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

Ladies and gentlemen, welcome to momo.com's conference call. Our Chairperson today is Terrisa. Please begin your conference. Thank you.

Good afternoon, everybody, and welcome to momo's Third Quarter Earnings Conference Call. This is Terrisa, momo's Head of Investor Relations. momo is hosting our earnings conference call via live audio webcast through our company website at www.fmt.com.cw where you can download the latest company presentation and earnings report. We encourage you to have this meeting materials from our third quarter operations, followed by outlook for fourth quarter. Afterwards, I will go through our financials in detail. As usual, I would like to remind everybody that our comments in response to your question reflect management's view as today only, and will include forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained 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.

Hello, everyone. Thank you all for being here today with us. Firstly, let's talk about the industry landscape and the market dynamics. Physical stores such as department stores, hyper supermarkets and the convenience store together, net revenue increased 8.7% year-on-year in third quarter, higher than e-commerce modest growth of 3.7% year-on-year. It was mainly impacted by ongoing reopening effect, overall weak consumer sentiment and macro uncertainties. However, the gross rate gap between online and off-line has been further narrowed from Q2 13.6% to Q3 5%, and we expect that gap to further reduce in fourth quarter. In the meantime, we have seen continuous efforts of offline players to expand their online sales and the new entrant ramps up its marketing campaigns. All these activities are going to accelerate Taiwan's e-commerce market growth and expand their market penetration. Although the competition is heating up, we think the stronger ones will get even stronger and can benefit from a large market share in the long run. One thing we firmly believe is that Taiwan EC market penetration rate will continue to grow to match those well-developed markets such as Korea, China and the U.S., et cetera. As for momo, our leading market position and the demonstrated execution track record will continue to allow us to benefit from this growing larger markets. And so far, we have outgrown the industry average for the past 3 quarters of this year. Let's move on to the third quarter operational highlights. Our third quarter company revenue increased 6.4% year-on-year, stronger than 4.3% in the second quarter, in line with our expectations. Third quarter company operating margin came in at 3.6%, with the first 3 quarters' operating margin at 3.9%. Third quarter operating margin was impacted mainly by the lower tax rate and higher marketing expenses. About our e-commerce business. Despite macro uncertainties, our EC business reported a 7.3% year-on-year growth in third quarter, continuing to grow much faster than the e-commerce industry average of 3.7%. Meanwhile, e-commerce operating margin improved to 3.6% versus 3.5% a year ago, driven by efficiency gain in operations. The major 5 product categories continue to their growth runway, but at a more moderate pace with Beauty and Healthcare, Sports and Leisure, Fashion and Luxury delivering stronger momentum. On the other hand, 3C and Home Appliance and Household products reported tepid growth rate, largely due to COVID high base and consumer spending more on travel and leisure activities. Home Appliances still suffered from high base in previous year and consumer electronics sales was helped by the new iPhone launch in September. Despite the low growth rate of overall 3C's category, we are still gaining the market share. We are also pleased to see the e-commerce active user and their order frequency continued their upward trend in the third quarter. And the total Fubon and momo co-branded credit card payments has increased 30% year-on-year, contributed to 34% of total e-commerce revenue versus 29% a year earlier, demonstrates growing customer loyalty and stickiness. About our TV shopping and the live streaming. TV shopping continued its downward trend, and resulted in lower revenue and lower profit. However, we have also seen a good growth momentum on live streaming in terms of the user base and the time spend as well. On the logistics side, Southern distribution center will be in operation in the first quarter of next year. With that, we will be able to offer even better services to the customer in Southern Taiwan and improve our logistic efficiencies. As for central distribution center, we held our groundbreaking ceremony yesterday. The construction work will begin soon and is set for 2027 in operation. The total CapEx for construction and automation for central distribution centers is around TWD 7.6 billion, with actual payment being spread through various phases of construction until completion. On the ESG front, we launched a new green line membership program on September 1, by quoting customers with intent to participate in our various environment friendly activities such as using recycled packages, combining multiple shipments into one, environmental-related community services, et cetera. In just 2 months, we have accumulated more than 140,000 customers. Finally, look at -- looking ahead to the fourth quarter. Fourth quarter is the most important season for us, where we're well prepared with strong marketing programs and a competitive product lineup. We expect a positive revenue growth, but the growth rate will be lower than last year. As far as the operating margin is concerned, we think it will be slightly lower than last year as well. So this concludes our -- my third quarter operational highlights and the key messages. Now let me turn the microphone over to Terrisa.

Thanks, Jeff. Before financial update, please turn to our presentation, Page 5. You will find the full note regarding accounting adjustment for mo coin our cash reward to customers. Starting in third quarter, instead of booking mo coin as marketing expenses. mo coin will be directly deducted from our company revenue, leading to lower net sales, but also lower OpEx. Thus, no material impact to operating profit. By using the same accounting treatment as last quarter, third quarter company revenue growth would be higher at 6.8% year-over-year, instead of 6.4% as reported. While OpEx Y-o-Y will be also higher at 11.7% instead of 4.2% as reported. We expect the adjustment will be fully reflected to your third quarter 2024. Back to key ratios. OP margin came in at 3.6% from 3.7% a year earlier, impacted by TV structure decline and unfavorable EC TV mix change, offsetting logistic efficiency gains. You can see from the P&L, operating cost declined 1.4% year-over-year as we further improve operational efficiency across our Island-wide logistics network. For example, improved digitalization of demand forecasting and inventory allocation also optimized order fulfillment and minimized mid-mile transportation cost. Net income to parent declined 0.9% year-on-year and basic EPS came in at TWD 3.12, which can also be attributed to company operating profit increased 4% year-over-year together with non-op gains declined 63% to TWD 22.9 million. Moving to Page 14. The major 5 product categories continue their share gain story in spite of overall slow product consumption. 3C and Home Appliance continue to grow and increased 6% year-over-year, contributing 39% of our EC revenue. Even though it is the most mature category, its growth runway is still long, given the online penetration rate for consumer electronics is only 25% to 30% in Taiwan versus over 50% for other developed countries. Household product, including grocery items, kitchenware, home improvement, furniture, bedding and pet supply contributed 28% of e-commerce revenue and increased 5% year-over-year due to high base. Beauty and Healthcare increased 60% year-over-year to account for 18%, maintaining robust growth driven by our superior supply chain capability. Our efforts in deepening relationships with brands and maintaining stock availability and assortment have been paid off in recent years. Last, Fashion and Luxury increased 9% to account for 10% and Sports and Leisure increased 11% Y-o-Y to account for 5%. As for live streaming, we are encouraged to see the total numbers of participating suppliers and the product increased robustly in third quarter. And the total number of viewers reached a record high. We believe engagement on live streaming helped drive higher level of traffic, new customer acquisition and retention on our user base. Moving on to the balance sheet in Page 10. We ended third quarter with net cash positions of TWD 4.57 billion. Regarding cash flow and the CapEx in Page 11. During the third quarter, we generated about TWD 1,157 million in cash from operations. Spent TWD 802 million in CapEx, including around TWD 600 million... [Audio Gap] distribution center construction expenditures. Finally, let me touch on CapEx. Every year, our CapEx expand in anticipation of the growth that will follow in future years. Given the near-term macro uncertainties and the tougher competitive environment, we continue to manage our business prudently and continue our reinvestment to cement our industry leadership and future growth. In the meantime, work diligently on our internal efficiency improvement. We continue to be optimistic about the long-term growth potential of the opportunity and the market we are addressing. This concludes my update, and thank you for your attention. Now we are ready to open the line to questions. As usual, Jeff will lead this part. Operator.

[Operator Instructions] Okay. I got a first question from Angela from Citi. The first question is regarding competition, with coupons aggressive competition in 1P this year, what are the things that we have done and or are we going to do to -- what are we going to do to increase our competitiveness or things you have done? Can you please share the initial results? And the second question is, how do we balance share gains and the margin contraction? Is share gain still our priority and are we willing to sacrifice the margin pressures for that?

Okay. Thank you for the question. For the first one regarding coupon, certainly, I think everyone has noticed that they have increased a lot of their investment in this market, both in terms of the marketing activity and price competition. We have seen -- they have got a lot of attention through the heavy advertisement. So I think that will lead them to enjoy some gain in terms of the traffic. And however, the way we see this is, I think the e-commerce business is -- we treat it as a marathon. So I don't think we will do quite differently, because downwards sprinting at the moment. We will maintain our long-term competitiveness. And with no intention to engaging in price war with them, just because they would like to use the price to acquire more customers. In terms of long-term impact, I think after the dots come down, everyone needs to go back to their normal business. I think the true test will be at that time. And we believe if we continue to increase our product selections and do a better service, I think this business will, at the end, come down to those basic principles, and I think we are okay in the long run. But it doesn't mean we ignore its existence. We still watch very carefully about all the developments they had done. And including they just announced they're going to build certain warehouses. However, as you probably can find every large distribution we announced, we need to take a switch for 2, 4 years to build. So whatever you can find on the market is really available are all those small ones and how to make those small scatter the warehouse to run competitively, I think that's another challenge to present to them. Regarding the second question about the, how do we balance the growth and the profitability. We have always told investors that growth is very important to us. I think so far still it is, although we have experienced some headwinds so far this year because after the COVID, we still believe the e-commerce market penetration going to reach to -- to the standout of those developed countries. So we need to make sure when that happens, we are there to grab that growth opportunity. So growth is still important. However, we will not sacrifice with all the way just for the growth. I think profitability, maintain certain profit level is also very important to us. And I think so far, we have been successful in doing that. So although for this year, the past 2 quarters, our revenue growth rate has slowed down, and we still maintain the profit, still positive growth. So we will carefully manage this balance for the coming period to come. Okay?

Okay, operator.

Next question comes from Daniel with UBS.

Jeff and Terrisa, could you hear me?

Yes.

Okay. My first question is that as we open in fact, it gradually goes away and everything goes back to normal, what revenue growth rate would you expect in the mid- to long term for the company?

I think long term -- mid to long term, it's hard to say at the moment. And -- but we can -- we also feel that we open, in fact, has gradually goes away. But how soon the consumer going to go back to their normal standing allocation online, offline, I think we don't have an answer for you yet. We still observe some key indicators. But I think the only answer I can give to you is we still believe our e-commerce penetration rate, we're going to reach to that level. How soon, I just cannot comment yet.

Okay. And second question is, could you give us an update on the development of the new business, which is the 3P and advertisement, what's the time line and the potential revenue contribution in 2024 and '25?

I think we will probably give you more information when we have -- once we complete our 2024 budget and all the preparations. Next year going to be probably one of the early years of this initiative. I think it won't be a significant year to our overall business. However, the next year, we're going to focus on the growth rate. And I think probably our next conference call, we can give you more color on that.

Yes, sure. Sounds good. And the last question from my side is that I noticed there is some delay for the operation of central distribution center. I recall previously, we targeted 2026, but now it's '27. Any reason behind this delay?

Mainly is the complexity of the construction work. After we finished the design is going to be underground, 2 storey and above the ground, 8 storeys building. And the overall storage space is going to be 39,000 ping is going to be one of our largest distribution center. So once that design gets finished and we have the -- and we'll have that work contract out. And so we have the more accurate construction work, needs to be done. So that we will work out, there going to be really in Changhua center. We would like to be really [indiscernible] but however the way it is.

Okay. That's very clear.

Next, we have Andy. Andy, please begin your questions.

Hi, Andy, we cannot hear you. Andy Wang from Morgan Stanley. Okay. Maybe operator, we can move to the next question.

Our next question comes from [ Casey Tan ] with Allianz Global Investor.

Hello, can you hear me?

Yes.

I have 2 questions. The first one is regarding your B2C take rate [indiscernible] in the third quarter, is down about 40 to 50 bps both Q-o-Q and Y-o-Y. But when I look at your product mix, the customer also both Q-o-Q and Y-o-Y. So I'm just wondering what's the challenge here for lower [indiscernible] both Q-o-Q and Y-o-Y that's my first question.

Sorry, you are breaking out. So we really can't hear you clearly.

Okay. So I'll try again. So my question is, your B2C take rate was down 40 to 50 bps, both Q-o-Q and Y-o-Y. But the product mix are [indiscernible]. So I'm just curious what's the reason here?

Right. Regarding the take rate, basically, company-wise, there are many impacted by the percentage shift between the TV and the e-commerce. Within the e-commerce, I think it'll be -- take rate mainly impacted by the product category, as you can -- you have noticed on our presentation, Page 14, our third quarter, our 3C and home appliances accounted for 39% and -- which is 1% or 2% lower than we used to be. And that category is low-margin categories are certainly going to help. However, you can also see -- there are, let me see -- our -- the household had only had 5% year-on-year. So all these adds up. [Audio Gap]

[indiscernible] mix is actually lower Q-o-Q and Y-o-Y, right? In the third quarter, it was below 40, in second quarter this year and third quarter last year. So it should be a tailwind rather than a hail-wind for your B2C take rate. So I am just curious if -- I'm not sure if there are any more other reasons like pricing, have you taken more accretive pricing to defend market shares?

That's certainly also one of the reasons, yes. And because you have that weaker consumer sentiment, of course, sometimes you will resort to the lower price to really incentivize people to buy more now. Yes, it's also one of the reasons. But the main reason is still the product mix.

And my second question is, it's also partially related to my first question. So looking at your active buyers, right? Those buyers, whether the numbers what they're spending are still growing quite well versus the overall MAU, rather the broader time base. So my question is, do you think if we reached the limit of converting MAU into active users? And if so, will you consider just cut marketing expenses, right? Because now, the -- if it's the major spending -- the growth of spending when it comes from your loyal customers and as such they are not as sensitive to the marketing campaign? So the CapEx expenses here. That's my second question.

Right. Yes, the loyal customers become more loyal, as you can see from the average purchase per active customer, yes. And also you are right, the conversion rate is lower and as I said, it's hard to convince people to spend, because of the weak consumer sentiment and then their preference to spending on the travel and dining out. So all those things more expensive or they tend to shop around. So they are all result of lower conversion rate. However, it doesn't mean we have reached to the peak of the traffic. It's just because of those macro conditions, both consumers become more cautious on the spending. And I think it's not going to gradually improve with the more clear on the economic outlook and also the reopening effect -- reduce and people go back to normalize in terms of how they spend the money.

Got it. Those conversions are just temporary?

Yes.

And my final question is regarding the subscription program or membership program. We know -- I think again, as sort of the membership program, I'm not sure it's here in Taiwan, but definitely in the country. And also, I think Shopee also launched a subscription for free shipping. I'm just curious, given your dominance and leadership in B2C and in terms of market share and also in terms of product category you've offered, you've added many new categories like food, insurance, and now you have more cooperation with Taiwan Mobile. The product portfolio look to be becoming more bigger and more diversified and also different kind of value to customers. So I'm just curious, are you considering -- besides your new business, right? Those 3P and MS, are you considering also launch sort of the membership program? And when will be that? And if not, what's the duration here?

We have been contemplating to have a membership program. However, in order to have a membership program that has that kind of stickiness is difficult to come up, because the fierce competition landscape in Taiwan, we already made most of the shipping costs to 0. So all those cases, you mentioned the membership program as surrounded the shipping cost. So you joined the membership, then you will have the discount of free of the shipping. So that has gone, so we need to come with something else and we have tried several different activities with our associate companies. For example, Taiwan Mobile they have their mobile phone plan combined with momo coin. So if you use Taiwan Mobile subscription, and they will reward you with momo coin, so that will take that customer to momo. We had limited success. It's not a mainstream mobile product yet. However, it does attract some of the customers. So it benefited both of us and we are continuing to explore other ways. But so far, we haven't really carved a program which can reach to the effect that you mentioned or you referred to what happened in the overseas areas.

Just to clarify. So it's not like if you are going to have more active [indiscernible] centered around momo coin rather than a membership program charging, let's say, TWD 100 per month? It's probably one of the big action we will do more actively to combine with the momo coin. Is that understanding correct?

Momo coin is a vehicle to link our products together. So it's not a -- momo coin is a membership program, but it's a very good vehicle to make the customer feel they get a benefit and make all our products linked together. And we would like also to expand that momo coin into our ecosystem. If we can do that and by the use of membership it will become more beneficial to the consumer and it will become a more effective membership program, but we're still working on that.

Okay. Thank you. This concludes our Q&A session. And thank you for joining us today, and we hope you will join us again next quarter. Thank you.