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

Good afternoon, ladies and gentlemen. Welcome to the Momo Conference. Terrisa, please begin your call and stand by for the question-and-answer session. Thank you.

Good afternoon, everyone, and welcome to Momo's Fourth Quarter Earnings Conference Call. It's great to see everyone once again. This is Terrisa Liu, Momo's Head of Investor Relations. Today's event is being broadcast live through our website where you can also download our earnings report and presentation. The format for today's event will be as follows; first, President Jeff Ku will provide company key message, operation highlight followed by 2024 outlook. Afterwards, I will jointly share some operational updates for the fourth quarter. Last, Jeff will take your question during the Q&A session. As usual, I would like to remind everyone today's discussion may contain forward-looking statements that are subject to significantly risk and uncertainty, which could cause actual result to differ materially from those contained in the forward-looking statements. Please refer to the Safe harbor notice that appears on our presentation. And now I would like to turn the call over to Jeff.

Hi. Hello everyone. Happy New year. Thank you for joining us today. I will start with a brief overview of the industry landscape. After that, I will touch upon the company's performance and then the outlook of 2024. First, the industry. For the previous year, 2 factors that impacted the retail industry most were post reopening consumer behavior shifting in favor of physical activities, and the competition dynamics change. In fourth quarter of 2023, despite the traditional high season for e-commerce, the online sales growth still lags behind the physical stores with a 2.4% and 5.3% YoY growth rate, respectively. However, the growth rate gap between the 2 groups had further narrowed and the momo continued to outperform the market. It is an early sign that the reopening effect starts receding. Looking ahead, we anticipated that reopening and the high base effect from the COVID period will diminish. Consumer spending behavior will soon return to the long-term evolution path. Online, we're continuing gaining market share. Regarding the competition landscape, we are all aware that there are a few equity deal announced. The industry is going through a new round of consolidation. Besides that, the new entrant has been aggressively acquiring market share with high spending in advertising and the price discounts, particularly on FMCG. Its impact is not limited to online. This has also impacted the physical stores. Although it has put pressure on us as a competitor, on the other hand, it also helped increase the online penetration of the whole market. Taiwan online retail as a percentage of total retail excluding auto and a few stood around 13% to 14% on fourth quarter of last year. Taiwan's e-commerce penetration still lags behind that of its regional peers such as Korea, China, and Indonesia, even after the strong growth during COVID period, suggesting that there's still considerable room to grow. Therefore, we still strongly believe that the total addressable market is substantial for momo. On back of our strong warehousing and logistics capability, extensive product offerings and proof track record of execution, momo is best positioned to capitalize on the structural growth of e-commerce over the next several years. Now, let's move on to the fourth quarter operations performance. Our first quarter revenue was NTD 32.8 billion, marking only 3.2% year-on-year increase. The rising competition and softer consumer spending resulted in lower than expected revenue growth. As a result, e-commerce revenue growth was 3.6% year-on-year, compared to 20% year-on-year growth a year earlier. Nevertheless, the 5 major product categories continue to gain market share. However, the operating profit margin remained resilient at 4.2%, supported by an improving e-commerce operating margin of 4%, up from 3.9% a year earlier. The healthy operating margin reflects our advantage as a market leader and excellent management discipline. On the cost side, operating costs were effectively managed, driven by enhanced bargaining power and efficient cost management practices. Concurrently, we have made a significant stride in optimizing inventory management, packaging, material conservation, and automation. Although facing competition, we have smartly managed our marketing expenses and avoid the right price competition, while still keeping a good customer engagement. We are pleased to see that the number of quarterly active user have reached an all-time high with a 5% year-on-year increase for order frequency as well. In the meantime, momo/Fubon co-branded credit cardholders' spending contributed to 34% of the total EC revenue, demonstrating a good customer loyalty and stickiness. Now let's look at our warehousing and logistics development. momo's island-wide logistics infrastructure, which we have built over the last few years, represents a key competitive advantage. In 2024 with addition of the southern distribution center and a few main warehouses added in Q4 last year, the total spaces were expanded by 15% year-on-year. Southern distribution center is expected to be operational in middle of the year. Now let's move to the ESG part. Our effort to engage customer in environmentally friendly practices such as promoting the use of recycled packaging, combining multiple shipments within the same order, and supporting environment-related community services have all yielded some success. Since the launch of our Green Life membership program in September last year, we have more than 330,000 registered members. momo recycled bag was developed and launched back in 2020 to facilitate easier ways to recycle these bags. We have expanded our collection point to include around 1,000 Taiwan mobile branded stores on top of the existing collection points such as postal mailboxes, i-boxes and simple modest chain stores. Now finally, let me make some comments on 2024 outlook. We have observed ongoing effort by offline players to enhance their online presence. In the meantime, we have also noticed the new entrant has increased their investment in this market. All of these activities are expected to accelerate the growth and penetration of Taiwan's e-commerce sector. For sure, momo will be one of the major beneficiaries riding on this trend. We estimated that our sales growth in 2024 will surpass that of 2023 and will be getting better quarter by quarter. As for profit, there are still a lot of uncertainties and it's kind of hard to predict at this moment. That said, we estimate the Q1 profit margin would be close to last year's average. Also, we think our B2C business will continue enjoying the economies of scale and the efficiency improvement, which can support the investment of the new initiatives. In terms of the new initiatives, we have committed to invest in areas such as 3P services, retail, media network and live streaming shopping to foster long-term sales growth, profitability, and shareholder value. We are taking a balanced approach between growth and profitability. The scope of those new initiatives will be rolled out in phases. Some of them have already been launched, such as live streaming, and others will be launched soon this year. Now I will turn the call over to Terrisa and I will take your question after that.

Thanks, Jeff. In the fourth quarter, momo achieved a record high company revenue of NTD 32.8 billion, marking an increase of 3.2% year-over-year. Our e-commerce contributed 96.6% of our total revenue and increased 3.6% year-over-year compared to 20% year-over-year a year earlier. The decelerated revenue growth mainly reflected overall product demand slowdown and consumers refraining from stockpiling as happened during COVID period. Despite encountering macro headwinds, we continue to gain shares across our major 5 product category. You can refer to presentation page 11 and 12. You can see the chart. 3C and home appliance increased 3% year-over-year, household 1%, beauty and healthcare 17% year-over-year growth, fashion, luxury 4%, and sports and leisure is 6% year-over-year increase. Among the notable subcategory, communication, healthcare supplements, skincare and cosmetic products report stronger customer demand. On the other hand, home improvement, kitchenware, bedding, fashion items saw tepid momentum. As unusual warm weather hurts sales of winter collection across fashion, our steadfast commitment to customer engagement yield positive result. Key customer metrics such as numbers of order, active user growth, repeat purchase, and average revenue per user all continued to grow year-over-year, demonstrating growing customers loyalty and stickiness, while ticket size was down 2.6% year-over-year, mainly due to fewer purchase in the 3C and home appliances item. Moving on to our operating margin, it remained resilient at 4.2% supported by EC op margin improving to 4% from 3.9% a year earlier. The improvement was mainly driven by favorable product mix and efficiency gains in logistic operations, offsetting higher marketing expenses. Thus, our net income to parents increased by 12.4% year-over-year, resulting a basic EPS of NTD 4.78. Moving on to the balance sheet in page 7, net cash position was NTD 6.3 billion compared to NTD 8 billion in the fourth quarter 2022. The decrease was mainly due to higher cash dividend distribution and higher CapEx in warehousing and logistic infrastructure. Now regarding to cash flow and CapEx in page 8 and 9. In 2023, momo reported a free cash flow of NTD 2.3 billion. You can see the chart. The cash CapEx was paid NTD 1.3 billion, including, first, NTD 846 million directly toward the construction, procurement of equipment, and implementation of a solar power system for the southern distribution center. Second, NTD 279 million allocated for construction-related cost associated with the establishment of the new central warehouses. Among the other expenditures such as IT equipment and software enhancement, warehouses-related facility and the vehicle purchase. This reinvestment reflected our dedication to innovation, efficiency, and sustainability, which are the key factors ensuring our long-term success and growth. Meanwhile, 2024 CapEx is budget at NTD 1.28 billion. NTD 457 million is for implementations of automation equipment for the central distribution center to enhance operational efficiency and a streamlined process. NTD 350 million investment in infrastructures and facilities directly related to the warehouse operation to optimize storage capacity and logistics management, while NTD 378 million is for the IT infrastructure to support developing of our new business and also enhance technology capacities. Last, NTD 92 million primarily focus on expanding and improving our in-house fleet to meet a growing operational demand and maintain service quality. Finally, let's look at a recap of our performance in 2023. 2023 was a challenging year for Taiwan e-commerce industry, mainly due to the macro backdrops. Nevertheless, leveraging our core competence, momo continued to outpace the growth of Taiwan online industry. Our company revenue continued to reach record high of NTD 109 billion. With the e-commerce revenue increasing by 6.6% year-over-year continue to outpace the industry growth of 2%. Our operating profit increased by 2.3% year-over-year and op margin held up resiliently at 4%. Basic EPS reached NTD 15.10, reflecting a 5.7% year-over-year increase, while recurring EPS reached NTD 15.44, demonstrating an 8.9% year-over-year growth. In conclusion, our performance in the fourth quarter and 2023 underscore our resilient and capability to navigate challenges, while driving both growth and profitability. We remain optimistic about our future prospects in this dynamic e-commerce landscape. Operator, we are now ready to begin the Q&A session.

Thank you, Terrisa. Ladies and gentlemen, we will now pool for questions. [Operator Instructions]. And our first question comes from Daniel Chan with UBS.

So first question is about you mentioned there are still uncertainty around 2024 operating margin. Could you share with us what's the uncertainty? What's the moving part you are seeing?

Well, 2 things I think, Mandy. One is the speed of customer behavior shifting go back to normal. Last year we're mainly affected by the reopening effect. People just so into the physical activity they have been missed for 4 years. That activity sooner or later going to go back to normal and the less spending will be reallocated as well. Just the speed of that change. And then secondly, of course, is related to the competition label, what kind of competition we will see in the coming quarters. And that will also affect the profit margin. Yes, basically these 2 things.

And in terms of the revenue growth, and also you mentioned about the competition, do you think we're still able to grow above industry in 2024 or are we willing to sacrifice profit margin to outgrow the market?

Firstly, we are pretty confident that we'll grow more than the industry average since we have been the clear leader on B2C e-commerce side and we will enjoy that position and the scale induced benefit on that part. And sorry, what's the other part? Just to refresh.

Are we willing to sacrifice profit margin like more in marketing? Yes. Thank you.

No. As I said before, no. We don't think we need to go down to that level. From past years experience, I think we will still take a balanced approach. It can achieve both revenue growth maybe a little bit lower than it was a few years ago, but maintain still a reasonable profitability.

And my second question is about the new business. I see some media report says our new business will be launched soon, probably in March. So could you share with us what's momo's strength and weakness compared to the current 3P market share leader, Shopee, and also what will be the impact on our financial from this new business and your target and outlook. Thank you.

Yes, we're still testing a lot of things and make ourselves well prepared before we launch our 3P services. So whether we'll be marginal or not, we haven't really made the final call yet. Regarding what's our advantage, I think our biggest advantages are 2 things. One is our brand. I think we have a very trustable brand on Taiwan e-commerce market and secondly, our customer base. We have more than 10 million registered customer. And for the past few years, we have been concentrating working with the brands on the B2C side of the business. We have reached some level of penetration and we also noticed we're on the long tail part, which we still don't have enough product can be presented and sell to our customer. And that's the reason why I think it's a time we can bring more merchandising and make it available to our customers. And all that operation still [indiscernible] on the same thing with the same operation. So I think our past record could be our one of my major advantages in entering into this new business.

Thank you. And my last question is about this quarter's company's overall take rate. I read in your operating report you mentioned under previous accounting treatment, company take rate actually increased year-on-year. So I remember company take rate tends to decrease because high margin TV shopping business is declining. So I'm just trying to understand why take rate increased this quarter. Is it due to B2C take rate increase or other business take rate increase?

Well, I think for one is the product mix. If you can look at the numbers just shared by Terrisa, our beauty and health product category outperformed our 3C and home appliance, which means the high-margin ones grow more than the low-margin ones. But more importantly, I think still it's a scale thing. I think the scale give us an advantage in all aspects of this business, so not only on the product side, also on the operation. So all that I think has been showing as a market leader, you can enjoy that benefit.

And do you think this strong take rate increase is more like one-time or we can observe that it can sustain into future quarters?

Except that product mix difference, if you talk about individual product category, we don't see the take rate will vary that much and will continue gaining that scale benefit.

Thank you. Our next question comes from Helen Chien with Daiwa.

I have 3 questions. First, regarding to the reinvestment in the future growth engine, what's the OpEx impact in 2024?

I can't give you a number, but what I said in previous section was we intend to use a balanced approach and we'll always -- translating that word is we certainly will have our EPS in mind. We don't want that fluctuating a lot. And fortunately, our B2C still doing well and charge a good money and so can support us into this new business. And also not all this new business need a lot of investment. For example, live streaming we have started a few years earlier and that take advantage as part of our TV operation and 3P service is really 1P extension based on the same platform and also take a phased approach. So I think yes, it will spend some money, but I think so far we say it can be very well managed.

And my second question will be I consider Taiwan EC growth normalization post-COVID and also you mentioned about the warehouse space will expand by 15% year-on-year. Can we expect double-digit revenue year-on-year growth in 2024 or what should we expect?

I don't have the exact number. I just know in terms of the sales growth we're going to get better quarter by quarter and it will affect by the same reason I talked about before. Regarding the warehousing space expansion of 50%, as a part of it actually was added in first quarter last year. So it's just because those are big warehouse. So once it launched, you just have a big chunk of the space added to your capacity. So what we will do is we used to rent a lot of the space from the third-party because in the high season we always run out of space. Now we just need to cut down on that. So we basically take those rental needs back to in-house. So we don't see that's a problem.

And my last question will be more on the Taiwan e-commerce markets. Why the reason behind the recent slowdown and the long-term outlook because do you think the long-term structure growth story working in the Taiwan markets as we see the offline growth overall actually very solid after the COVID and why Taiwan's EC penetration rate is quite low compared to as you mentioned like China, Hong Kong, Indonesia and you think what will be the key driver for the further penetration rate increase.

I think the key driver is the technology trend. However, why Taiwan's EC penetration rate is low compared to other countries? I think for one is because we are a small country and highly populated. Everything seems convenient. So that need is not that urgent. However, during an evolution, no matter for whatever reason, you will go along with that trend. So one good example is Uber, Uber Eats that kind of food delivery service. When they first launched in Taiwan, people always say, there's no need, I can go downstairs and just grab whatever I want to eat. But still, you can see even after COVID, people's behavior doesn't return 100% before COVID because they just get used to it. And I think Taiwan has a reason why the penetration rate behind because of its natural inherited characteristic. And secondly, because if you look at market, for example, Korea and China, they have been through a period of very highly competitive market on e-commerce. There are so many players and they're putting so much money on and that accelerates its penetration rate for sure. So I think, as I said before, with the new investment coming in, we don't see just only the competition get intensified, it also help to drive the overall market penetration, so the growth -- the pie become bigger for us. So it's also a positive side of the competition.

Our next question comes from Bill Lin with JPMorgan.

My first question is about the growth because we can see, I think, the competition in Taiwan is rising. And if you're looking into your category group, I think for beauty that category is doing well. But for the household other category [indiscernible] last year actually the year-over-year growth rate decelerated. So if looking to 2024 as you guided the comparison base will be easing and maybe shopping behavior will come back. What is the company's strategy to enhance the growth of the sales growth in slower categories among that? And I also have a second question that is about the new business. Going forward, I want to clarify about the accounting treatment for the new business because it's 3P. So I want to understand will momo just record it as a service fee model or that will also incorporate into our revenue top-line growth.

Okay, your last question first. For the 3P service, we only were taking the commission part, so we are not taking the overall sales as a revenue. And your first question regarding different product category, how do I see it in this year's growth? I think competition really collapsed. I don't think our slow growth on say for example household mainly comes from competition, rather it really comes from the high base. For example, face masks was selling a lot during the COVID, but it didn't sell any last year, so that comparison and for example, the 3C, so it's really nothing to do with the competition, just the overall market for the notebook and PC hasn't really recovered yet. So I think it still depends on the product and the economic situations and I think the product innovation certainly will drive the demand. Of course, also there's a continuous shifting from the physical store to online and that part I think will be benefited once the reopening effect is receding.

Okay, I understand. And also Jeff, can I clarify a question with you? I think in your comment you are saying the quarterly revenue will be better and better each quarter. Do you mean year-over-year growth over the absolute number?

Year-on-year growth rate.

And we have some questions actually from our webpage. The first question actually comes from the UK. Please comment on which e-commerce companies in Taiwan that are winning and losing market shares. Who is the most aggressively on advertising, pricing and also promotions?

I probably cannot really comment on this one. I think you can all read on financial report. You will know their market share, how the market share changes. And I already mentioned the new entrant has spent a lot of money on advertising and offered price discount. So, yes.

Okay. The second question will be when will media network platform to be launched and what can we expect from this new business opportunity by size and also margin.

This is kind of a total new business line for momo. And the first challenge is to build the technology foundation. We have some trial products running. So I think this year is mainly building out the capability. The revenue would be still moderate, although the gross margins on those revenue are pretty high, just like a normal advertising business. So hopefully and we'll see the revenue picking up in the coming years and that will become a major profit margin contributor.

Okay. We are ready to take the final question. Actually comes from the UBS.

The question comes from Daniel with UBS.

Hi Jeff, I got 2 more follow-up questions. And first question is about the live streaming. So we have seen success of e-commerce in live streaming in other Asian market. And how would you accept the possibility of live streaming e-commerce gaining mainstream popularity in Taiwan. Also I understand we already transformed TV shopping into live streaming. When do you expect this to scale-up and make meaningful contribution to our business?

I don't see live streaming will take that kind of significant role like what happened in Southeast Asia or China, in Taiwan. However, it's a good compliment at least for momo. For one, we have an existing TV operation with the reducing target audience. It's good media for us to shift the same scale to address a new audience. And secondly, I think it's a good way of complimenting the existing e-commerce by adding more content. So you not only come to momo to buy something, you can really just like you go to a department store, they're not just going to buy things. You browse the window, you see the product. So it has the effect of driving the traffic. As you all know, running an Internet service, traffic is very important and live streaming do drive a lot of traffic and stay longer term. In terms of the GMV and all that, I think in terms of that is we were still behind the 1P service by far. And I even think a 3P service has a much faster growth rate than live streaming in terms of the GMV.

Any reason why you think the live streaming e-commerce won't be that successful in Taiwan compared to like Southeast Asian?

I probably need to rephrase it. I think it will be successful in Taiwan, but just not as crazy as what happened in Southeast Asia and in China. And I think it is also suitable for certain product category, and in other words, it doesn't suit both for another product category for product need to be presented and need to be explained. And I think that's a good way of demonstrating your product and sell it. And for product pretty centralized I don't think live streaming has a good role to play. Maybe we come from sort of a general purpose e-commerce player with 1P, 3P, live streaming. We have all these different channel to reach customers, so we don't really depend on one channel. So I made that comment. For other guys, if they're mainly working on the live streaming, maybe that's very important to them. So I think that's from different perspective.

I see. And 1 final question. So I understand our main competitive age is on our logistics advantage. And how difficult or how easy do you think for competitors to follow suit and invest in logistics, then catch-up in terms of our logistics advantage?

Right. I think it's easy to go out, rent some spaces and easy to find someone to deliver your parcels. However, if you want to enjoy the efficiency and the high level of customer service, you have to own it. So far we don't own everything. We have a lot of warehouses rented from, but we do have our northern distribution center in operation for years and soon we'll have the second one. So we noticed a bigger difference, because if you build your own, it tends to be fully automated. That'll be more efficient to operate. If you rent someone's existing warehouse, it may not 100% feed your needs and you certainly will not spend a lot of money to automate it. Because once this ends, then you need to write-off all the investment. And not to mention you need to have your own fleet to manage end-to-end service labels. So far we have 25% to 30%, all our process delivered by our own fleet. All that you need time and the money invested and not money alone. Even you have money, if you build a distribution center automated, the same automation label like ours, you're talking about 3 or 4 years build-out time.

And our next question comes from Angela Hsu with Citi.

So I have 1 question regarding to the momo and Fubon co-branded credit card. So I noticed that rebate is further lower to 3% from 4% starting from this year. I just wonder why we want to lower the cash rebate amid rising competition. And more importantly, do you spot any consumer behavior changes post a decrease in cash rebate.

Well, that decision is not made solely by us, it's a co-brand card. So we jointly made that decision with the bank. Of course, we have noticed that benefit has reduced year by year. So in the meantime, we have also working with other banks and institution to have all the different campaign promotions to compensate for that. And we have ourselves putting more marketing support together with our manufacturers. So, so far, we're seeing -- although we heard customer feedback and so far we think it's still okay.

Okay. We are running out of time. Thank you again to join our fourth quarter conference call, and we hope to see you again next time. Thank you. Bye-bye.

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