Ruhnn Holding Ltd (RUHN) Management on Q3 2020 Results - Earnings Call Transcript

Ruhnn Holding Ltd (NASDAQ:RUHN) Q3 2020 Earnings Conference Call March 3, 2020 7:00 AM ET

Company Participants

Sterling Song – Senior Director of Investor Relations

Min Feng – Founder and Chairman

Jinbo Wang – Chief Financial Officer

Conference Call Participants

Bo Pei – Oppenheimer

Vicky Wei – Citi

Xing Liu – UBS

Lingxiao – SWS Research

Operator

Hello, ladies and gentlemen, thank you for standing by for Ruhnn Holding Ltd’s Earnings Conference Call for the Third Quarter Fiscal Year 2020. At this time, all participants are in a listen-only mode. Today’s conference call is being recorded.

I will now turn the call over to your host, Mr. Sterling Song, Senior IR Director of Ruhnn. Please go ahead.

Sterling Song

Thank you. Hello everyone, welcome to Ruhnn Holding Ltd. Earnings Conference Call for the third quarter of fiscal year 2020. As a reminder, this conference is being recorded. The company’s financial and operating results were issued in a press release earlier today and available online. You can download the earnings press release and sign up for the company’s email distribution list by visiting the IR section of the company’s website at ir.ruhnn.com. Mr. Min Feng, our Founder and Chairman of the Board of Directors; and Mr. Jacky Wang, our CFO will begin with some prepared remarks. Following the prepared remarks, Mr. Lei Sun, our Founder, CEO and Director, will also join us for the Q&A session.

Before we continue, please note that today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company’s actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission, including its Annual Report on Form 20-F. The company doesn’t assume any obligation to update any forward-looking statements, except required by law.

Please also note that the company’s earnings press release and this conference call includes discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. The company’s press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the floor over to Ruhnn’s Founder and Chairman of the Board of Directors, Mr. Min Feng. Mr. Feng will deliver his remarks in Chinese, followed immediately by English translation. Mr. Feng, please go ahead.

Min Feng

[Foreign Language] Hello everyone, thank you for joining our earnings conference call for the third quarter of fiscal year 2020. In the third fiscal quarter, we continued our dual strategy of diversifying our monetization channels, and at the end, reaching our KOL pool, allowing us to deliver robust topline growth and a healthy non-GAAP net profit growth. The strength of our business model, our powerful execution capabilities and our advantage as the first mover in China’s internet KOL e-commerce sector, all filled this outstanding performance.

[Foreign Language] We are pleased to report another strong quarter with GMV increasing 69% year-over-year to RMB1,703.3 million and total net revenue increasing 25% year-over-year to RMB482.1 million. In addition, we achieved adjusted net income attributable to Ruhnn of RMB21 million, representing a 35% year-over-year increase. This is another back to back profitable quarter following the last quarter on a non-GAAP basis.

[Foreign Language] I want to further emphasize that, the continued expansion of our platform, our business and a further exploration of diverse monetization channel and our platform model, continue to be crucial growth driver in this quarter, as well an important part of our long-term core strategy. In the third fiscal quarter, platform model GMV and services revenue through the platform model increased by 249% and 154% respectively, with gross margin of platform model maintaining at a high level of 56%.

[Foreign Language] Annual platform business model, the online sharing for business, as we first mentioned on our last earnings conference call, that we initiated at the end of 2018, continued expanding in the third fiscal quarter, with revenue generated from the online sharing, to accounting for nearly 20% of the total services revenue, under the platform model. In the past few months, we have seen an increasing number of KOLs, participating in our online sharing store business on Taobao platform.

Through our KOLs tremendous marketing capabilities and a distinct personal style and our precise matching capabilities and our KOLs recommend third-party merchant products to their fans and customer, effectively achieving content monetization. The successful operation of online sharing stores have been our phased accomplishment in diversifying the platform business and will continue to be one of our main growth drivers.

[Foreign Language] In addition, under the platform model, our e-commerce live streaming business grew rapidly in the third fiscal quarter. E-commerce live streaming new to Ruhnn, as our KOls have been utilizing the live streaming to introduce our new women apparel products for several years in our full-service model. In the current quarter, e-commerce had been expanded to third party merchants and brands from our own women’s apparel brands, and we have received positive feedbacks from merchants and consumers. Our KOLs cooperate with third-party merchants and recommend products to their fans through live streaming, leveraging our powerful KOL portfolio and a large scale of fan base.

Our e-commerce live streaming business diversified, delivered good result, and has generated an important part, nearly 20% of the total services revenue under the platform model. Our diverse KOL group matches different types of merchants and products, further demonstrating characteristics of product and attracting more brands. Moreover, our KOLs have a large number of high-quality fans, who have converted to consumers of e-commerce live streaming business. We will further promote our e-commerce live streaming business and cooperate with more third-party merchants, fully exploiting our competitive advantage in this area.

[Foreign Language] Our constant innovation, exploration and development in new business areas are driven by our enriched and the diverse KOL portfolio, which is fueled by our strong capabilities in KOL incubation and development. As of December 31, 2019, the total number of KOLs signed by Ruhnn through long-term agreements reached 159, with average number of fans of about 200 million. Many of our KOLs are in different verticals and fully cover the major internet consumer sector.

Going forward, we will expand our own KOL pool, while being more flexible in terms of our cooperation model with KOLs. In addition, we will cooperate with more third-party KOLs. These additional cooperation models and third party KOLs will help us reduce KOL cultivation costs, decrease KOL transaction costs, and increase the overall profits.

[Foreign Language] In addition to KOL exploration and incubation, we also put great emphasis on debt, and the reach of KOL communication. We derive fans from different social media platforms to crucial parts of our monetization. The channel, largely reducing the potential loss of fans from content marketing to product marketing, as well as successfully converting fans to consumers. On the other hand, we expand the reach of KOL communication through building multiple social media portfolios. The powerful marketing capabilities and communication strength of our KOL attracts more brands, seeking cooperation with us. As of December 31, 2019, we partnered with 961 brands, compared with 501 brands as of December 31, 2018.

[Foreign Language] Looking at last year’s Double Eleven event as the leading Internet KOL e-commerce platform in China, we achieved fruitful results, with GMV increasing significantly year-over-year, once again, demonstrating the strong marketing capabilities and a competitive strength of our KOLs.

[Foreign Language] Looking ahead, we will continue to expand our business model and partner with more platforms. We have maintained and will continue to maintain a close cooperation with Alibaba, our significant strategic stakeholder and a long-term key business partner. In addition, we will continue to develop our platform business with Weibo and Bilibili two of our other important shareholders and other social media platforms, such as TikTok, Kuaishou, and Little Red Book, while further exploring more monetization channels and areas.

[Foreign Language] I would now like to discuss, the unfortunate coronavirus outbreak in China and its impact on operations. The outbreak, which started right before Chinese New Year, had a short-term impact on the company’s business during the fourth quarter of the current fiscal year. However, the overall outbreak has been controlled, and we have gradually resumed our normal operation since mid February 2020. Meanwhile, our cash reserve remain healthy and sufficient, and that we believe Ruhnn is a company that operates in the internet KOL e-commerce sector, will achieve even faster growth in the long run.

[Foreign Language] Further, we will also explore more new investment opportunities in China’s prosperous internet KOL market and promote the healthy and rapid development of internet KOL e-commerce industry in China.

[Foreign Language] With that, I will now turn the call over to Jacky Wang, the CFO of the Company, who will provide an update on the financial performance for the third quarter of fiscal year 2020.

Jinbo Wang

Thank you, Mr. Feng and Mr. Sterling and hello, everyone. I will begin with some key financial highlights for our third quarter fiscal year 2020. We are very pleased to have maintained growth momentum in the third quarter of fiscal year 2020. Net revenue increased to 25% to RMB482.1 million, with services revenue from the platform model increasing 154% to RMB110.7 million. Gross profit increased 18% year-over-year to RMB174.9 million. In this quarter, we achieved adjusted net income attributable to Ruhnn of RMB21 million, representing an increase of 35% year-over-year.

Net cash provided by operating activities was RMB89.9 million, representing an increase of 9% year-over-year. Here I would like to further discuss certain highlights of our financial performance for the nine months ended December 31, 2019 and 2018. Net revenue increased 25% to RMB1.1 billion, with services revenue from the platform model, increasing 140% to RMB241 million.

Gross profit increase 42% year-over-year to RMB405.4 million with gross margin increased to 38% from 33% for the same period of last fiscal year. It’s worthy of noting that for our platform model, gross profit increase 158% year-over-year to RMB138.8 million, with gross margin increase to 58% from 54% for the same period of last fiscal year. We achieved adjusted net income attributable to Ruhnn of RMB1.9 million compared to a loss of RMB45.2 million during the same period of last fiscal year. Net cash provided by operating activities was RMB98.1 million, representing an increase of 114% year-over-year.

Before we move on to the detailed quarterly financial performance, I would like to update everyone of some additional information regarding our platform KOL classification. As additional matter to assess our platform KOLs performance, we classify our platform KOL, based on the total services revenue generated by the KOLs, and the platform model during the previous 12 months. For example, platform top tier KOLs generates services revenue of RMB10 million or more in the past 12 months into the platform model.

Our platform top tier KOLs increased from one as of December 31, 2018, to six, as of December 31 2019. As of December 31, 2019, total number of our platform top tier established and emerging KOLs, increase of 106%, to 37, from 18 as of December 31, 2018. This demonstrates our capabilities in KOL incubation and the cultivation. You can refer to the earnings press release for more details.

Now, let’s move onto detailed quarterly financial performance; net revenue increased by 25% in year-over-year to RMB482.1 million. Primarily attributable to an increase in services revenue to the platform model, and to a lesser extent due to an increase in product sales, through the full-service model. Revenue from the product sales through the full-service model increased by 9% year-over-year to RMB371.4 million. This increase was primarily attributable to the sales growth of the company’s major online stores opened in the name of the company’s top tier KOLs and was partially offset by the transition of the business model of some online stores opened in the name of the company’s lower-tier KOLs, from the full-service model to platform model.

As a result of such transition, the number of the company’s online stores decreased to 22 as of December 31, 2019, from 91 as of December 31 2018 and the number of the company’s KOLs serving the full-service model decreased to six as of December 31, 2019, from 25, as of December 31, 2018. On the other hand, product sales to revenue from the company’s online stores opened and our top tier KOLs, that were in operation in both periods, increased by 31% in in the current period as compared to the same quarter of last fiscal year.

Revenue from services revenue through the platform model increased by 154% year-over-year to RMB110.7 million. This increase was mainly attributable to several items. First, the increase in the number of KOLs serving the company’s platform model, which increased 44% to 145 as of December 31, 2019, from 101 as of December 31, 2018. Second, the improved performance of such KOLs, as evidenced by the increase in the aggregate number of the platform top tier, established and emerging KOLs to 37 as of December 31, 2019 from 18, as of December of 2018. And third, an increase in the number of the brands with which the company cooperated its advertising and marketing business to 332 in the third quarter of fiscal year 2020, from 238 for the same quarter last fiscal year.

Cost of revenue increased by 29% year-over-year to RMB307.2 million, which was largely in line with the increase in total net revenue. Gross profit increased by 18% year-over-year to RMB174.9 million. Gross margin slightly decreased to 36% from 38% for the same quarter of last fiscal year, with gross margin of services revenue remained relatively stable at 56% compared to 57% for the same quarter of last fiscal year.

Total operating expenses increased by 25% year-over-year to RMB166 million, included in the total operating expenses was an aggregate of RMB10.3 million of non-cash amortization of expense of the intangible assets, in relation to exclusive cooperation rights and share-based compensation expense and the litigation costs in the current quarter, compared to – for the same quarter of last fiscal year.

Total operating expenses accounted for 34% and 35% of the total net revenue for the three months ended December 31, 2019 and 2018 respectively. Excluding the above-mentioned non-cash charges and litigation costs, the percentage will be 32% and 35% respectively. Fulfillment costs increased by 13% year-over-year to RMB43 million. The increase was primarily due to, the increase in product sales during the three months ended December 31, 2019 compared to the same quarter of last fiscal year. Fulfillment costs accounted for 12% and 11% of product sales revenue during the three months ended December 31, 2019 and 2018 respectively.

Sales and marketing expenses increased by 24% year-over-year to RMB87.6 million. Sales and the marketing expenses consist primarily of expenses for KOL incubation, cultivation, content production and training, and the personnel costs of related third party for the company’s platform KOLs, and expenses incurred for our advertising, marketing and brand promotion activities, and personnel costs of related operation teams into then the full-service model.

The increase was primarily due to; first, the non-cash amortization expense of the intangible assets, in relation to exclusive cooperation rights of RMB5.2 million. Second, the non-cash share-based compensation expense of RMB1.4 million. And 3rd, the increased expense and the personnel costs, in relation to KOL incubation, cultivation content production and training to support increased activities for the company’s KOL sales and advertising business, following the expansion of KOL pool.

Sales and marketing expenses accounted for 18% and 18% of the total net revenue during the three months ended at December 31, 2019 and 2018 respectively, exclusive of the aggregate of RMB6.6 million non-cash charges as mentioned above, the percentage will be 17% and 18% respectively. General and administrative expenses increased by 43% year-over-year to RMB35.3 million. The increase was primarily driven by the increase in share-based compensation expense of RMB2.5 million, professional fees of RMB5.8 million, and the rental cost of RMB1.1 million. General and administrative expense accounted for 7% and 6% of the total net revenue during the three months ended the December 31, 2019 and 2018 respectively.

Income before taxes was RMB14.4 million compared to RMB14.8 million for the same quarter of last fiscal year, as a result of the following; income tax expenses was RMB3.9 million, compared to RMB4.2 million for the same quarter of last fiscal year. Net income attributable to Ruhnn was RMB10.7 million inclusive of an aggregate of RMB9.2 million of non-cash amortization expenses of intangible assets, in relation to exclusive cooperation rights and share-based compensation expenses, compared to RMB15.5 million for the same quarter of last fiscal year. Adjusted net income attributable to Ruhnn was RMB21 million compared to RMB15.5 million for the same quarter of last fiscal year, representing an increase of 35% year-over-year.

In terms of our balance sheet and the cash flow, as of December 31, 2019, we had cash and cash equivalents, restricted cash and short-term investment of RMB853.5 million compared to RMB103.8 million as of March 31, 2019. Net cash provided by operating activities was RMB89.9 million and RMB98.1 million for the three and nine month ended December 31, 2019, representing a year-over-year increase of 9% and 114% respectively, compared to the same period of last fiscal year.

Now turning to our outlook, despite the fact that as of today, the coronavirus disease 2019 outbreak in China has a short-term impact on the company’s business during the fourth quarter of fiscal year 2020. Based on the company’s current expectation estimate, the company still remains confident in the growth prospects and reiterate its outlook for the full fiscal year 2020.

For the full fiscal year 2020, we expect net revenue from product sales through the full-service model to between RMB980 million and RMB1,130 million, representing a year-over-year growth between 4% and 20%, and net revenue from services through the platform model to be between RMB280 million and our RMB380 million, representing a year-over-year growth between 86% and 152% respectively. This forecast reflects the company’s current and preliminary view on the current business situation and market conditions, which is subject to change, as well as to the company’s current estimate of the impact from the COVID-19 outbreak, which is also subject to change.

This concludes our prepared remarks. We will now open the call for Q&A. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Bo Pei of Oppenheimer.

Please ask your question.

Bo Pei

Good evening management. Thanks for taking my question. [Foreign Language] So I will translate myself. So congrats on another great quarter. Just now in your prepared remarks, you previously mentioned the impact on coronavirus. So I was wondering, whether management can share more details regarding the impact on the business operation and financial performance? So what is the performance wheel from a longer-term perspective? Thank you.

Min Feng

[Foreign Language] Okay. Now let me talk about the specific impact on the company’s business operations and how to take a longer-term view of the epidemic and then Jacky will comment on the specific impact on the financial performance.

[Foreign Language] First, in terms of the full-service business, due to the impact of the epidemic and extension of the Chinese New Year holidays, our supply chain has been greatly affected. At present we have more than 700 suppliers. So in February, we don’t have any recommendation or the introduction of our own brand, new style women’s apparel. At the same time, the suspension of the fulfillment and logistics has a direct impact on our e-commerce business of the full-service model.

[Foreign Language] And in terms of the platform of business, because we have quite a lot of service merchants and the brands, so if they belong to the e-commerce sector, it is true, they will encounter the same problem as our full-service business. If they belong to the offline business, normal operations is not possible, and this will yeah visibly affect their need for various marketing activities. Of course, we will have some branding and advertising business on hand. In addition, there is not much impact on the company’s KOL incubation, which has a beneficial impact on the company’s business operations in the future, after the epidemic.

[Foreign Language] Now as you can see, the epidemic situation in China has been quite well controlled. Ruhnn has done a lot of work in terms of employee health and safety. Now there isn’t any substantive or confirmed case. Actually our colleagues have been back to our headquarters office in Hangzhou since middle February. At present, you can see that the logistics-related operations has been almost back to normal and our supply chain has gradually recovered and we will resume our recommendation for our own brand, new style women’s apparel in the full-service business model in March.

[Foreign Language] Finally, in the long run, the epidemic will further develop the online e-commerce business in China, and consumers will be much more accustomed to online shopping on the social media platforms. For Ruhnn, as the mainstream e-commerce platform and social media platform in China, the company will greatly benefit from the further development of the trend. Jacky, please go on your part.

Jinbo Wang

Let me add some inputs regarding the impacts on financial performance. As a result of the impact of the basis operation, as discussed by Mr. Feng just now, the financial performance during the fourth quarter of fiscal year 2020 definitely will be affected. The fourth quarter usually will be the slack season during the Chinese New Year holidays in January, and the outbreak and extended holiday in February resulted in decreased revenue in February 2020. However, certain expenses like you know the personnel costs and the rental fee and given certain professional fees, based on a new framework, right, those items cannot be saved. But based on the current expectation estimates, we still remain confident in our growth prospects, and we reiterate our revenue outlook for the full fiscal year 2020, as I just mentioned in the prepared remarks.

If you look at the balance sheet and our cash flow, you can see that we have adequate cash on hand, and we are also generating positive cash flow during the past three quarters. So it’s very healthy, and one more additional point I think I want to mention, is that during the current period, the cost to incubate the KOLs like cumulative fans. It’s lower, and we achieved you know better cost saving results. I think that will be – impacting another way or better for the financial performance for the fourth quarter.

Bo Pei

Okay, thank you.

Operator

Your next question comes from the line of Vicky Wei of Citi. Please ask your question.

Vicky Wei

Good evening, management. Thanks for taking my question. I have two small questions. The first one is about service revenue; around how many percentage of service revenue is from advertising revenue, please? And my second question is about the gross profit margin trend, so what is the reason for the decline of product revenue, gross margin decline in this quarter, and would management please provide some color on the gross margin trend for the next quarter and the long-term perspective? Thank you.

Jinbo Wang

Okay, thank you. Let me take your questions. And your first one, talking about the, the services revenue, and advertising pricing revenue is – yeah, it’s a very important monetization channel for our KOLs and the platform model and talking about the percentage of the advertising revenue compared to the total services revenue from the platform model, and for the current quarter, it’s about 46% as a compared to – I will also show you know the prior year – the comparative period figure, compared to 72% – I think over 70% for the same quarter of last fiscal year.

And further, if you look at the nine months ended December 31, 2019 it’s about, you know, over 50% – I think it’s about 53% and in the current period as compared to 67% for the same period of last fiscal year. So you can see that the percentage is decreasing gradually – mainly as a result of the company’s efforts to explore more and the more KOLs, KOL monetization channels, and the platform model. So like you know, the jointly operated online stores, online sharing store or e-commerce live streaming and so on.

And regarding your second question, talking about the gross margin trend. Yes, you know, the gross margin of our product sales and the full-service model, as compared to the same quarter of last fiscal year, is a decrease, right. The major reason is, because of the way we utilize the e-commerce live streaming for our own women apparel brands are extended and we have a different method or way to utilize it. Previously, you know, we mentioned that it should be only utilized live streaming to introduce our new products. So there are no – there was no direct sales involved. But following the new trend of the live streaming, right really booming – it’s really booming in China, and we all know that, a lot of online stores are utilizing it.

So now from the current quarter, we also release you know that the product linkage in the – during the live streaming. So people or customer can buy it directly, and in order to because it is a new – its kind of a new it kind of a new platform, right? In order to attract new customers, accumulate the fans in the live streaming platform.

During this quarter, we did you know, strategically lower the sales price during the live streaming, because it’s a typical you know character of the live streaming and the customer who want to buy products through the live streaming, they expect to see a big discount, and that’s the most important thing, you know, if they want – if you want people to buy to follow follow you through the live streaming platform, you need to give a large discount.

Of course, you know, obviously in the third quarter, the overall competition environments, right, especially by considering all of competitors – our competitors, they are not really fully in compliance with related tax laws. They might also affects our pricing, in order to compete with them. Regarding the long-term trend of sales gross margin. I would have seen you know, from the – dividing into a full-service model and platform model. In the full-service model, right. If you look at the nine month ended December 2019, the gross margin of the full-service model is 32%. In fact, a little bit higher than 31% for the same period of last fiscal year.

I just want to mention, that’s evidence to show that the lower margin for the third quarter is kind of one time; and live streaming, did affect our current quarter gross margin. But for long-term, right, we have implemented internally certain matters, how to deal with that right, and including why we can’t design or manufacture different products, for the live streaming. It means, we have some specific products for the live streaming, and some other products for the non-live streaming sales.

And in addition, I want to mention that, because of the effectiveness of Chinese New e-commerce law in 2019. And we expect the actual implementation might be completed in the next, maybe two or three years, and we believe we will benefit from them, because we have already fully compliant with related requirements. And gross margin will be increased in the future as compared to the current quarter.

And for the services revenue and the platform model. So gross margin for the current quarter is 56%, a relatively stable, in fact, as compared to the same quarter of last fiscal year. And if you look at the nine months and it’s 58% as compared to 54% for the same period of last fiscal year, much higher. And as the only cost of revenue for platform model, is the KOL service fee. So it will be affected by several factors, like the difference of cooperation methods, with different KOLs and the different monetization channels.

For example, The Hot Topic live streaming monetization channel, is a one of the channels under the platform model. And KOLs, yearly will be paid a higher service fee. It means the gross margin for the revenue generated through the live streaming will be lower, as compared to other channels. And in the future, we probably will also cooperate with, well established third party KOLs, which might also affect the gross margin, but will not incur the incubation cost for such third-party KOL, because it is already well established, they’ve already accumulated fans, they probably do not really need to increase it. And therefore, the overall operating margin will not be affected materially. However, I believe the overall gross margin will still remain at a very high level for the platform model in the future. Thank you.

Vicky Wei

Thank you.

Operator

Your next question comes from the line of Xing Liu of UBS. Please ask your question.

Xing Liu

[Foreign Language]

Do you guys have a systematic strategy to drive e-commerce GMV through live streaming? How do we allocate resources through live streaming? Thank you.

Min Feng

[Foreign Language]

Yes, you are correct. Nowadays, the e-commerce live streaming has developed quite rapidly. And the company, we also formulated a very systematic strategy in this field.

[Foreign Language]

For the live streaming in Ruhnn, it is mainly the live streaming on Taobao platform, and this has been an important part of the company’s full-service business model. Our KOLs have been utilizing the live streaming on Taobao platform, to introduce our own brand new style women’s apparel products.

[Foreign Language]

The company also made relevant adjustments in our business, that is mainly in two aspects. First, in terms of the full-service business model. We only recommend our own brand, women’s apparel products through the live streaming. Live streaming process customers can place orders directly and they can complete the purchase process. We have seen that significant part or considered global part of our GMV, is related to this live streaming, especially in this fiscal quarter, including the Double Eleven period.

[Foreign Language]

Second, in terms of the platform model, for the live streaming business, we have extended from our own women’s apparel brands to the third party merchants and brand, which has been an anchor and fast growing monetization channel for our KOLs. And we have received quite positive feedbacks from merchants and consumer. Our e-commerce live streaming business delivers quite good results in short term. This has greatly boost the GMV increase in the platform model, and it has generated an important part. It’s nearly 20% of the total service revenues and in the platform model.

[Foreign Language]

In terms of the resource allocation, I would like to share the following aspects.

[Foreign Language]

In terms of the merchants resource average, we have gradually build strong and unified team, fully exploiting our advantage of centralized merchant resource average.

[Foreign Language]

In addition, we have a very strong KOL pool. So on the basis of the unified merchant resources average to some extent, our top tier and established KOLs play the role to drive emerging KOLs.

[Foreign Language]

In terms of KOL incubation, the company is signing an incubation team, also regard the e-commerce live streaming as an important and additional monetization channel. The company also sign up for cooperation, including KOLs, why especially in the direction of live streaming.

[Foreign Language]

In terms of e-commerce live streaming and actual resource allocation, Ruhnn is quite different from other MCNs. Leveraging on the main competitive advantage of KOL incubation of Ruhnn, our KOL, they have a very large number of high-quality fans with very strong on different social platforms. So they have converted to consumers of our e-commerce live-streaming business, with quite good conversion results – conversion rates. So in that way, actual resource allocation from the company will not be that much.

[Foreign Language]

In the future, that we will continue to focus on the e-commerce live-streaming, cooperate with multiple platforms and further enrich the monetization channels for KOLs. Thank you.

Xing Liu

Thank you.

Operator

Your next question comes from the line of Lingxiao of SWS Research. Please ask your question.

Lingxiao

Hi, management team. Congrats for the strong financial results. And I have two questions, one is about the industry and one is related to other business. The first one is, as you mentioned before, that the coronavirus – lone impact of coronavirus is that people may turn to use e-commerce in the future, more in the future. But like as we all know that KOL e-commerce sector is booming as well, and many choose to set up their own MCN business and incubate their own KOL in that case.

Will other competition environment become fiercer, that is my first question. And my second one is the top tier attribute to around 60% of service revenue. In the long run, what do you think of the percentage? What do you see the percentage of sales that top tier KOL attributes? And how long does it take to incubate established or emerging KOLs, and what is the life span on expanding of the KOL pool? Thank you.

Jinbo Wang

Okay. Thank you. Lots of questions, let me take them. And I think that’s true, as you mentioned the lifestyle will be shared, because of the outbreak. And one thing I want to point out, the outbreak will not reverse the current trend in the future. But it’s a kind of in a way to accelerate of the chain. That is if you’re talking about people are moving their habits to – from the offline to online for shopping, for work or even entertainment and so on. The chain has been there for many years, and the outlook we believe will be further accelerated. And of course, Ruhnn is a leading company connecting the major e-commerce platform and social media platform in China, through our sales incubated, all cooperated KOLs. We will definitely benefit a lot from that chain.

But talk about, yeah, you know, because, it’s a booming – and a lot of newcomer and even other capital they try to invest in the MCN enter – talking about the competition. It’s true that, that we are seeing a lot of newcomers. All we can call is a follower, that have started or will start to invest in the KOL marketing, a KOL MCN company right. And the competition always exists, and especially for such a hot topic in China and KOL marketing.

And let me share my view that KOL economy market, such a huge market in China, and based on, you know, certain research report – there are a lot of a research report, and it will have, you know got a annual growth rate over at least 40 plus and the year-over-year for the next several years, and it’s huge and developing really fast. And the KOL marketing industry, is highly diversified and no one single MCN company can sign off or can get all potential KOLs. So newcomers will not compete directly with Ruhnn in fact, from this perspective.

And another thing I want to add that, Ruhnn is the largest, as, internet KOL facilitator in China, and we pioneered the commercialization of the KOL ecosystem in China, back to several years ago. And Ruhnn, the brand is a trusted brand, and it will not only attract, the third-party merchants or brands to help us help them to facilities or to promote their products, but also will attract the most talented new KOLs or potential KOLs.

And also right, Ruhnn is probably the only one that could manage, so diversified monetization channel and for different KOLs. As I mentioned just now that, the channels, including right, the self-owned online store right under the full-service model and the jointly operated online stores – online sharings though, even the live streaming. And we can cooperate with our sales incubated, we have as the strong capability in incubating the KOLs from an amateur. So that’s a lot of advantages Ruhnn have that, we don’t believe our competitor have. So we are not really kind of concerned about that, the computation.

And regarding your next question, you talked about top-tier KOLs contributing – over above 50% of GMV, and I want to say that, if you compare, because we have full-service model and platform model, you cannot really compare the GMV, because the GMV for that certain top tier KOL for whom we opened online stores for them and the full-service model. The GMV probably will be much higher. But in other way, if you look at our KOL classification and there is the platform model, right, you can see, we grow really fast, right and as of December of 31, 2019, we only got six top tier platform top-tier KOL and this is all under – under the platform model, and the revenue generated by them, it’s a service revenue and probably – the majority of them is advertising revenue, there are no associated GMV. So you cannot really just compare the GMV.

And if talking about how long does it take to incubate established emerging KOLs, I want to answer the question in that way, that’s right. So we sign new contracts with potential KOLs every month, right, and based on the historical experience, and we almost got a nearly 100% success rate in incubating new KOLs. It means, we invest in the initial incubation period, and then after a certain period, we got all the investment back, and after that, basically there are no new additional costs incurred for them, if there are no revenue generated from them.

But we can see, that our success is depending on, we can sign more and more new KOLs and incubate them to have them get the initial investment back, and then will generate profit for the company. And because of the gross margin for each KOL, if you look at the average figure, it will be the same for our top-tier or for lower tier KOL. The gross margin generated by them will be same.

So we don’t really want to – not really want to – it’s impossible to have every KOL to be, establish all top tier KOL, but what we would try to make sure a nearly 100% successful rate in during the incubation.

Talking about the long-term, the percentage of sales that’s top tier KOLs attribute; and as I mentioned just now, our policy that, it’s now really – you cannot really have everyone to be a toptier KOL, and so if you look at the percentage in the future – if you look at the current period, it’s nearly 50% and that is a platform model. But I believe in the future, if you look at the percentage, it would be either stable over there or lower gradually, because we have more and more KOLs to be added to the KOL pool of Ruhnn, and that will account for the majority of the revenue generated and the future, we will be more flexible in expanding our KOL right.

We will keep our normal pace to sign the new contract with KOL. Every month, we probably will sign about 5 to 10 new KOLs. But in addition to that, we will have, more flexible ways, either cooperate with third party, well established KOL or maybe sign the KOL only for – only under one monetization channel. It’s not for the full scope. Like, we can’t sign some people, who are only doing the live streaming, are only doing the advertising.

So if you look at our, the future plan for the next year, I believe, the overall addition of the new KOL will be much higher than the prior. The prior I think is about 50 new additions. If you deduct currently, 159 deductions or 111 as December 31, 2018. And I believe they’re probably several times of the number of the new additions in the coming years. Okay, thank you. Hope I answer all your questions.

Operator

As there are no further questions now, I’d like to turn the call back over to the company for the closing remarks.

Sterling Song

Thank you, everyone. Thank you again for joining us today. If you have any further questions, feel free to contact us from our Investor Relations information on our website. Thank you, everyone. Bye-bye.

Operator

This concludes this conference call. You may now disconnect your lines. Thank you.