advertising activity will adversely impact our net margin.
Shall we move to the next question sir?
Unidentified Company Representative
Okay. Yes, please.
Ladies and gentlemen, kindly note due to restrictions of time, you kindly limit your question to one question at this time. We have the next question coming from the line of Wendy Hung from Macquarie. Please go ahead.
I’ll translate my questions in English. So first question is a follow-up question, on the last question the management talked about we will continue to invest in the emerging brand. Could you share some of the investment criteria’s behind to invest these brands?
And the second regards the revenue contribution from the market place, does the company have a target in three to five years time phrase regards the contribution percentage from market place revenue. Thank you.
Hey thank you, Ali [ph]. So when we do the investment we will not touch the autofields in the market. For example, emerging brands; they work very closely with the [Indiscernible] and their reverations were high, so we will not do the investment for these deals. Instead, how we select the project is that we will select the brands, whose sale resembled more than 5 million market sales. So for these emerging brands we will send our investment team to do the – to do certain works and if the works is okay and these brands can accept reinvesting in our comparable low investment price would do the investment.
So our investment philosophy is to only to find the target through our own platforms if these brands have certain, to meet certain sales targets, certain monthly targets in our platform we were starting to look into these targets.
And your second question is that – okay, so for the marketplace, because of marketplace model can provide our members more products and more product category for their select and to produce our billing. So our marketplace model increased very fast, even faster than we expected during the beginning of this year. So at the present state we cannot forecast the portion of the GMV or revenue contributed by the marketplace model for next two or three years. But our current estimation is that marketplace model can at least contribute more than 30% of total GMV of this year.
Thank you. Thank you so much. Ladies and gentlemen, I would now like to hand the conference back to our management. Kindly take over for any ending remarks.
Unidentified Company Representative
Yes, thank you everyone for joining us today and if you have any questions, please contact the IR team of Yunji. Thank you.
Thank you so much Ma’am. Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may all disconnect now.