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

Good afternoon, ladies and gentlemen. Welcome to the momo.com conference. Terrisa, please begin your call, and I'll be standing by. Thank you.

Thank you. Good afternoon, everyone, and welcome to momo.com's third quarter earnings conference call. It's great to see everyone once again. This is Terrisa, momo's Head of Investor Relations. Today's event is being webcast through our website, where you can also download our presentation and earnings report. The format for today's event will be as follows. First, President Jeff, will provide industry overview, message and also outlook. Afterwards, I will jointly share operations update for the quarter. Next, Jeff will take your questions during QA session. As usual, I would like to remind everyone, today's discussion may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears on our presentation. For now, I would like to turn the microphone over to Jeff.

Okay. Thank you, Terrisa. Thank you all for joining us today. Let me begin with the industry overview and the competition landscape. Taiwan's GDP for the third quarter of this year is estimated to grow by almost 4% year-over-year, driven by resilient export and manufacturing investments. However, domestic consumption slowed further in the third quarter. Total retail sales grew by 2.5% year-over-year, which is lower than in the previous quarters. Conversely, spending on travel and recreational activities remained strong. In the online retail industry, growth was 3% year-over-year falling short of expectations. There was a continuous high demand for outbound travel this summer with outbound travelers increasing by 29% year-over-year in July and August only according to governance data. This increased overseas travel has led to lower domestic consumption, particularly for the luxury goods and branded cosmetics. Regarding the industry landscape, recent investments made by Uni-President into Yahoo Taiwan and the PChome highlights the growing importance of Taiwan's online market. More industry leaders are recognizing its potential and making significant investments. This illustrates a substantial runway for e-commerce growth and reinforces our belief in considerable untapped demand. However, the impact of Uni-President's M&A activities and the resulting change in competition dynamics are yet to be seen. Moving on to our operational highlights. Increased overseas travel and the trend of trading down pressured our third quarter revenue growth. Additionally, revenue recognition for our 3P business is commission-based only. As a result, our third quarter revenue growth slowed to 1.9%. Within this, the media business dropped by 15.8% year-over-year, while the e-commerce business increased by 2.6% year-over-year. After excluding the difference resulting from the different accounting practice on mo-coins, the company's revenue growth would be 2.4% year-over-year with the tax rate remaining stable at 14.3% compared to 14.4% a year ago. Among different product categories, fashion and luxury experienced negative growth while sports and leisure performed the best. This reflects the macro trend and consumer behavior shift we described earlier. On the other operational indicators, we are pleased to report steady growth in our key customer metrics. Our quarterly active users increased by 10% year-over-year, the highest growth rate in last 6 quarters. On the cost front, operational efficiency resulted in stable gross margins. The increased operating expenses this quarter reflect investments in new business development and the related marketing activities. Over the first 3 quarters, we generated TWD 1.6 billion in free cash flow, supported by an increase in operating cash flow, which reached TWD 2.9 billion. Regarding logistics, the Southern distribution center is now in service and we will hold an opening ceremony in late November. This development is expected to enhance our logistic efficiency, allowing us to provide faster and better service experiences for customers in Southern Taiwan. In early September, we launched the moPlus membership program aimed at enhancing customer engagement and loyalty. This program offers at least 4% cash back in mo-coins plus an additional 4% cash back from 100 selected brands. Members can also enjoy other benefits, including exclusive cross-platform discounts with partners like Uber Eats and LINE GO taxi service as well as member-only coupons. More than 10,000 customers have already signed up for this program. And we are entering the Double 11 campaign period. We are fully prepared for this crucial marketing campaign and the fourth quarter shopping season and optimistic about fourth quarter's performance. In the meantime, we will continue investing in strategic initiatives, namely moshop, [ IMM ] and live streaming. So far, they have demonstrated their potential, and we are confident in the longer -- in long-term benefit they can bring to the company. Now I'll turn the call over to Terrisa.

Thank you, Jeff. In the third quarter, we generated revenue of TWD 25.5 billion, a 1.9% increase year-over-year. Our e-commerce business, which now representing nearly 97% of our revenue, saw a year-over-year growth of 2.6%, primarily impact by the sluggishness of overall retail industry, while media business continued to be affected by the structural downturn in the cable TV industry. EBITDA came in at TWD 1.15 billion with an EBITDA margin of 4.5%. During the quarter, we continue to invest in new business development, including marketing promotions to boost new business growth, along with our R&D investment in new business to drive long-term growth and innovation. For third quarter, we reported a net income of TWD 666 million, resulting in an EPS of TWD 2.64 based on 252 million outstanding shares after dilution. On balance sheet and cash position, ending the quarter with TWD 3.3 billion in cash and cash equivalents, we have achieved a notable increase in free cash flow, reaching TWD 1.6 billion over the first 9 months. Operational cash flow totaled TWD 2.9 billion, while our capital expenditures of TWD 1.27 billion have been strategically directed towards enhancing our logistics info structure, automation and IT equipment. Moving on to the e-commerce business performance, you can refer to our presentation, Page 4 and Page 9. With adjusted figures, our e-commerce revenue growth will be 3% year-over-year, growing much faster than the total online industry of 1.4%. However, growth momentum was short of our previous expectation. This was influenced by the following factors. First, the overall sluggishness in retail environment. Second, a surge in outbound travel during summer vacation, which impacted domestic consumption. We observed more demand for low-priced products. This shift has increased low-priced shares of our revenue mix. Third, revenue recognition for our 3P business is commission based, which also affected our top line growth. In terms of category highlights, which you can refer to slide -- Page 11. Among our top performing category, sports and leisure, together with 3C electronics and home appliances, demonstrated stronger growth with 7% and 4%, respectively. Customer demand in this area remain resilient on the back of interest in leisure activities and take upgrades. Conversely, increased international travel lead to a decline in domestic spending for apparel and luxury products. Therefore, our fashion and luxury segment declined 3% year-over-year. Beauty and health care category also saw slower growth, moderating to 2% year-over-year. Now let's touch on customers' metrics. Despite external challenges, we have been seeing the positive trend in our core customer metrics, enhanced customer acquisitions and strong focus on customer loyalty and retention continue to yield results. Cumulative app download demonstrated robust and sustained growth, reflecting both of our promotional effectiveness and improved app engagement. Our monthly average visitors grew by 1.3% year-over-year while quarterly active users saw a strong 10% increase, a notable improvement from 4% during the same period last year. This was our strongest active user growth in the past 6 quarters. Last, let me update our latest corporate events. This year, we launched our 20th anniversary brand transformation project, a key milestone in elevating our brand image. Our new brand identity and slogan, [ More and More ], reflects our commitment to continually enhance the shopping experience for our customers and further strengthening the value of momo. With that, we are now ready to open the call to questions. Operator?

[Operator Instructions] And our first question comes from Daniel Chen with UBS.

Could you hear me?

Yes.

So I think in Q3, our gross margin is down by 0.3 percentage point year-on-year. Could you break this down into different factors like depreciation, product mix or business mix? And also, specific on e-commerce take rate, could you just share what's the year-on-year change and what are the factors that drive that change?

Right. If you look at our operating margin, first, you can look at our operating cost. Actually, our operating cost year-on-year is a negative growth, so -- which means we gained operational efficiency there. And so the main reasons why we see the operation margin drop year-over-year is mainly because of different treatment of mo-coins on accounting practice. As far as tax rate is concerned, third quarter, this year, take rate, 13.6%; last year was 14.1%, is around 0.5% lower. However, if we adjust the number to restore the different practice with -- in fact, you find this year, tax rate will become 14.3%, so only 0.1% lower than last year. So actually, our tax rate remained quite stable. However, our operating profit was lower than last year, was really because -- mainly because operating expenses. Those are resulting from the new investment -- the investment made in the new initiative and the marketing expenses.

And how about the e-commerce take rate, not the overall take rate, is this under the same trend as the overall take rate?

Well, actually, the TV shopping business still continue under the downward trend. The revenue actually dropped. So the margin contribution from TV shopping was lower. So it doesn't help on our margin per se. So the e-commerce margin actually remained quite stable. However, we spend more marketing dollars on, one, promoting the new business and secondary, of course, offer more of the discount and other benefits to our customers.

And second question, how's the initial sell-through for the Double 11 festival compared to the same period last year? Have you seen any demand recovery so far?

I don't think we are ready to disclose any number related to the Double 11 yet. And still, kind of early on as well. But I have to repeat, I just said, we remain optimistic in terms of the first quarter's performance. Remember, last quarter, I have mentioned that we expected the outbound travel will continue to prosper during the summer holiday season, and it did. And now we see people may come back to -- resort to more of the domestic consumption, but that's still too early to tell, and we don't think we are ready to discuss those internal estimates yet. However, I repeat myself again, we remain optimistic on the first quarter.

And last question, I might have missed it, but I think a couple of customer metrics is not in the presentation this time. For example, the purchasing frequency and ticket size. I'm wondering, could you just share the year-on-year trends for the 2 metrics?

We have discontinued to provide that mainly because we have now the different mix of business, and we are in the transition on how we report the numbers. And with the increased percentage of our moPlus and IMM, we might change how we're going to report those number in the future. So this quarter, we only disclose our active user, which means the customer has made a purchase in momo, in third quarter, has increased 10%. And the overall traffic increase of 1.3% in terms of the unique visitor per month. So -- and under that, you can figure out actually customer per ticket size actually lower, however, their frequency, higher.

And our next question comes from Bill Lin with JPMorgan.

I would like to know, can you share more color with us about the current progress of moshop and the growing of moshop, how it lead to the growing of the ad business? And my second question is about your distribution center. I would like to know, since the launch of the south distribution center and also growing moshop business, when do you expect the company will start to offer like the 3PL business for those moshop merchants?

Well, those new initiative, still in the early stage of development. We are still continuing investing in the technology part, and we're hiring more people to support those business. So far, we don't have any number, can share with you. And regarding the Southern distribution center, the warehouse mainly benefited our 1P business. However, with the warehouse may also linked to our delivery service, which can benefit on both the 1P and the 3P. With the radius of Southern distribution center, we are going to have more of our own fleet ready there, and that can be easier to serve our customer and also our merchants in the future.

[Operator Instructions] And our next question comes from [ KC Chan ] with Allianz.

I have a question on your membership program. Glad to see that you just launched the program. Have been waiting for this program. But one thing I've noticed is that the value you offer is still many discount. Just curious, any other values you're probably going to add into the membership? For example, like the video content, the live stream content from Taiwan Mobile, any possibilities that you guys can probably collaborate and offer some -- I mean, bundle some of the live streaming programs into your membership and maybe just profit sharing with Taiwan Mobile?

I think the membership benefit is evolving process. We are still engaging a lot of different partners, of course, including the Taiwan Mobile, to bring more the benefit to our customer and make this program more attractive and it certainly includes the video services. A lot of the membership program now include that product as the member benefit. But so far, we don't have anything concluded yet. So once that's ready, we'll report to everyone.

Okay. And a follow-up question on your ad business. Could you maybe comment, any progress on this business? Like how much of the GMV already comes from ad business?

Ad business actually performed better than we expected because it's more of -- it's very technology and platform dependent. And we start all the technology development from zero. So we basically, from scratch. But largely because the data has proven is useful, so it has been regarding a very good marketing tool by our merchants. So -- and we are in the process, engaging them more and help them understand how to use the decision well, so that I think that can benefit their business and also drive up our IMM revenue. Well, again, those are still in the early stage compared to what happened in other markets like U.S. and China. We still -- that account only very small revenue. So we're pretty excited for the upside potential in the future.

Understood. But if we want to sort of rank the momentum of the new -- the 3 new business, is it fair to say, right now, from what you can see, as it's better than moshop and then better than live streaming?

It's difficult to compare that way. I think probably if you say compared with our original expectation, I think IMM performed the best. We -- early on, we expect we're going to encounter a lot of technical problem and platform readiness. And I think, so far, we have overcome those hurdles and made some progress. So if you talk about comparing that regard, yes. However, in terms of the GMV contribution relate to your first question, of course, 3P business has more contribution on the GMV overall.

All right, thank you, and -- everyone. This concludes our Q&A session. Before we conclude today's conference, please be advised the updated ESG report and video are available through our website. So thank you, everyone, for joining us today. We hope everyone continues to stay well, and we hope you will join us again next quarter. Thank you. Have a great day.

Thank you for your participation. This concludes the conference. You may now disconnect. Goodbye.