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

Welcome everyone to join momo.com Second Quarter Earnings Conference Call. momo.com is hosting our conference call via live audio webcast through our website, where you can download the latest equity report and second quarter company presentation. The format for today's event will be as follows: first, our President will summarize our operation highlights in the second quarter of 2023 followed by business outlook. Afterwards, I will discuss the financial results. Next, we will open the line to questions from analysts and investors. You are also welcome to leave your question through chatbox during the presentation. As usual, I would like to remind you today's discussion may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from this content in the forward-looking statements. Please refer to the safe harbor notice that appears in our presentation. And now, I would like to turn the call over to Jeff for the summary of operations and outlook.

Thanks, Terrisa. Hello, everyone. Thank you for being here with us today. Let's kick things off by sharing some key highlights from the second quarter. Looking at the bigger picture, Taiwan retail markets showed varied performances across different operations. Department stores and convenience stores, which suffered badly during the COVID, now have experienced remarkable year-over-year growth. On the other hand, supermarkets and e-stores faced the challenges, mainly due to the high base effect and the shifting customer spending towards entertainment and leisure activities. In the second quarter, the Taiwan EC market grew by a modest 0.5% year-over-year as the reopening and macroeconomic conditions impacted this sector. Despite these challenges, we are proud to say that momo still outperformed its peers. Regarding the competitive landscape, there hasn't been much happening except for the newly entered foreign player who has been launching larger marketing campaigns and offer big discounts to attract customers. We believe this aggressive pricing strategy might persist for some time, and it may cause confusion among consumers and has raised concern among vendors. As the leading EC player in Taiwan, we maintain optimism about the long-term perspective of the industry. While there are current headwinds, we believe they will subside and the industry will regain its growth momentum. This optimism is driven by 2 key factors: the low EC penetration rate and the relative healthy competitive landscape. To ensure the sustained growth in the long run, we recognize the need to focus on innovation and strengthen our core competencies. These efforts are a reflection of our commitment to transforming TV shopping into online streaming and investing in a robust and retail marketing platform to support the advertising business. As we navigated the challenges and opportunities in the ever-evolving EC landscape, we are dedicated to maintaining our position as a front-runner in Taiwan EC industry. By leveraging our expertise and continuously adapting to the changing customer preferences, we are confident in achieving long-term success and contributing to the overall growth of the industry. Now, let's delve into some operational highlights. Our EC revenue for the second quarter increased by 5.6% year-over-year. However, the low expected momentum can be attributed to overall soft consumer sentiment amid prevailing macroeconomic uncertainties. Consumers are directing more of their discretionary spending towards travel, dining out and entertainment. Nevertheless, we continue to outpace the total online industry and our peers in terms of the growth. All of our major product categories reported growth, though at a more moderate pace compared to the previous year. In terms of profitability, our company take rate for second quarter declined to 14.4% from 14.6% last year. This decline was influenced by the less favorable revenue mix of TV and EC. However, the EC take rate improved from 13.08% to -- improved from 13.02% in second quarter last year, driven by a better mix, product mix and the improved bargaining power. Our second quarter company operating profit margin came in at 3.8% compared to 4.1% last year. This decline can be attributed to higher marketing expenses and unfavorable revenue mix of EC and TV. Summing up the first 6 months of this year. Our company's revenue growth was 6.8% year-over-year, lower than the previous year, but our net margin remained at 3.4%. Let's turn our attention to the new initiative. We are pleased to report that the monthly live streaming viewership in the second quarter increased by 13x compared to the last year. This significant growth rate highlights the potential of this new channel, offering a unique shopping and entertainment experience. Additionally, our new 3P operation model attracted more suppliers and expanded the product selection to our customers. Looking ahead to the second half of the year, we expect Fashion & Luxury and Beauty & Healthcare to maintain strong gross momentum. However, 3C & Home Appliance and Household categories were continuing to deal with the recovering soft customer demand and the high base caused by COVID last year. Overall, we think that the market condition in second half will be gradually improved. The EC revenue growth is expected to be higher than the first half. Although the second half operating profit margin may be slightly lower due to the seasonal planned largest scale promotions. Due to the unexpected tougher market conditions, our annual revenue growth may not meet our original expectation of mid-teens. Now, let's touch on our logistics infrastructure and the ESG efforts. Over the years we have diligently established an island-wide warehousing and logistic infrastructure in line with our business growth. Consequently, our logistic cost has been in line with the revenue growth. And then with the scale increase, we had witnessed efficiency improvement. Looking ahead, the central distribution center will be in service in the first quarter of next year, and the central distribution center will begin contracting work later this year. This new infrastructure development, coupled with the increasing capacity of our own fleet, will provide strong support for our future growth and serve as a long-term competitive edge. On the ESG front, we are proud to announce that our 2022 ESG report is now available on our website. We are delighted with our 2022 ESG performance, and we received several related awards recently. This included being recognized as a top 5% company in the Corporate Governance Evaluation for 7 consecutive years. You can find more details of these awards in the presentation form. We're committed to create sustainable value for our investors, employees, customers, supplier and the communities. This concludes all my remarks. Now, I would like to hand over the microphone to Terrisa.

Thanks, Jeff. Now, let's walk through second quarter results. Consolidated revenue grew 4.3% year-over-year, lower than previous years, impacted by overall soft consumer sentiment amid macro headwinds and consumers' discretionary spending allocation more on travel, restaurants and entertainment out-of-home. Our EC revenue increased 5.6% year-over-year, continually grew faster than Taiwan EC market and our competitors. EC take rate hold well to 13.08%, driven by less low margin product mix. EBITDA came in at TWD 1.29 billion. EBITDA margin was down to 4.9% from 5.2% a year earlier, primarily because of higher marketing expenses and unfavorable revenue mix of EC and TV. Moving on to the balance sheet. We ended second quarter with cash and cash equivalent of TWD 5.2 billion, a decrease of 40% year-over-year as we distributed TWD 3.27 billion cash dividend this quarter versus cash dividend paid out in third quarter last year. Regarding cash flow and CapEx. During the second quarter, we generated about TWD 1.37 billion in cash from operations, spent TWD 240 million in CapEx. For the first 6 months of this year, free cash flow was about TWD 800 million, an increase of 17% on a Y-o-Y basis. Regarding the CapEx. Year-to-date, we spent TWD 172 million, including warehouse facilities, IT equipment, and TWD 71 million acquisition cost for e-magazine and e-book business. I'll finish my financial summary, now let's turn to industry dynamic and operations update. Based on the Ministry of Economic Affairs, non-store sales as a percentage of total retail sales declined to 12.7% in the first half from 13.7% first half last year. Given first one, the physical store rebounded from the low base and the consumers' discretionary spending shift more to travel, leisure activities in the post reopening. For your information, Leisure & Sports surged 26% year-over-year in the first half. Taiwan outbound travelers jumped 17x in the first half. Meanwhile, we also saw concert and festival boom here. Nevertheless, online penetration rate remained higher than the pre-pandemic levels. You can see the upper right-hand side chart, second quarter retail sales rose 12.7% year-over-year to TWD 1.12 trillion. General retail sales increased 14.1% year-on-year, mainly driven by department store sales, supported by relatively low comparison base last year, while total online industry sales only increased 0.5% year-over-year. Now, let me turn to E-commerce. Despite tough industry environment, our major 5 product categories continue to grow, but at a more moderate pace than previous year, supported by our compelling customer value proposition, including competitive pricing, faster delivery services and widest assortment with active SKU over TWD 4.6 million, an increase of 23% year-over-year in second quarter. Across our best assortment, apparel, shoes, fashion accessory, luggage and leisure-related items replace consumer electronics, food, home improvement, kitchenware among the best-selling. Cosmetics seen as an affordable luxury also gained traction and became a bright spot with rising unit sales as people headed back to social activity. Now, moving to the key customer metrics. Our MAU monthly average visitors in second quarter came in at 12.5 million versus 12.4 million in the first quarter and increased 2% year-on-year. Number of active user continued to increase sequentially for the 69th straight quarter and each up 4% Y-o-Y. Both order frequency and ticket size was flattish owing to more cautious spending behaviors. On momo and Fubon co-branded credit card, is cardholder spending contributed 34% of EC revenue versus 28% in second quarter last year, demonstrating the growing customers loyalty and stickiness. Finally, on logistics infrastructures. This quarter, net warehouse numbers remain 55, while we put more efforts on operating efficiencies, such as process improvement, automation and supply chain optimization. Meanwhile, as Jeff mentioned, SDC will be in service in first quarter next year, and CDC construction will be kicked off later this year with the support from these 2 new DCs, plus the existing NDC, along with ongoing satellite warehouses expansion and increasing capacity of our own fleet, our competitive threshold will be further increased through offering the best delivery services to majority of populations in Taiwan. Of the largest B2C players in Taiwan, equipped with island-wide logistic infrastructure, which we have built out for years, we believe still can create moats around business. Sometimes size is hard to compete with and very expensive. This concludes our prepared statements. Operator, we are ready for Q&A session.

[Operator Instructions] First question comes from Angela with Citigroup.

This is Angela from Citigroup. I got a few from my end. Our first question, a quick one. So in the briefing, Jeff noted sales won't meet mid-teens growth year-over-year for this year. Wondering if you can share a rough range of the sales growth guidance this year. Like are we aiming for 10% to 15% or like even lower? Any color would be helpful.

Right. This year's market is very hard to predict. And so, we tend not to give you a range. What I can say is, I think the second half revenue growth -- in terms of revenue growth, the second half will be better than the first half. And, of course, with a great help with the first quarter promotions. So we think that's going to help a lot on the revenue side. However, because of that big promotion, so we think the operating margin, as usual, will be lower. So the revenue will be higher than first half and the operating margin will be slightly lower. That's probably the best estimate we can give to you.

Got it. And may I just clear, Terrisa, one thing? So on the margin guidance you mentioned previously, we are aiming for a flattish year-over-year and now we are looking for maybe down on a year-over-year basis. Is that correct?

Well, first half already compared to last year is already lower slightly, I think, it's at 4.3% and 4.1%. And I think the trend will continue to the second half. Yes. So I think overall the whole year this year will be slightly lower than last year.

Got it. That's very clear. And my second question is about the impact on coupons. So I believe we are all well aware of the aggressive promotion by coupons from April this year. Yet, surprisingly, when I look at your presentation, second quarter MAU held up quite well and even marginally improved on a quarter-over-quarter basis. So what's the better way to understand this number? Does that mean we do not lose many existing customers, instead, the strong promotions done by coupon helps drive overall e-commerce penetration so that we are also part of the beneficiary?

I think different people have a different view. Our view is, if someone coming in the margin offer a discount, it certainly will bring attention from the customers. However, the customer doesn't necessarily, just for one big discount, switch to that player. They probably still shop around us. And also for things, they do not carry, they still need to go back to the place they buy -- they used to buy from. So I think probably that is the reason, and there is the #1 B2C e-commerce player, so we continue to gain the market share, although at a slower pace. I think you probably also want to know what's the impact in the long term we can tell from the new entry. We don't know. I think we will continue doing what they do for a while to prove that we work a lot -- would lead clearly want to achieve. And there's probably not much we can do to change or alter their mind. I think what we need to do just run faster. We just do our things and run faster, and the market is still big, and the penetration is still low. So no matter we get a new entrant or not, we believe we will continue to grow.

Got it. And just a quick follow-up. So I'm wondering if they continue using promotions to gain traction. Are we also likely follow suit, i.e., increase the scale of promotion in second half? And what would be our strategy to fend off such competition?

Well, we have no intention to offer things so much lower than your cost. We don't think that's a sustainable strategy. I mean, probably new entrant want to acquire customer and they're probably the one with that tactic. So -- but we are here for longer term, we just -- we think we can -- we still stick with our strategy. We offer good quality of the product and the competitive price. And I think those new -- or temporary high discount offer probably will affect us in a very short time. However, there is still room, there are new customers you can win from. So, we just -- as I said before, we just need to run faster and to uncover those hasn't been served markets.

Next question comes from Bill with JPMorgan.

I just wanted to understand if we are looking into a 3-year framework, what is the growth CAGR that the company management is targeting at? And we understand you are going to launch the distribution center next year. Will there be other strategy or drivers you will use to push and to lead to the growth target you are thinking of?

We are sorry, we don't have that 3-year CAGR, can't share with you. However, we believe this market is going to grow and the growth momentum going to resume some time. And we -- as we -- our track record, we always outperformed the market. So that's still our strategy. And we just need to get through this period of time, which get impacted by the post opening and also the macroeconomic push consumers to reallocate their spending.

[Operator Instructions]

There's a question online. Let's have a look at the question.

Okay. There's some questions from the chatbox. This is from the line of Capital Commerce. Could you please comment which categories are seeing most competitive advantage and also the pressure?

I think for online player, standardized product always is more than easy to get a customer to tend to buy online. But I think the Taiwan market has already passed that stage. People tend to buy almost anything from online. So I think it just needed to give them the selection. So that's the reason why we are gradually pushing to our own 3P operation model that will bring in those long-tail product selections. And also, there's a question been asked about the momo card. momo card, we think by the end of the year, we're going to approach around 1 million card issue. And all these cardholders currently account for around 30% of the total credit card spending on momo. Let me see and also we can find on the...

Okay. Operator, this concludes our Q&A session. Before we conclude today's conference, please be advised the replay of the call will be accessible within 1 hour from now through the momo.com website. So thank you for your participation today, and we hope everybody continuing to stay well. Have a good rest of the summer, and we hope you to join us again next quarter. Thank you. Bye.