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

Good afternoon, ladies and gentlemen. Welcome to the Conference Call. Terrisa, please begin your call and I'll be standing by for the question-and-answer session. Thank you.

Hi. Good afternoon, everyone, and welcome to momo's First Quarter 2024 Earnings Conference Call. It's great to see everyone again. This is Terrisa, momo's Head of Investor Relations. Today's event is being webcast live through momo's website, where you can also download our earnings report and the presentation. The format for today's event will be as follows. First, Jeff will provide company key message, followed by outlook. Afterwards, I will jointly share operational updates for the first quarter. Last, Jeff will take your questions during the QA session. As usual, I would like to remind everyone that today's discussions may contain 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 on our presentation. And now, I would like to turn the microphone over to Jeff.

Hi. Hello, everyone. Thank you for joining us today. I will start with the industry status and Q1's financial performance. Then move on to the new business initiatives. And lastly, we will touch upon the outlook. First, the industry and our operational highlights. In the first quarter of 2024, the overall retail industry showed a modest growth of Y-o-Y 3.1%, lower than previous quarters. Among them, supermarkets, convenience stores and e-commerce recorded higher than the industry growth rate. The slow product consumption may be partially impacted by future economic uncertainties and better service consumption across transportation, travel, dining, et cetera, which took more share of consumers' wallets. As for momo, our e-commerce began with -- the year with 7.2% year-on-year growth in revenue and continues to outpace the total online industry, which had a 3.6% year-on-year increase. All our product categories have experienced to a certain extent of market recovery from post-COVID, but the recovery speed varied. Noteworthy products such as camera, food, jewelry, health supplement, skincare, cosmetic, all reported stronger customer demand, while certain segments such as consumer electronics, home appliance, home furnishings and fashion saw relative weaker consumptions. Key customer metrics also displayed encouraging trends with a 7% year-on-year increase in quarterly active users. This growth was primarily driven by an uptick in male customers, underscoring our efforts to attract and broaden our customer segments. Our operational performance, the total company's EBITDA reached $31.45 billion (sic) [ $1.45 billion ], an increase of 5.8% year-on-year. The company's EBITDA margin held well at 5.4%, primarily driven by a favorable business mix attributed to improved TV shopping revenue and the margin contribution. The operating profit increased 2.3% year-on-year, lower than EBITDA's growth, mainly due to increased warehouse rental amortization with continuous warehouse storage optimization by returning those temporary rented warehouse spaces and moving into those large ones. This unfavorable amortization factor can be neutralized with time. EC EBITDA grew at 4.5% year-on-year, maintained a solid EBITDA margin of 5.1% despite unfavorable product mix compared with last quarter and higher promotional expenses. However, the low 0.3% EC operating profit growth was mainly caused by internal depreciation and amortization and administration cost allocation and the cost incurred by new businesses. Because those reasons, we encourage you to focus more on its take rate and EBITDA rather than operating margin. Media business reported a 3% year-on-year revenue growth with EBITDA 33% year-on-year and operating profit [ 16% ] year-on-year, which has benefited from competitive product selections, cost reduction and the favorable internal cost allocation. Q1 generated TWD 910 million free cash flow, reflecting a healthy business operation and our net cash position stood at TWD 6.9 billion. This demonstrates our company's ability to maintain a strong financial position to support a future dividend, [ growth ] initiatives and strategic investments. Meanwhile, the Board has decided to distribute a cash dividend of TWD 14.8 and a stock dividend of TWD 0.5 per common share. We will hold a shareholder meeting on June 19 to approve the dividend proposal. Now, turning to our new businesses, building upon the solid foundation of our 1P business, customer base and online industry growth potential, all 3 new growth drivers, mo shops, momo Ads and live streaming all have made good progress according to our plan. Mo shops, our 3P model, marks a strategic milestone in expanding our EC business scope. Launched as a trial service in March to test out the overall customer experience, merchant interfaces and other supporting functions. At this stage, it is an invitation-only basis. So far, we have selected and invited more than 1,000 of merchants on board, offering products ranging from apparel, shoes, food, home decor, [ sushi ] accessory, et cetera. Mo shops targets broader demographics, particularly the younger segment, to offer more product selections and expand our total addressable market. Mo shops has officially launched on May 1. One thing to be noticed is that, mo shops, due to its business nature, only book its commission and fees as revenue, which is different from our current 1P practice. Momo Ads, a retail media network, offers a comprehensive solution for brands and merchants seeking to maximize their online presence and drive sales. As a way to monetize our data and traffic using first-party information, there are many technologies to be deployed in this system. This system is under intensive development and will roll out new features and service down the road. In the meantime, the sales has already started and the initial responses from customers are very positive. Live streaming has demonstrated positive outcome as well, marked by notable increase in sales, traffic and user engagement and time spent. This year, we will expand our collaboration with influencers and merchants. This move aimed to make our live streaming business as a platform, which can host both our own products and also enable merchants to run their own live content as [ talent ]. Finally, let me make some comments on the outlook. We think the EC industry will continue to recover throughout this year, and the market should grow faster in the second half of the year. As a result, we anticipate our second half revenue growth to outpace of that over the first half. Our 1P business will continue to grow and enjoy the scale benefits. Although the competition from the new entrant will persist for a while, part of the profit will invest in the new initiatives, namely mo shops, momo Ads and live streaming. We firmly believe these in new initiatives are important in driving future growth and profitability. Hence, we estimate that the OP margin for 2024 may experience a slight decline compared to 2023. Looking ahead, we will continue demonstrating strong execution capability and optimizing our operation. We'll be striking a balance between growth and profitability. So that's all for me. And now, I will turn the call over to Terrisa.

Thank you, Jeff. momo reported company revenue of TWD 26.8 billion, reflecting a 7% year-over-year increase. Our market shares in EC industry continue to rise. EC increased by 7.2% year-over-year, primarily driven by an increase in the number of transactions. You can refer to the Slide 14, our major 5 product category continued their growth runway, underpinned by the improved online consumption and also the market share gain. Beauty and health care increased 14% year-over-year, reported the strongest growth, followed by sports and leisures, up 9%; household, up 7%, and 3C and home appliance up 7%, fashion luxuries up 5%. Notably during the first quarter this year, 3C and the home appliances, household, improved sentiment from low single-digit last year. On key customer metrics, demonstrated positive trend with a notable 7% year-over-year increase in quarterly active user driven by the growth in male customers. Despite a 3% year-over-year decline in the average ticket size attributed to the lower contributions from 3C and home appliances, customer engagement remained robust. The proportion of revenue from momo and Fubon co-branded credit cardholders increased to 34% compared to 32% in first quarter last year, indicating growing customer loyalty and retention. While the company EBITDA reached TWD 1,455 million, reflecting an increase of 5.8% year-over-year. The company EBITDA margin held up well at 5.4%, primarily driven by improved TV shopping revenue and margin. Meanwhile, EC maintained a solid EBITDA margin of 5.1% compared to 5.2% a year earlier. In the meantime, outperforming last year's 4.9%. EC EBITDA margin was resilient in spite of unfavorable product mix and higher promotional expenses, demonstrating resilience through efficiency gains in fulfillment and logistic operations. And amid the upward pressures from increase in warehouse costs and labor expenses, we effectively manage operating costs, that result from our ongoing cost efficiency measures, including operational streamlining, package reductions, route optimization and cost management. Meanwhile, we continue to make progress in optimizing inventory control, fraud detection and automation. In terms of operating profit, the company OP margins actually reached 4.2%, slightly beat last year's average. And the company OP profit increased by 2.3% year-over-year was lower than EBITDA, mainly due to the increased warehouse rental amortization, while the B2C OP margins actually impacted by promotional discount and one-time loses caused by Japan's contaminated red yeast rice caused product recall. First, the higher amortizations due to the newly added warehouses put pressures on the OP margin as well. On balance sheet, the net cash position stood at TWD 6.9 billion, increased by 10% quarter-over-quarter. Other receivable reached to TWD 2.4 billion, an increase of 48% year-over-year. This increase can be attributed to the higher purchase of mo coins from our brand and merchant partner for the purpose of a marketing campaign. Other non-current assets increased by 87% year-over-year less on to the higher warehouses rental, deferred income tax, deferred tax asset and also then increase in the prepayment of the equipment. On cash flow, in the first quarter, we generate TWD 910 million free cash flow with outflow CapEx TWD 379 million, mainly for the DC construction and equipment expenditures, warehouse facilities and IT equipment expenditure. Also, you can refer to the Page 11 regarding the dividend. Our Board further increased the cash dividend payout ratio to 98% for the last year's performance. While the working capital remained healthy of negative TWD 4 billion, 1% difference on a yearly basis. Cash conversion cycle was healthy maintained at 16.2 days with an increase in the AR days, mainly due to an increase in other receivables. Finally, regarding the business development, apart from the 3 new business Jeff just mentioned, on the logistic infrastructures, which we have built up for years is essential to support our [ further ] market share gains. This year, we expect a 15% year-over-year expansion in the warehouse spaces, primarily driven by the upcoming launch of our 1,000 distribution center in the second quarter. This expansion aims to bolster momo's warehousing capability and accommodate the growing demand of customers' need. In addition, momo is strategically improving its last mile delivery process by setting up additional satellite stations throughout the Central and Southern Taiwan. This means reduced delivery distance, faster transit times, and enhance customer satisfaction. Leveraging AI technology for intelligent product selections and route optimization, momo aims, not only to boost the delivery efficiency, but also minimize the energy consumption during the product transit, leading to a notable decrease in carbon emissions. With that, we are now ready to open the call to questions. Operator?

[Operator Instructions]

Sorry, before you raise any question, let me make a quick correction on the number I just said in the conference. Our mid-year business EBITDA growth actually is 20.8% year-on-year. I misquoted the number. And also, please forget about that operating profit year-on-year growth rate. That's also misquoted. I don't have that number on my hand.

Okay, operator, we can start the QA session. Thank you.

And the first question comes from Daniel Chen with UBS.

Could you hear me?

Yes.

Okay. So my first question is on the B2C margin side. So B2C take rate, although not disclosed, but seems to be still under pressure due to high promotion. So how long would you expect this high promotion to last? And what's our strategy to support take rate or margin back to increase amid this high promotion environment?

Right. Current market, we have a sluggish consumer demand. And as I said in my previous statement, customers prefer to spend money on those leisure activities. So in order to cater for that situation and also the competition, more promotion discount are used. So I think that going -- this situation is going to last for another few months. And I think it will get better in the second half of the year. So the take rate I think should remain similar level as the first quarter.

And our strategy to support the margin amid this high promotion environment?

Well, I think we still enjoy that scale benefit, and also, we engage a few of the cost reduction activities to realize that scale benefit. So we don't see big downward pressure on the take rate. However, we also have some new business initiatives to support. So I think probably the profit will be investing in those items. So I see the take rate pressure is okay, but the operating profit mainly are pressurized by a few other things.

And my second question is on the TV shopping side. So what drives the TV shopping back to growth in Q1? And what's your outlook on this business in terms of growth?

I think the seasonal effect during the new year and excellent product selections, and we'll exercise the marketing campaign, all led to a good result for the first quarter. However, I don't think we can reverse that downward trend, but we will do more to slow down the downward speed. So, I think overall this year media business will do better than last year. But I think the long-term trend will still sustain because it's high-margin business, it does support on the bottom line.

You mean TV shopping will be better this year than last year, so a Y-o-Y growth?

I think the last year Y-o-Y is in the mid-10. I don't think it will become that worse this year.

Okay. Got it. Yes. And I think previously you mentioned you think this year's the company's total sales growth will be higher than 2023. So do you still expect the same or would you give out any quantitative guidance on the sales growth?

I think with lack of a clarity for the second quarter. As I explained, I think the consumer demand still sluggish. However, we're still confident on the second half of the year. So I think overall the whole year I think should be better than last year.

Okay. And final question is on the dividend side. So what's the reason behind the increase in payout ratio? And will the company sustain above 90% payout ratio in the future?

I think it's not a sudden increase just because we did a calculation. We take into consideration all the investment, dividend outflow and we think our operation can still support it. So we are confident our future business and our cash flow isn't healthy. So -- and I think under that background, so we think we can reward our shareholder with a better dividend payout.

Next question comes from Angela Hsu with Citi.

Jeff and Terrisa, can you hear me?

Yes, please.

Okay. A few from my end. First question. So in first quarter, our household category still managed to grow 7% year-over-year. That's actually further accelerated from like low single-digit growth in 2023, despite no slowdown in competition. So what's our read to that? And any strategic move we have adopted in household category? And have we seen any changes in the competition landscape?

Well, I think it reflects to the fact that we described before more competition, although put pressure on us, but it also drives the market become bigger. So I think that reflects that fact. E-commerce, there are more players joining the e-commerce. We are going to enlarge the market and we are part of the players. So we're going to enjoy that benefit. And the facing competition, we can still manage customer buying from us, although we're not always the cheapest. So it also reflect our customer relationship and the brand equity. I think that give us some long term competitive advantage.

Got it. And also on the South distribution center, when will our South distribution centers start operating? And what's the estimated depreciation and also additional OPEX expense of South distribution center for 2024?

South distribution center will be ready in July. And once it's in operation, the depreciation will start. We estimate the depreciation amount is around TWD 12 million a month. So -- and, of course, it has associated operating expenses. But I think that is fine because we are also going through a process of consolidating our warehouses before because we don't have distribution centers. So we rent a few of those mid-sized warehouses. Now, we are going through the process of consolidating them. So I think at the end of it, I don't think that we're going to increase more in terms of the operation cost.

Got it. And lastly, on the electricity price hike. So have we done any calculation on potential like or additional cost from electricity price hike?

Sorry, I think I need to make another correction. I did my division wrong. The South distribution center depreciation is TWD 150 million a year. So divided by 12, it's not TWD 12 million. So it should be anyway, TWD 150 million a year.

Okay. Angela, can you please repeat your question?

Sorry, it's TWD 12 million a month. That's correct.

TWD 12 million a month. Okay. Got it. So TWD 12 million per month and TWD 150 million per year. All right, got it. And last question is about the electricity price hike. So have we done any calculation on additional cost from the electricity cost?

Yes, we have. The impact is marginal. I think it shouldn't affect our operation cost that much. And in the meantime, we have -- as I said, we have been through serious activities and try to optimize our warehouse operation. I think we can compensate that increase by those optimization efforts.

Our next question comes from Bill Lin with JPMorgan.

I think I have 1 question here. It's about the new business investment. Do the company have any guidance about how much budget the company plan to invest in? And for the revenue contribution, if you're looking forward to next, maybe 2 to 3 years, what is management's goal for the 3 new business revenue contribution to the total consolidated revenue?

The investment actually will be realized with the project -- as the project moving in. So I don't have a number I can give to you. And what I can say is, most of the money invested are all associated with technology, the hardware and all these software. As far as the contribution, I think it's due to premature to name a dollar amount or time line yet. I think we'll probably have a better idea when the time comes.

Got it. So if you're looking into your financial numbers, I noticed your R&D spend actually go up a bit, maybe from second half last year. Can we think that as your investment to a new business, as you mentioned, there will be more investment in the software and hardware side?

Yes, we are e-commerce and Internet company. Technology investment is always a major CapEx expenditure. So we have the regular upgrade and capacity enhancement. And this year, we add the new business initiatives. So yes, we have all those budget into our CapEx and we just do the -- according to our own plan.

And our next question comes from [ Casey Chen with Allianz ].

Jeff and Terrisa, can you hear me?

Yes.

So my question is regarding 3P business. So I'm just curious, are you seeing or do you expect vendors to pay and utilize your current delivery capacities?

Not initially, because Taiwan's 3P business actually dominated by Shopee at the moment. And most popular way of delivering goods in Shopee's model actually is convenience store pickup. So I think that customer behavior will also happen at our 3P business. However, in the overall logistics, I think we can provide other services to those merchants, for example, warehousing also -- or part of the home delivery requirement. But we don't think they're going to be big at the moment. But we think we can play a better role is, we can serve those large merchants by helping them moving their goods more efficiently to the convenience store hub. Because if they are running this convenience store pickup delivery, they need to, by themselves, to get those packages to the convenience store. Or if they are running a large quantity, they have to really move to the convenience store transportation hub. I think we can have some synergy layer and provide that kind of service. And in the long run, I think together with our old merchant, no matter whether it's 1P or 3P, we do have the chance to run our logistics as a full service, more like whatever Amazon is doing to their supply chain. But that is more long term goal.

Okay. That's clear. So in that case, how should we think about the impact on your current fulfillment capacities? Meaning, is this going to be complementary? So you can take these 3P orders and fill them into the low season or off peak hours so that the overutilization on your capacity is actually increased? Or these 3P deliveries, as you see right now, is pretty similar to 1P and do, when the 3P business hits a certain level of contribution, you will have to expand your capacities?

Our own fleet currently deliver around 25% to 30% of our products. So basically, we don't have that excess capacity. If we do, then we can deliver more. So we will continue to grow our own fleet. In the meantime, I think by adding 3P business should not cause us to have excessive capacity not to be used or the capacity not able to fulfill their needs because if that's the case, we still have all the third-party delivery vendor working with us. So I don't see there's an issue there. And also, as I said, most of the 3P business actually delivers to convenience store. So rather, we should focus on how to streamline the process by connecting the information flow with those convenience stores and help us -- help our merchants run their business more seamlessly.

Okay. So basically, you're saying with these 3P orders, the utilization on your fleet or warehouses could be smoother?

Yes.

Is it correct?

Yes.

Okay. Good Great. And my second question is on the ads, right? So you -- I think you just mentioned you've seen some positive response. I'm just curious if you can try to maybe quantify that or try to give us a ranking in terms of the revenue contribution by these 3 new businesses in terms of timing and contribution.

Well, in terms of GMV, of course, 3P has the greatest GMV potential. In terms of our profitability, I think the momo Ads, the retail media network has the biggest potential or the profit margin in that sense. How soon that was going to happen? I think they only take some time because they all need to have a platform to host them and there are a lot of function and the feature need to be developed. So I think the revenue will come with those platforms capability because that enable you to sell the services. We supposed to see some initial number by the end of the year or early next year. We'll see -- when the time is right, we will share those information with you guys.

[Operator Instructions] And next we have a follow-up question from Daniel Chen with UBS.

Jeff, I got a few follow-up questions here. So first is on the live streaming. So which segment is live streaming classified under? Is it online or TV shopping? And how do we book this revenue? Is it gross revenue or net revenue like 3P?

Well, at the moment all the revenue are gross revenue because we don't have the 3P merchant officially launched yet, although they launched it 3 days ago. How the revenue was classified for the online streaming? I think your question was, it depends the product itself. If the product originated from the TV channel, then the revenue goes to -- and the revenue and the margin goes to the media business. If the product comes from the EC, then the revenue and the profit goes to EC. At the moment, that's how we classify them, and then we may change it. As I said, we are building the platform and also, we are learning how to manage it and also learning how to report them. So, as I talked about in my previous statement, 3P business going to be going only book the commission and the fees, not the gross revenue, which also implies -- at one point in time we have to report our GMV. So -- because our 3P is still very small, so it's not -- it will not impact the number yet. So we will find a better time and we may adjust how we report our numbers.

And for now or for Q1, under the live streaming, more product is from TV shopping or it's for online. So in other words, more recognized under TV shopping or more recognized under the e-commerce?

I think probably 60% from TV, 40% from the e-commerce, I think. But their numbers are still small compared to their overall revenue.

And my second question is also on the 3P side. So I just want to ask, how would you solve the conflict between 1P and 3P suppliers? For example, 3P supplier may sell cheaper product and this might potentially affect 1P supplier sales. So how would you manage this kind of conflict?

Well, so that's the reason why I said our 3P model at the moment is on the invitation-only basis. We have 3P merchant selection criteria and preference, and which take into consideration how to complement our existing product portfolios so that can minimize the potential interest conflict or cannibalization. So the reason why we do 3P is really expanding our selections and attracting different customer segments. So that's how we guide our -- those things actually guiding us how to select our merchant. However, having said that, if you guys remember before we have this 3P business model we used to run, we call, 1P 2.0 to cater for those long tail product selections. So maybe down the road we will move those 2.0 vendors to the 3P platform, make them more naturally belong to where they belong to because that will make the running business more flexible and well, but that hasn't happened yet, but I think we will do that in the future.

Okay. This concludes our question-and-answer session. Thank you all for joining today's call. We look forward to speaking to all of you again next quarter. Thank you.

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