momo.com Inc. (8454) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, welcome to the momo.com conference. Management, please begin your call, and I will stand by for the question-and-answer session. Thank you.

Thanks, operator. Welcome everybody who joined our first quarter earnings conference call. For today's call, President, Jeff Ku will kick-off the opening remarks, and I will discuss the financial results. After that, we will open the line to questions from analysts and investors. I would like to remind you the following discussions, including the response to your questions reflect management's view of today only. We do not undertake any obligations to update or revise these information. And also we have uploaded [ equity ] report in the latest presentation on our website for your reference. With that, I will turn the call over to Jeff.

Thanks, Terrisa. Hello, everyone. Thanks for joining us today. Let me start with sharing some highlights of the first quarter of this year. First, our first quarter group revenue was TWD 25.1 billion, growing 9.5% year-on-year, and the B2C revenue increased 11.3% year-on-year. We attribute the lower-than-expected year-on-year growth to the macro uncertainties, more public holidays and the post-COVID reopening. In particular, we saw that customers have allocated their spending more towards leisure activities such as dining out and domestic and overseas travels plus there were more long holidays in Q1 this year. The number of overseas departures from Taiwan in the first 2 months of the year rose to more than TWD 1 million, a figure that is 15 times higher than a year earlier, following Taiwan's decision last October to relax this COVID border control. The recently published Q1 GDP number of Taiwan showed a 3% year-on-year contraction, which was found to have an impact on customer spending allocation, particularly on the discretionary goods. In first quarter, the total retail market tier grew 5.3% year-on-year despite the unfavorable GDP number mainly because of the New Year and other long holidays, but the online sales increased just 1.5% year-on-year, which is the lowest point in recent years. Although mobile still achieved a higher growth rate than the market, each of our 5 product categories experienced different market conditions. Among them, household items, PC, smartphone apparel facing weaker customer demand. Nevertheless, our B2C take rate held well to 13.14% and more importantly, our OP margin was up to 4.2%, reflecting the scale benefit. On the customer loyalty side, active customer numbers increased for the 68th straight quarter and grew at 7.3% year-on-year. Revenue per active user also increased by 3.7% year-on-year. momo/Fubon co-branded credit card holder spending accounted for 32% of the B2C revenue. Our co-branded credit card holders purchased 2 times more frequent than non-card customers. Regarding our TV shopping, although it only accounts for less than 4% of our total revenue, TV Shopping's Q1 revenue dropped to 19.4%, which was the largest drop in recent quarters and has negatively impacted our margin rate because TV merchandises usually carry high gross margins. The accelerated decline rate was worse than we expected. Therefore, we have sped-up the transition to live streaming social commerce, its monthly viewership active users revenue all have shown significant growth. We will continue shifting resources from TV operations to [indiscernible] schools and we are very confident in its potential. Looking ahead, we remain cautiously optimistic about the rest of the year. We think people's life will gradually go back to normal, with opening effect will diminish with time, our online market penetration is still low and will regain the growth momentum. However, we also noticed the micro uncertainty will affect customer sentiment and in turn, their spending. All of these factors made the future hub to predict. We hope the macro environment in the second half of the year will get better. Because of those unexpected headwinds, our revenue target will move toward the mid-teens at the low-end of the original target. As far as operating margin is concerned, we maintained the previous target of similar to last year. Finally, a touch on logistic infrastructure part. We now have totally 55 warehouses versus 54 in last quarter. After aggressive expansion in the last few years, this year, warehouse footprint increase will slow down. In state, we will streamline the operation process, work on efficiency improvement and be prepared for the soft distribution center during the operation at the end of the year. As for the central distribution center, it is currently moved ahead as planned and is currently working on getting those required government permits ready before its construction can start. Finally, on the ESG part, we're working on the TCFD report. We believe this will be one of this kind of report published in Taiwan by e-commerce player. And we also have received a few of ESG-related awards, which you will find a reference in Terrisa's report later on. Now I will turn the call over to Terrisa to review the financials in more details.

Thanks, Jeff. Let me walk through first quarter results and operations update. Our group revenue reached TWD 25 billion, increased 9.5% year-on-year, given the TV revenue dropped 19% Y-o-Y and its revenue weighting decreased to 3.7% versus 5% in the first quarter last year. Therefore, you can see the group take rate was down to 14.5% from last year's 15%. And at the same time, the EBITDA margin was down to 5.5% versus 5.7%, also because of the business mix change. Net income to the parent increased 7.6% Y-o-Y and basic EPS reached TWD 4.07 which can be attributed to the operating profit of TWD 1,092 million and non-op gains of TWD 20 million. Moving to the B2C. Its revenue increased 11.3% Y-o-Y, continue to compound and grow much faster than the total online sales of 1.5% Y-o-Y due to savings take rate hold well to 13%, owing to the similar product mix of last years. More importantly, B2C EBITDA was up 12.5% Y-o-Y. EBITDA margins was up to 5.2% from 5.1%, driven by stronger bargaining power as we scale as well as operating efficiency improvement. Cash position in the first quarter was TWD 7.5 billion, 6.7% quarter-on-quarter decrease was the result of bulk of last quarter's AP due at first quarter. 10.7% Y-o-Y decrease was primarily owing to the PP&E acquisitions and cash dividend paid. Moving to the inventories. Our inventory is under consignment model, meaning our customers are paying cash much earlier before we have to pay to our suppliers. This model implies our customers are essentially financing our growth through the prepayment. In the first quarter, total working capital for momo's operation was solid and healthy at TWD 4 billion, while the cash conversion cycle was net 20 days. On cash flow, free cash flow per NT was result from the book of fourth quarter AP due at first quarter, meanwhile, CapEx spending, including TWD 173 million, the construction payment for the FTC. Last year's basic EPS was TWD 15.72. Management has decided to distribute a cash dividend of TWD 15 and a stock dividend of TWD 1 per common share. This slide show the CapEx budget for this year. During the first quarter, TWD 5.2 billion was paid mainly for the warehouse facilities. Having discussed the financial highlights, let's turn to the industry dynamics and operation update. In the first quarter of the year, retail sales totaled TWD 1.1 trillion, up 5.3% Y-o-Y, the Minister of Economic Affairs attribute to more people returning home over the Chinese New Year's holiday as well as rising consumption by international travelers following the easing of border restrictions last years. General retail, including the department stores, supermarket and CVS rebounded 9.7% year-on-year from low base last year, thanks to the coding normalization and the rising store traffic. While total online sales rose 1.5% against 12.6%, the high base during the COVID period. In terms of the market shares, in the first quarter, momo accounted around 20% of total e-commerce market shares and slightly over 3% for the total retail sales. Moreover, as you can see from the upper left bar chart, online retail penetration in Taiwan remained low at roughly 13% as compared to around 30% to 50% by the Asian peers, especially China and South Korea, suggesting very positive temp growth opportunity for momo to capture as an e-commerce market leader in Taiwan. Next, let me touch on momo's operational updates. Momentum across the major 5 categories was slower than expected. So you can see from the bar chart, 3C & Home Appliance increased 11% versus last year's high base, 20% and household this year increased 10%, beauty and health care around 16%, fashion luxury around 9% and Sports & Leisure 17%, less impacted by the high base and also a reopening impact due to the strong recovery in service and also the overseas spending coming out of the COVID era. And also more public holidays this year's negative impact on the product e-commerce spending and also the economic uncertainty globally affects consumer sentiment. However, each category continue growing at multiple of the segment, indicating that we're still at early stage of the product e-commerce growth cycle. As of the first quarter, the numbers of the brand increased 9% year-on-year and active SKU was up 26% Y-o-Y, driven by growing revenue scale and network effect, meaning we are further gaining traction with the brand suppliers and widening our industry-leading positions. Regarding key customers' metrics, the number of monthly visitors in the first quarter was largely flattish at 12.4 million against the COVID high base. Active user numbers increased Y-o-Y for the 68th straight quarters and grew 7.3% Y-o-Y and also in the meantime, revenue per active user also sequentially increased. On warehousing, these numbers, the net warehouse increase will slow to 7 versus 10% last year. Regarding customer service, we believe customers are always dissatisfied when they report being happy and this is great, even when they don't yet know it, Customers always want something better, and we desire to delight customers, which will drive us to invent on their behalf. Therefore, with the support from 2 new DC plus the existing NDC, along with the ongoing satellite warehouse expansion, our competitive threshold of our warehousing and fulfillment capability should be further raised through the offering the same-day delivery services across the major 6 cities in Taiwan versus only Northern Taiwan population right now. Looking ahead, having a more comprehensive logistics footprint in the coming years, our infrastructure will simultaneously serve the faster rep of the hybrid 3P business in the mid to longer term and offering logistics as a service for both brands and also the hybrid 3P customers. Finally, on the new initiatives. Our recent strategic effort in initiating the hybrid 3P business are expanding product offering to long tail, which will help accelerating per customer spending for the longer term. We are pleased to learn the number of hybrid 3P suppliers increase nearly 1 times year-on-year in the first quarter across apparel, fashion, home improvement, toy and food and beverage, et cetera. In the meantime, we launched customer review and star rating in the first quarter. We incentive the customers to fill out the reviews by offering free momo coin, of course, we encourage customers to leave photos and honest positive feedback, which will improve products and the customers' experience. So, so far, the initial feedback are good. Last, live streaming, its monthly average viewers of our 2 regular channels increased nearly 20 times year-on-year. Active users increased nearly 3 times. And in the second half, we plan to increase more collaborations within KOL influencers to live-stream features products and engage with the shoppers. As we continue to grow, we will work to maintain a culture-led embrace new business. We will do so in a disciplined way with an eye on the returns, potential size and ability to create differentiation that customers care about. And regarding the ESG performance, momo has awarded the top 5 positions for the 7 consecutive years of the securities and future institutes, corporate governance evaluations. We are very proud of it. In closing, we believe what is good for the customer is good for the shareholders. Operator, we are now ready to begin the Q&A session.

[Operator Instructions] Our first question comes from Bill Lin with JPMorgan.

I have 2 questions here. First of all, regarding to Jeff's guidance, the company has lowered down the [indiscernible]. I'm curious to know if you're looking from a longer-term end goal with the launch of self-distribution center and a central distribution center, will the company think that the revenue growth rate can go up faster to like high teens or even 20% in the next 2, 3 years? Second is, I think given the company has been strong in the non-3C categories and [indiscernible] hybrid 3P, I'm wondering what is the trigger that we can accelerate the growth in 3C categories, because in past few quarters, the 3C growth is a little bit slower. So I would like to know what is the main reason behind this? And if there is any strategy that the company can push out the 3C revenue could grow faster again.

The first regarding the 2 distribution center needs to be joining up operation, will that helps our business, certainly will. I think we shared before our current revenue, the northern part of Taiwan accounted for 55% to 60% depending on the season and since there's a lot of undiscovered demand that exist in other parts of Taiwan and because of lack of the better service with those 2 distribution centers joining certainly will help. But to what extent, it's really hard to give you an estimate at the moment because there is not only one factor going to affect that. I think the past quarter slowed down and this year's macro uncertainty are affected by a lot of different reasons and most of them have touched upon in my previous talk. But those are temporary. I think it's even the rising interest rate of COVID, post-COVID reopening is going to come in just a matter of time. So when all those outside factors be [Technical Difficulty] everything needs to go back to the trend. I think in Taiwan, the online trend is still going up. We still have the low penetration rate. We have to go together with the rest of the world. So I think we will regain the growth momentum. However, no one knows when that time will be certain, hopefully, will be the second half of the year. The second question is 3C always become a revenue driver, now with 3C slowdown and plus our view on that. I think this 3C demand is really -- it's a global issue. I think you guys can see the news from all the different industry sectors all reported slowing in electronic components, the finished product. I think that all getting impacted by the same reason during the COVID, people have over-ordered a lot of this kind of equipment and we're facing the economic downturn, people shifting their spend into the discretionary items with the priorities so certainly way impact the customer demand in this category. However, my view is 3C always a strong category in the electronic commerce. So no matter which market, it will be always an important segment. So when this period passes, and people will pick up the demand, we will regain the growth momentum.

Our next question comes from Harvie Chou with Credit Suisse.

Just a quick follow-up on your guidance. Generally, I see that the top line guidance for the year has been upheld toward the lower range of the guidance range for about, I think, mid-teens on your growth despite the softer first quarter sales reporting. This will imply accelerating momentum in terms of year-on-year growth for the remaining of the year. So just a quick question. Could you briefly discuss your view for all in second quarter and maybe the seasonality trend for the remaining of the year? And maybe what quarter do we expect the strongest momentum to catch-up the shortfall as we recorded in the first quarter. And lastly, are we seeing any update from TWD 6,000 cash distribution and how have we seen or even to target further for this incremental budget increase from consumer.

Right. I will answer your last question first. So far, we don't see a great help from the government on TWD 6,000 subsidy. I think based on our observation, people tend to use that money for other purpose lead you activity I mentioned about or maybe pay some taxes, is tax season now. So that also relate to your first question, what's our view on the rest of the year. It's really difficult or hard to really see through. Our view is the second quarter will not be very good and may the tax season and rising interest rates are still hanging in the distance. So that will impact how people want to spend. However, we hope the second half every step going to settle and also customer sentiment so that they will be sure for the future and then their spending behavior will go back to normal. And luckily, if that happen and plus the first quarter will always be the biggest season of the e-commerce. So hopefully, all the shortfall is going to be made up by the second half of the year. But I have to stress again no one can be sure. I think we still watch for every development in the whole economy.

So basically, we are in our forecast or meeting [Technical Difficulty], we are basically building in like sort of rating momentum into the second half of the year in set or maybe pick-up from second quarter in terms of year-over-year comparison.

That's right.

My second question is that with your co-branded card with Fubon, it seems that after card issuance right acquisition, momo coin cashback benefit has also been lower down on momo platform as well from originally 5% to 4% this year. On the back of a macro headwind, do you think that this also create other layer of uncertainty to your guidance in order to achieve your target for mid-teen percent, do you think that you may need to maybe treat in more sales and promotion effort, which may end up with a larger margin pressure to build profitability.

Yes. In the coming economic downturn, I think every industry faces different kind of difficulty. So certainly, cost saving is one of the primary thing people who want to take on. So to cut back from 5% to 4% is consensus amount back-end and based on, first, we want to save some costs and secondly, we want to see whether the real loyalty is going to kick-in because we have compared with the market, 4% is also attractive enough. So based on that, we think the impact to the business should be minimized and so we have decided to cut that 1% back. However, we will reinvest 1% in different areas, hopefully, to get a better return, which means for those traditionally low spending customer segment to be discovered customer behavior, if we can invest in those areas, maybe we can get more return in their buying frequency or ticket size. So we are basically just shifting how we spend our marketing dollars from one year to the other.

Lastly, maybe on your longer-term maybe strategy, I think momo has been becoming more active recently in terms of the development of momo ecosystem, maybe including the recent partnership announcement with Taiwan Mobile for buying now and pay later services. Could you maybe give us an overview on what are the areas of interest in order for momo, like in order for momo to like cultivate the ecosystem. For example, we see Japan giant Rakuten having good financial coverage, including banking, security, insurance, sporting and broadcasting and even mobile network. So from a mobile ecosystem perspective, what can we expect the ecosystem to be like, say, in a year or a few year time frame from Telecom Momo.

A few ideas still on the cooking, so probably not a good time to disclose them yet, however because of the relationship with the group company, so we have frequently changing those ideas and try to realize as much as we can and you just mentioned one, buy now, pay launched by Taiwan Mobile. And also, we have took over the electronic group business might go from Taiwan Mobile to momo. Those are the example which has already happened. There are still more and hopefully, we can still working with a good company, but I want to mention others, we also try to work with company outside the group using more and momo coin as a tool to create more -- to enlarge the benefit to become momo's customer. We try to engage with different channel or some of our merchants to make sure when they buy things or shop at late place, they also can enjoy the benefit of being the momo customer, which means to use momo coin to get a better service, and we will announce them when time is ready.

Our next question comes from Angela Hsu with Citigroup.

A few from my end. First one is on the Slide 15. I noticed the number of the main warehouses for 2023 is now 19 and that's actually down from 21 in your previous presentation in February. So does it factor in our plan to shut down some warehouses? And also, if so, can we get some update on that? And if there is any timeline on the closure of the warehouses?

Yes. I think probably because we actually have 3 different types of warehouses, but from outside, you only see 2 types, one is the main warehouse and the other is satellite warehouse. But among the main warehouses, there are 2 different kinds, one is long-term rented the other are shorter rent. I think probably the number differs because of a few of the short-term granted one actually terminate the lease. I don't want the number, but I think the I will go into double check that and reply you later. I think that is the reason for it.

Okay. So does that mean we are going to close 2 factories because they are shipped and leased -- sorry, warehouses.

No, because levels of time we need warehouse so badly and needed urgently. So we really -- not much of the top release and then you just have to commit one, but you now that doesn't fit the long-term purpose so you will sign a short-term lease. And several times, the lease is short as 1 year or 3 months just for the [indiscernible] only. Now we are leasing more of the larger or better located place or warehouses, we tend work them out.

Got it. And my second question is about our initiative. So how much sales in first quarter comes from third-party and also advertising? And also, do we have a full year target?

We do internally have 3-year target. However, new, young business, so we don't give any financial guidance yet, but they are still quite small. So not significant enough. Once they reach to the certain size, we will announce in this meeting.

And our next question comes from Daniel Chen with UBS.

My first question, just I want to follow-up on the marketing spending. So the total marketing spending will remain the same. We just allocate to form rebate to other areas. So we will incur incremental promotion to try to attract customers. Is my understanding correct?

Yes, but maybe not 100%, but what I mean is we don't intend just to think that part of money. The intention really is to invest in other areas, but whether it will be second model., roughly.

Okay. So maybe we will come to promotion or discount to attract customer just like what we did in the second half of 2022.

Maybe, yes.

And my second question is for B2C take rate. What's the negative factors that offset the favorable product mix change. So B2C take rate remained flat year-on-year. I'm just trying to understand why B2C take rate didn't expand this quarter.

I think mainly is the product mix. Terrisa has explained in presentation. The product mix of first quarter this year is quite similar to the fourth quarter of last year. So if you can see the tax rate are quite similar as well.

Okay. And my final question is that what is the number of registered members as of Q1?

We have stopped reporting the registered members because that number becomes so high and also contain some double registered ones. So from now, we changed to the active visitor and active users. So I don't have that number. But those are accumulated numbers for last, I don't know, 50 years or more. So basically, I think that the sense for managing that number is less important.

Our next question comes from [ Casey Chan ] with [indiscernible].

So firstly, I also want to follow-up on the full year guidance. So if I look at Page 13 of your power point, it seems like for the first quarter, your expected revenue, probably one of the reasons probably shift in offline online behaviors. So as you sort of guide down this year revenue growth, are you basically assuming this shift, either temporary or not, will proceed into second or third quarter?

We certainly assume this behavior shift affected by a few of the outside reasons, and I briefly talked about. And those reasons going to disappear, but no one knows when that is going to disappear totally and what the leftover effect going to last. But we do know it will not go away in the second quarter of the year. And hopefully, we think the second half of the year will be better, but everyone's guess I say. So we just have to -- based on that assumption, prepare our business plan, so do it accordingly. And since [indiscernible] certainly will adjust our actions.

Got it. And my second one, just on your core customers, if I look at revenue mix, more revenue generated from either the Fubon cardholders or your core customers, which grew about 7% Y-o-Y, but overall member active monthly registered only kind of flat Y-o-Y. So my question is, more of your revenue generated from these core customers, does that mean your marketing expense, it can also save the marketing expense? I guess those customers are less sensitive to marketing campaign or am I wrong on that?

Okay. That is how I would like to read the number on Page 15. The monthly average visitors has a number around 12 million, which is probably 50% of the total population of Taiwan. But as you know, some of the purchasing are made for the household, not for individual. So you were not able -- just for the domestic market, as an e-commerce player or any retail player, you won't be able to have everyone as your customer because maybe in the household, only the mother responsible for the buying things. So I think that monthly average visiting, the low growth of that means we pretty much reached to everyone in the market. So difficult to find a new visitor. However, there's still a gap from 12 million to 3 million a quarter as an active customer, which means I may still have the opportunity to turn the other 2/3 of the visitors become buying customer this quarter. However, that means we publicly have 100% penetration of the old legible buyers in the market. So that's how I'm going to really -- so to me, the more important is, do I have more customers buying in this quarter and do they buy more often or do they buy more or less. Regarding the co-brand card customer, because co-brand card give 5% rebate and now it's reduced to 4%, still quite a lot, which means most of the heavy users or loyal customers, they have to have one because I don't see anyone will give away 4% for nothing. So everyone bound to have one co-branded card. So that together with our marketing promotion, so make the number very high as a part of the B2C revenue percentage. I think that is just naturally going to happen. Having users have to have a card and therefore, they have a card they get a rebate point and rebate point trigger them to buy more and that's exactly why we design this co-brand card. And that is exactly we pass the number going to come or big percentage of our revenue. I think that is part of our customer loyalty.

My final question is just a quick verification. I think in your opening remarks, you mentioned there was a loss of TWD 1 million, not sure revenue or something in first quarter due to the public holidays. Can you elaborate on that?

No, what I meant was, in the first 2 months of the quarter means during the New Year holiday season, there are more than one meeting power needs go overseas to travel more, yes, which is 15 times than last year, of course, last year because of the COVID. But that also tells or people spend a lot of money doing those leisure activities, dining-out, travel, doesn't matter overseas or domestically that going [indiscernible]. So they allocate less in purchasing other goods. So that's the reason why you find a lower growth rate over the first quarter of this year.

Okay. We have seen some -- a couple of questions from the website. I think I personally will reply each questions to you. Because of the time constraint, this will conclude today's conference call. And thank you all for joining today's call. We very much look forward to speaking to all of you again next quarter. Have a great day today.

Bye-bye. Thank you.

Thank you. Thank you for your participation. This concludes the conference. Goodbye.