Weimob Inc. (2013) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. Welcome to Weimob Incorporation's 2020 Interim Results Conference Call. A copy of their interim results announcement can be found and downloaded from the company's Investor Relations website at http://group.weimob.com/en/pages/relation. [Operator Instructions] Joining us today on the call are Mr. Sun Taoyong, Chairman of the Board and Chief Executive Officer; and Mr. Cao Yi, Chief Financial Officer and Joint Company Secretary. This call will be conducted in Chinese and English. Before we begin, I would also like to remind you that the management's comments during the call will include forward-looking statements that are based on our current expectations. All statements other than statements of historical fact during the conference call are forward-looking statements, which are subject to a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of the company. This presentation also contains some unaudited non-GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. So please do take a minute to read the risk factors and non-GAAP measures discussion in Weimob's 2020 interim results earnings release. I will now turn the call over to Mr. Cao.

Thank you. Good evening and good morning. Great to see you here online and hope everyone is safe and sound during this special period. On behalf of the management, we'd like to express our sincere gratitude to the investors for your interest and support to Weimob when we went through this challenging period. We firmly believe our mission in creating shareholder value and it's your support that makes us work hard day and night. We've seen a lot of changes and challenges since the beginning of 2020. The change brought by the general economy and the challenges from COVID-19 has accelerated the digitization of merchants business. Merchants realize more and more the importance of building out online sales channels and integrate with the offline business. Major platforms like WeChat have also speed up the commercialization of their ecosystem to accommodate more merchants business. In light of the opportunities, Weimob has also offering a range of SaaS solutions that target at e-commerce, retail, catering, hotel and tourism, and other industries to enable merchants to digitize their sales channels and enhance their customer acquisition efficiency. In spite of the headwind brought by the COVID-19 to the sales side, we have achieved solid growth in both of our business segments. Let's look at a summary of key financial performance. Excluding the impact of compensation due to the SaaS sabotage event, adjusted revenue has exceeded RMB 1 billion in the first half of 2020, representing nearly 60% increase. Adjusted EBITDA increased by 68% to RMB 114.8 million. In the first half of 2020, SaaS revenue increased 39% to RMB 305 million, and target marketing gross billing increased 156% to RMB 4.6 billion. We have continued sustainable growth in a number of SaaS paying merchants and have over 88,000 merchants by the end of June. Smart retail and smart dining are our 2 strategic segments. We have doubled our size in smart retail which total 2,260 merchants. And within that, 457 brand merchants with average contract value exceeding RMB 227,000. The total revenue for smart retail segment is about RMB 46 million with 7x increase year-over-year. In smart dining segment, revenue from the first half of 2020 reached RMB 22 million with 69% year-over-year growth. By the end of June, we have totaled 6,500 merchants with average contract value around RMB 16,000 per customer. Altogether, 26,000 merchants use our target marketing services to place ads, representing 33.5% increase year-over-year. Capital market has become a very important support for the company's strategy to grow not only by sales development but also by investment and acquisition. In February this year, we announced a deal to acquire over 60% equity interest in Yazuo, a well-known SaaS company in catering industry. After acquisition, we are integrating with Yazuo in creating a one-stop solution for large catering merchants that connect the online restaurant, CRM, POS and ERP solutions. In April, we invested in a smart delivery SaaS company named SYOO to increase our footprint in smart food delivery business. Recent years have also seen short video becoming a popular trend in marketing business. And in April, we also invested in a start-up company, Clipworks, to tap on growth in short video making business. Since our listing, Weimob has been getting more and more attention from the capital market. In May, our stock has been included in the MSCI index. During the month, we also completed USD 150 million convertible bonds issuance. In July, we have been selected as part of the Hang Seng Technology Index. We also work closely with our strategic partner in the first half of 2020. We became a member of Tencent's first SaaS Technology Alliance. After investment in Yazuo and SYOO, we leverage their competence in large merchant markets and smart food delivery market to better grow in the large catering segment. We also established an investment fund with Meridian Capital. And so far, the fund has participated in the investment in 3 start-up companies. So next, I will talk more about the financial performance of the company in the first half. So in spite of the disturbance from COVID-19 and the weak general economy, we recorded a strong revenue growth in the first half '20 with 60% year-over-year growth. Revenue from both segments increased significantly and both contributed to the total revenue growth. In terms of revenue dollar amount, SaaS represented 29% and target marketing represented 71%. While the number of paying merchants from SaaS business represented 77% of total merchants, the target marketing advertisers represented 23%. The split of number of merchants between the 2 segments is relatively stable. And meanwhile, both segments added more KA, namely large merchants, to the portfolio. The trend of improving operating efficiency continued in the first half as a percentage of operating expenses as of revenue further decreased to 47%. In first half, excluding one-off items like fair value change in convertible bonds, compensation for SaaS sabotage event and others, the adjusted net profit is RMB 52 million, a 77% increase versus last year. A strong balance sheet is also important to our sustainable growth in the future. By the end of June 2020, we have RMB 4.8 billion total assets and RMB 2.1 billion cash and cash equivalents, which secure the resources for future market expansion and strategic investments. Next page is about the revenue. For the interest of time, I will not get into details on this page. The key message here is that although 70% of the total revenue comes from value-added service target marketing, SaaS merchants remain as a foundation for our business and represent 77% of the total merchants in our ecosystem. Next, let's deep dive into the 2 business segments. First, for the SaaS business, revenue grew by 39%, mainly driven by the growth in Commerce Cloud. The number of paying merchants grew by 26% to 88,000, and the ARPU increased 10% to RMB 3,400 on a half year basis. As one of our key strategies to move upmarket to add more KA merchants, we are looking forward that the investor not only pay attention to the total number of merchants but also the quality of the merchants. Our ARPU growth rate slowed down in the first half, mainly because the growth of ARPU in Weimob and smart retail has been partially offset by a lower ARPU from smart restaurant and other products, partly due to the COVID-19 impact and our onetime free period granted to merchants for smart retail and smart restaurant during the pandemic and also partly due to the effect of consolidating Yazuo's revenue for just 3 months. Next, let's move to the target marketing segment. Despite the changing environment and the weak economy, Weimob's target marketing business maintained a strong growth in the first half. Gross billing increased 157% to RMB 4.6 billion and revenue grew by 70% to RMB 745 million in the first half. The strong growth are mainly driven by both the increase in the number of advertisers and the average spend per advertiser. Number of advertisers increased 34% from 19,000 to 26,000, and average spend increased 92% from RMB 92,000 to RMB 177,000, reflecting not only a continued advertising spend from merchants but also a changing merchant profile with more KA merchants. Among the total of CNY 4.6 billion gross billing, CNY 545 million gross billings were booked revenue using the gross method, and the revenue booked is CNY 495 million. The remaining CNY 4.1 billion is booked revenue using net method and revenue booked is CNY 250 million. The proportion of target marketing revenue and the gross method increased from 64% in the first half '19 to 66% in first half '20, which impact the gross margin a little bit. Next, we will take a look at the gross profit and gross margin. The overall gross margin decreased from 55% in the first half '19 to 49% in the first half '20. A further deep dive into the gross profit split, we'll see gross margin of both segments decreased a little bit for different reasons. SaaS gross margin decreased from 81% to 76% as the company has been continuously strengthening R&D investment in SaaS products in recent years, and therefore, increase the cost of revenue in the current period. Target marketing gross margin dropped 5 points to 38% in the first half '20, mainly due to the slightly increased proportion of target marketing revenue on gross basis, which traditionally have a relatively low gross margin. We continue to see a trend of improving operating efficiency. Operating expenses as a percentage of revenue further decreased from 56% in 2019 to 47% in first half 2020 after excluding the non-GAAP items. Operating expenses consist of mainly people cost, like sales, operating, management and supporting stuff, channel cost and some promotion expenses. The increase in operating expenses mainly come from staff cost, including sales and marketing staff cost, which increased CNY 15 million, general and admin staff increased CNY 31 million, and related property -- rental and property expenses, which increased by CNY 12 million, and promotion expenses which increased by CNY 7 million, all in line with the business expansion. So as a result of the revenue growth and the improved operating efficiency, we continue to be profitable in the first half of 2020. The net loss from the financial statement for first half '20 is CNY 546 million. However, the loss is mainly driven by a fair value change of convertible bonds of RMB 496 million, compensation accrual due to the SaaS sabotage event of RMB 87 million and other non-GAAP items. After excluding these items, we have an adjusted net profit of RMB 52 million in first half '20, which is 77% increase year-over-year. Because of the nature of convertible bonds, we do expect the more increase in the price of our convertible bonds in the future, the larger fair value loss will be in the financial statement. So we will continue to adjust this item so that investors can see a better picture of our own business results. The compensation due to SaaS sabotage event will be a onetime event, and majority of the financial impact will be in 2020. Based on the latest fact, we estimate the net financial impact will be around CNY 87 million. So this basically concludes my part in introduction of the first half results. Let's invite our CEO, Mr. Sun, to talk more on the business and strategy.

[Interpreted] Good evening and welcome you all to this interim results performance meeting. First, let's go over about the overview of our business. In order for you to have a better understanding, I'd like to introduce about our business model first. Our main business mission is to help transform and upgrade the traditional companies and the business and mainly including those e-commerce like Taobao and Tmall and also the catering about like the Meituan and the tourism and hotel like Ctrip. And those all lead to several problems like they cannot control the overall traffic and the data, and they cannot directly connect to our users. And also, it has increasing CAC and also the high commission fee. And our solution is to have a multichannel acquisition of the data and also to operate this private traffic from the platforms such as WeChat, Douyin, Kuaishou and Baidu. Therefore, we can help our merchants to have a mastering of their data and the traffic and can decrease their CAC and also can have a reduced commission. And right now, we have 2 business, one is SaaS products and the other one is the targeted marketing. And there are 3 clouds in SaaS products. These are the Commerce Cloud, Marketing Cloud and the Sales Cloud. And in the targeted marketing, we just target those advertisers from the Tencent platform like WeChat, Douyin, Kuaishou. And focus on SaaS products, we include the e-commerce, retail, hotel, catering, local lifestyle and marketing. And there are many like the landmark or benchmark merchants that are using our products in each category. In the first half of this year, our paying merchants number has increased by 26.4%, while the ARPU increased by 10.2%. Though our attrition rate has increased a little due to the pandemic influence on the SMEs, but we think that the risk is still controllable. And we will focus on the smart retailing, which is our main product or main focus during the 2019. And this half of year of 2020, the retailing revenue has surpassed the whole of the 2019. Because our target is mostly the chain merchants, therefore, their ACV this half year have reached CNY 220,000. And the number of our retailing merchants has increased from 217 last year to 457 this half year. And our merchants in terms of the ACV or attrition rate or the quality, they are all better than the SMEs previously. And all our merchants and our customers are all landmark, and there are many in the head part of our business. For example, in the home textile, we have lots of representative, customers like the Mendale, Fuanna, Beyond and Mercury. And we also have many typical and the head customers in the apparel segment like in the female apparel, we have JZ, Dazzle, Erdos and Ellassay. And in the male part, we have GXG, Cabbeen and Mark Fairwhale, K-Boxing and also have Balabala and Annil in the children's department. And so another example is about the beauty and the makeup. We have Jahwa, Forest Cabin and also Marubi. And we think that in terms of those luggage and also the apparel and shoes, our target is 2,000 customers. Right now, we have 500. And besides that, we also have a shopping mall and the supermarket, for example, Walmart. And also our newly signed contract with Starbucks is more than tens of millions of value. We think that our share of the smart retailing will be increasing with strength and almost half of that. And another core part is the smart catering. And through the acquisition of Yazuo, we have integrated the cashier, the ordering, payment, marketing and the supply chain. Up to now, we have 5 parts in our smart dining or smart catering. They are the restaurants, the Yazuo membership and the cashier and the cost steward and also the delivery. And we have provided the 3 steps integration solutions for our customers and integrating the eating, the delivery and also the e-commerce scenario. Therefore, our customers always prefer our integration solutions for them rather than the separate and the independent data that cannot be interchangeable. In the first half of this year, our smart dining has increased by 69%, accounting for 7% of our SaaS total. And also, our structure has more room for the bigger and the medium companies, and our ASPA has reached CNY 10,000. And the number of our dining customers has reached more than 6,500. And due to the pandemic effect, it has a huge blow to the catering industry. So they have quite a reservation for the budget. But I think that it will be much brighter in the second half of the year. And the next part is the targeted marketing. It is very prominent. And from the financial report, we can see that the number of advertisers has increased by 33.5% in the first half of this year, and the ASPA has increased by 92.1%, and also the gross revenue or gross billing increased by more than 1.5x. And also repurchase rates increased by 67.2%. And the reason that why we still can achieve such a great momentum in the first half year is because we have provided the effects-oriented marketing. And also, we have this regional license that can give us more room to perform, for example, like in Beijing and Guangzhou, the 2 very major markets. And also, we have usually make use of the Mini Program. For example, our typical client or customer is Wanda land. They are using quite a few or way more, many program and advertisements and have increased their sales a lot. And we predict that it will maintain the rapid momentum in the second half of this year in terms of the sales volume and advertisers, and it would last through next year. And due to the increase of those gross billing, and we are quite positive about this, the revenue rate, since we don't increase our operating fee. And next part is the outlook. And I will not go in detail about the core strategy since you have all seen that in our report. Maybe we will focus on the core strategy during the next 3 to 5 years. And the first is we are going to move upmarket. We will gradually move to the bigger and the medium company, just like we have done in the restructuring of our retailing and also the catering. And also, we will move in distraction in terms of the product strategy and investment. And we have seen that compared with the others, the upper market customers will have much more ASPA and their retention rate is much bigger and as well as their purchasement and the participant increase. So we think that in the future, those upmarket customers would have much more share of the value. And the next trend is globalization. And right now, we have already have the suppliers and the service providers in the other markets like the Australia, Canada, Japan, South Korea and Hong Kong, China. And in the future, we will do more localization, for example, the language and according to their habit and the local location, and we would increase more the globalization effort. And also, we can make sure of M&A to expand. And the third one is to make it an ecosystem, we would use the investment in M&A to cooperate with our strategy partnership to build up this ecology. And we have found that there are many diversified demands and also scenarios so that we could have more value as a service to meet their demand. And currently, we have done a lot of outlay and arrangement in the ecosystem building up like the CRM in the catering and also delivery. And the last but not least, let's look at this equal road map. And we have used the Tencent and the other platform like WeChat, QQ Mini Program, Douyin, Kuaishou, to have the connections with the merchant. And also, we provide SaaS and cloud service. In SaaS, we will provide 4 clouds, commerce, marketing, sales and service. And right now, we have smart marketing in the Marketing Cloud, and we have Xiaoke in the Sales Cloud. The Service Cloud is now coming to form. And in the platform, we would build up the service market, the distribution market and the live streaming market platform. And also, we will provide the added value service that could be an advertisement, finance, operating and customer demand. And those are the overview and the outlook of our business. Now we'll come to the Q&A session.

[Operator Instructions] So first question is from [ Chris Tan ]. And he was asking, good evening, Mr. Sun, do you think the WeChat new function Weixin Xiaoshangdian influence the market share for Weimob SaaS products?

[Interpreted] I think that the influence is not so much since those customers that's using the service of WeChat Xiaoshangdian is very rudimentary. They are basically those long tail customers with a low threshold, but they are not our targeted customer. We are more into the medium and the larger customers. And those small customers, they don't have much capabilities to pay. So they are still the entry level. And however, we have the connected API with Weixin, with WeChat. So it is open source. If they can upgrade those small and medium customers, they can always using our Weimob SaaS products. Therefore, it is a one key connection. And I think this Xiaoshangdian production is actually is a positive for us, and we don't think that much of influence. And also, it has been confirmed by WeChat Xiaoshangdian they have the same -- we are on the same page.

Our next question is from Zhao Liping at CICC.

[Foreign Language] I have 2 questions. The first question is related to our channel partners because the company, I think, they are going to focus more on KA. Then how is our channel partners development right now? And what's our plan for the coming years? And my second question is related to the integration of our investment in Yazuo. So how is the feedback from our client? And how much the management think will the smart restaurant business -- like how much is the basis for us to grow?

[Interpreted] Okay. Let me translate. And about this channel building, yes, previously, we are more dependent -- our customers, those small and medium customers are more rely on our channel. But we know that in the first half of the year, due to the not so strong market and also different cities have a different control management. So this channel building is so well rounded. And the more is about the direct sales. And our direct sales order have increased 100%, more than 100%, but the channel hasn't increased a lot. Therefore that we think that about those KA or the key account, we mostly focus on the direct sales and also reflect on the retailing and the catering. And we can build up those ecosystem, including those upper and the downstream customers like the CRM and also the ERP, those vendors. And also it includes traditional consultancies to make it more diversified and varied. And about this KA, yes, as I have said, that we used the core of the direct sales and to have increased their number and to engage more into their operating. So about to -- and overall that the channels will be made use of the expansion in the smaller cities and the lower cities. And in this SMEs that we think our portion will be 6/4, 60% is the direct sales. And for our KA, I think the direct sales was accounting for 80%, 8/2 distribution. And about the investments and the M&A, yes, we have finished the acquisition of Yazuo. And now we have integrated more functions like the cashier, the payment and the steward and the membership and the supply chain so that our customers can have the one-stop solution on Yazuo platform and they can decrease this connection cost and also can integrate their data, and it will become empowering. And we have seen that it's a very encouraging phenomenon for our customers. And especially those 3 steps integration, the eat in, the delivery and the retailing. And in the July and August, we have launched several activities in Hangzhou, Shanghai, Chengdu and other cities, and it has been well welcomed by our customers there. And we know that during the pandemic situation, the budget is limited. So probably it's not so quick investment into this business. But however, the products, so we're mainly doing the integration of our products. But we think that we are quite positive about the second half year of the performance and of the data.

Our next question is from Yang Liu at Morgan Stanley.

[Foreign Language] I will do the translation briefly. The first question is regarding to the smart retail brand customer churn rate in the first half of 2020. The second question is about the SaaS billing monthly growth dynamic. And the third question is the cash flow for targeted marketing, especially the given the AR, account receivable and prepaid expense is growing not as fast as the gross billing. So would like to have an update in terms of cash payment policies from the major platform partners.

[Interpreted] I'd like to answer your questions one by one. The first one is about the retailing. In the first half of the year, our retention or the renew rate has reached 100%, and even some of them have increased their purchase. So we think that we could maintain the attrition rates at the single digit. And the second question about the SaaS monthly billing. In the February, we know that there are very bad growth for the pandemic phenomenon. So in February, it is almost ignorable. And in the -- from the March to May, it has an explosive increase. However, in the June, end of July, it has -- have a downturn and back to normal. And we think that in the Q4, in the fourth quarter, we think there will be a busy season, and it will then increase a lot. So in the whole year, we think that the SaaS billing, we could maintain averagely is about 40% to 50% of increase. And about the third question about the targeted marketing. Yes, and we know that the Tencent have a bit changes in their policies. For example, in Toutiao and in Tencent, they have more policies or strategies for those intangible points. And also, they have more -- and also, their return rate is a little bit conservative. So we think that the billing -- and also the billing is increasing, and also the KA market -- KA share is increasing. So we think that our marketing value has reached more than 20 million. And since that the KA acquisition cost and also the cost is not as big as the other smaller customers, so we think that our net profit is very positive. And we think that because we will -- the operating cost will not increase a lot. And also, we can reduce the cost. Therefore, we think that to maintain a 35% to 40% sort of increase is not a problem. And actually, we think that we can do better than that during the whole year. And also, we think that the market has undervalued our value, only about 20% to 30%. We think that it hasn't reflect our real value. We think that our ratio is about 50% to 60%.

Our next question is from [ Yao Yuan ] at CITIC.

[Foreign Language] My question is about our SaaS business. How do we view the impact of the U.S. WeChat ban on our business since Americans companies such as Walmart and Starbucks are also are paying merchants on WeChat?

[Interpreted] Thank you for your questions. And I have 4 aspects to answer you. The first one is that the international market right now doesn't account for too much share in our overall distribution. And the second is that if we want to expand to the international market, we probably would not use WeChat. We would more prefer the FB and Instagram and WhatsApp and the other international apps or the platforms. And the third one is that, yes, Walmart and Starbucks are our customers, but they are the localized companies, not in the American or the Western market. And the fourth, we think that the ban on WeChat is maybe more influence -- has more effect on the trade aspect, not the normal business one. So overall, we don't think that there will be a much bigger effect on us.

Our next question is from Stephen at Credit Suisse.

[Foreign Language] The first question is about the market sizing for smart retail and smart catering. And how much market share that we expect the company can reach in the long term? Second question is on the expectation of the timing for breakeven for the SaaS business. Any key indicators that we should monitor to predict when that timing will come?

[Interpreted] Yes. About the marketing share of those RMB 3 billion, I'd like to do a clarification. We said that we have 5,000 of customers of those RMB 3 billion. And we have the customers in the apparel and the luggage or the bag segment, we have 2,000 of them. And they share the market of -- it's about 50%. But we have other customers like in the supermarket, in the shopping mall and also in the luxury goods, and those accounting for 30%, including those -- and the total market share is about 30%. So that we see that the number hasn't changed. It's about 30% to 40%. And then the second about the smart catering. The smart catering actually is not as higher or mature as the retailing, and also the market share is not as big as the retailing. And right now, we have about 5,000 customers. And their SAP is about 300,000 to 400,000. And also, they have much more willingness. And so we think that the market is about at 1.5 billion to 2 billion.

[Foreign Language]

[Interpreted] And right now, we are still in a rather breakeven. We are still in the input stage. And we think that in order to have a very proper and healthy increase and to increase this R&D and the marketing input, and we think that it will depend on the smart retailing and smart catering and the expansion of key accounts, KA, increase to a critical point, then we can predict what is the cash flow and also what is the breakeven point. And right now, we think that -- and also, I'd like to add to the answer for Liu Yang just now about the cash flow. And the targeted marketing, the cash flow of the marketing is decreasing. And at the same time, we have to maintain a rapid development and also to maintain the software a lot. And also, we have to increase the input in the R&D and also the expansion and the increase of KA. So we don't think that there will be a big problem of cash flow. However, in view of this unpredictable situation, it is hard to say.

Last question for today is from Yang Mengjie at BofA Securities.

[Foreign Language] The first question is, how do you consider the current models of commercial SaaS? We can see that we focus more on helping merchants realize digitization and companies like Shopify focus more on the production of merchants to business. Both of these 2 models performed well. Will we adjust our strategy to both have in future? And another question is about the smart retail and smart restaurant, both focused on offline clients acquisition and service. How do we realize the economies of scale? [Foreign Language]

[Interpreted] And about your first question about our business model. And we all know the business model of Shopify, and it is including that they monetize the payments, the logistics and also the commission. And however, we know that in the U.S., the e-commerce and the mobile payment is not as advanced as in China, and also their largest service is not as solid as in China. So the gross billing is actually not so high and the commission is not so high. And we think we could increase. However, we are starting from an increased those traffic and maybe we can also take some commission from that. And also we will add value for them and as well, for example, in the distribution and in the live streaming. So we think that in the long term, we are still the tool company that we would use our private traffic to help our customers to digitize and to provide these customized solutions for them. Being a platform is not our major direction. And of course, we can also consider the [indiscernible] and the other service. And also, as you've mentioned, June [ 16 ], and we have also demonstrate with our customers how to do the live streaming. And the main reason is to help them how to share with them the private traffic, not to guide them into the GMV. And I think that the platform market in China is already a Red Sea. It is already very saturated. And there's not so large room for the platform and e-commerce. But we can never say never. So maybe we can provide some added value for them. And the second one is, I think there is some misunderstanding because for [ 2B ], you can never make or it is not possible to make a online -- 100% of online trade. It does exist. Even for a KA, we think that it is much better to do the omnichannel, to increase the efficiency. And also, the KA, if it is a very big KA online, it still has the good model shop in the offline market. Therefore, we think that we can expand the KA, and then we can think about this -- even we are expanding the online KA, it still accounts for the economy of scale. And also, we think that the offline will not have a big influence because at the end of the day, those businesses would all come back to the -- those brick-and-mortar shops are all offline.

Thank you. Due to timing constraint, we now conclude today's call. On behalf of the Weimob management team, I would like to thank you for your participation in today's conference call. If you have further questions about Weimob, please feel free to contact us. Thank you and goodbye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]