Weimob Inc. (2013) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. Welcome to the Weimob Inc.'s 2024 Interim Results Conference. A copy of the interim results announcement can be found on the company's website. [Operator Instructions] This call will be conducted in Mandarin, and English simultaneous interpretation will be provided. Participants may flip the PPT on the streaming platform. Please note that this conference may cover information about non-IFRS metrics. As for detailed definitions, please consult the company's result announcement. Today, we have with us Mr. Sun Taoyong, Chairman of the Board and CEO; and Mr. You Fengchun, Executive Director and President of WeCom Group; and Mr. Cao Yi, CFO. Now may I invite Mr. Sun.

Fellow investors and analysts, good evening. Welcome to WeCom's result announcement for the first half. I'll walk you through the overall results for the first half. As far as our financial results is concerned, you will already -- you must have already seen it from the website. You may be in doubt why is it that the revenue has dropped by 28%. Overall, our revenue, I would walk -- I would touch -- provide some details subsequently. But we can see that our losses for the year has been narrowing. And overall, adjusted losses have improved a great deal. You will -- versus the CNY 61 million of the -- CNY 600 million of the same period last year, that loss has narrowed -- I'm sorry, the number should be CNY 200 million. And last year, our cash flow is negative. And this year, it's CNY 30 million positive cash flow. So we have the best cash flow in the 30 months to come -- 30 months until now. So for the first half, we have been able to get very good results in reducing our cost and increasing our efficiency. Regarding the decline of revenue, we think that there are 2 reasons. First is that the macro economy has been coming down and it has some impact to medium and small firms. So I believe that 5% to 10% of the revenue is impacted by this sector. The second and the main reason is we have some strategic adjustments for the small and medium firms starting last year, for losing cities, we are ruling that out. Just -- we kept only just the core cities. We have -- at the earliest, we have 15 subsidiaries. But now we are keeping only 5 in the most important cities like Beijing, Guangzhou and Shanghai. So this is a very important reason explaining why the revenue has come down. So this is a strategic move, I would say. And also, we have some losing business that we continue to shrink first half of last year through shareholding methods. We had seen some decline in overall revenue. And also, we also spin off some of the low profitability businesses. So the first half, especially the revenue, especially subscription has come down by 31%. However, our cost has also come down a great deal, especially selling expenses and cost of sales that has come down a great deal. So the overall result is that our overall losses have narrowed. And we have also other improvements in efficiency. Now overall, for the small and medium sectors of the mainland market, we think that given the current economic situation, these companies, first of all, the client acquisition cost is not too low and the budget is not too big. And also the revenue is not that big. So we -- so they would come with a high longer return on payments. So most of the cities because of these reasons, we see some losses. So we have -- this is why we have made the strategic adjustment regarding these sectors. And the core businesses, especially our retail, Weimob detail, we see that the -- our organic growth is 3.1% for -- and it is already 62% of our overall revenue. Despite of the overall economic slowdown being a challenge, we see that the retail sales is actually quite good, especially revenue proportion of all customers are very -- actually very good. So we think that given the economic situation, the smart retail and Weimob retails, we should -- is actually the sector that we should focus on. Despite that, the growth is not a really big one, but we think that it can still be sustained. And this business is very robust. So we will walk through specific details in a moment about Weimob retail. And we have a gross billing increase of 19.4%. And with our video account, we have a big increase and the same for Little Red Book and Kuaishou. Our business actually is not bad, but why is it that our revenue still comes down? There are several reasons. The most important one is the Tencent strategy change or adjustment. Since last year to mid of this year, Tencent has given -- has cut down on the rebate that's given to us. And we also have to give rebate to our customers because our business model is that Tencent give us a rebate and our customer and we also give our customer rebate. So our net income is the difference in the rebate ratio. However, our progress is actually lagging behind of Tencent in general. So at the beginning of the year, we have signed a framework agreement, but it is difficult to realize that immediately. So effects of Tencent strategies is -- would come in a lagging in later than reports. So if we keep the same strategy with our customers, then this would become a strong and stable trend. So this year, we think that Weimob sales overall, I think the growth is 10.9%, which -- 19%, which given the economic situation is actually quite good. But then the revenue is not -- it's coming down a bit. However, we have been able to reduce our cost and improve the operating efficiency. Our losses are narrowing. And this improvement is very evident. Now let us take a -- talk more about the Weimob Corporate Services. Our overall strategy is the upmarket strategy and that has achieved some very remarkable results. The -- that revenue has already become 60% of our overall and it will continue to grow. And we will continue to introduce more corporate services, especially with the clothing industries and sportswear, the performance is quite good, like leaning new balance and these have already become our customers, then there's [indiscernible] with the FMCG industry and other like Zheshang, these customers have also signed to subscribe to our smart selling product. So our trend in the top segments of these customers actually quite good. So as far as subscription is concerned, the ratio has been rising from about 52% last year to 62% now. So this is the strategy change in the small and medium sectors. With that change, we think that the overall corporate services will take -- will contribute 70% in the future. And we also have a lot of brand merchants. There are 2 figures that I'd like to disclose, which we have not been able to disclose before. The GMV and the order volume of Weimob retail has been increasing a great deal. GMV increased by 38% and order -- number of orders increased by 42%. Through Weimob Corporate Services, the increase in the number of customers is very evident. And upcoming, we may have a commercialized income that has to do -- that is linked to order volume. So this piece will continue to grow. This year, apart from keep further penetration of the clothing industry. And we also have some good results with the FMCG industry. We are also moving into further penetration of the building materials industry. Through industrialized industry-based sales, products and operations, we dig deeper into each of the industries. And through our direct sales, we will -- and channel sales system, we will continue to push our KA plus LKA to further penetrate medium segment customers and brands. And at the same time, we will push more industry-based products in order to gain an in-depth insight into the needs of these industries. And overall, we will also provide industry-based operations as well as commercial models that would help to increase our income. Each order is CNY 0.50. And that's an average, some may be higher. Now with the order numbers increase, we will be charging for cloud service fees. Now this activity basically is costless. It comes with no cost. However, it will bring us income straight profit every year. And we would also be charging for message, push and interface calling, which used to be provided for free. So this will be a driver for our revenue as well as our gross profit margin. Upcoming, let's talk about Weimob Marketing. Weimob Marketing as last year, our gross billing has increased year-on-year by 19.4%. And the Tencent advertisement consumption increased by 19%. And for Kuaishou and [ Xiaohongshu ], the increase is also very good. Now the Weimob Marketing, be it the status of the industry as well as our market share as well as some breakthroughs into the market and also our coverage of strong markets, I think in all these areas, I think we have done well. And because of media changes, or media strategy changes, our profits may fluctuate a bit this year. However, with stabilization of the media policy this year, we do expect some fluctuations. With [ WOPS ], we continue to solidify our technical fundamentals. We have new open capabilities, 125 more of these. And the time for new product launch has come down in a big way by 50%. And the year-on-year increase in the cost to open capabilities have increased by 21%. So this is a very good base for us. And with AI, last year -- since last year, our AI products matrix has become very rich. First of all, with WAI Pro is a propeller to the merchants use of this technology is increasing. Active customers has increased by 3.6x year-on-year, especially in 618 shopping festival, the use of AI technology has increased greatly. And we also have added on 18 scenarios as well as other functionalities. Some merchants through buying our SaaS model can then use -- they can then use our AI product. At the same time, for key customers, we also provide WAI Pro product. That -- it is a product that can help customers customize and personalize the AI applications. So we will, based on their business scenarios to provide multi-model scenarios and to provide an overall comprehensive solutions, some for advertising agencies and brands. I like to use this within the teams. So we provide trainings of WAI Pro to them. So this is for the very, very key customers. And lately, we have also launched a new product called [ WAI MI ]. This WAI MI product has been launched for less than 2 weeks and it seems to be good. The -- we already have 5,000 paying customers and 5,000 and there are over 200 non-paying customers. So WAI MI then AI is something that one can experience. Of course, we do not provide mobile support as of now. This space is individual e-commerce practitioners who would need to design posters and pictures and generate product detail pages, they can use this technology. They can have a picture ready in 3 seconds and marketing messages written in 3 seconds and they can also enjoy the AI-generated product details page as well as use AI writing, et cetera. Now this product faces personal individual subscribers. So this product is more for the individual designers and e-commerce practitioners' market. So we have products for the highest professionals as well as the massive individual markets. So this is all comprehensive product mix that will help us penetrate the market. Now let's talk about some of our outlook. Now first of all, the focus is on scenarios to promote AI applications and commercialization and also to leverage on enterprise level of AI services. So we know that apart from our SaaS product that can be paid online, we also provide WAI PaaS that connects to a third party. We have already connected to Definesys and Tencent Cloud. So by connecting, they can directly use our AI products. We also provide to small and medium customers, especially designers with design tools. And this is the WAI MI that I was talking about. WAI MI, especially as it relates to templates and marketing posters, we offer a very rich product. And the paying customers will then increase and demand will increase and we will continue to add on to the scenarios so that this can become a more popular AI tool. And also with WAI Pro, we will provide more personalized and customized AI solutions. For example, with the digital man oral broadcast, that's something that is very welcomed by the market. So with oral local training, the digital man can actually have you save a lot of time. And also with AI MH editing, AI music generation, content creation, we will be providing a comprehensive solution for these customers. The second outlook I'd like to talk about is the international market. So this is something that you all hold to your heart. Since last year, we have been trying to -- this globalization strategy. And we have a super app solution in Middle East and in Southeast Asia. We have built some potential customers. So from Middle East to Southeast Asia to Japan to the Americas, we have actually conducted some very in-depth research. So we believe that with the North American e-commerce should be our focus. And going forward, this will be the most important direction of our overseas expansion. And this is with the PIG methodology to build a product that faces -- with the SaaS product that faces small and medium customers. I think this is very good for us. And we think that -- after research, we think that there's a lot of opportunities. Using AI as a driver for e-commerce, comprehensive solution would be more efficient and cheaper for the customers and therefore, more welcomed by the market. This is, therefore, a important direction of our international strategy. We will continue to increase our revenue model and enhance our efficiency and financial performance. So we will be charging for some services. And this will be a driver for revenue in the coming year. And facing small and medium customers, we have a online subscription model. We do not wish to involve our sales team in there. So we provide a self-service platform so that they can do their subscriptions online themselves. We will then -- we can then focus more on our retail business and enrich our industry and scenarios and to dig deep into these different segments. We will also continue to reduce our cost and enhance our income. Overall, as far the -- for a positive cash flow, I think by next June, I think this is achievable. The fourth is we continue to push our key account strategy and to further penetrate the mid-segments of each industries. We anticipate that key account revenue would increase to 70% next year. And with the mid-segments, we will continue to enhance our penetration rate, especially with FMCG and clothing fashion industry. These have already been the leaders in the industry matrixes. And we will continue to open up new industries because our products are also suitable for chain stores, supermarkets and convenience stores. So regardless of the size of the customers, they will find our products very useful because we have a very rich offer. Then we continue to deeply look into the Tencent ecosystem and the video accounts platform. And with the video accounts platform, I think our advertising business is already very successful. And we will continue to push for video account plus influence or video account plus live streaming and short video as well as video account plus private domain. So these will bring further opportunities for us. So I'll end my introduction here and invite Mr. Cao to talk -- to walk us through our financial performance.

Fellow investors and analysts, good evening. So upcoming, I will walk you through the 2024 first half financial performance. Just like Mr. Sun has walked you through the overall half year, first half, there has been a great deal of economic challenges. Sales are soft and given such a challenging environment, we continue to adjust our strategy and continue to focus on the core business and to get away from the small and medium customers as well as third-party customers with low profitability. In the first half, our revenue is -- and we also have CNY 10 million to CNY 20 million of subscription revenue. So this indeed has caused a great decline in our subscription income. However, we also cut down on CNY 230 million of sales and staff cost, administration costs. So overall, the subscription losses has been narrowed. Now as far as merchant solution is concerned, we see that merchants are interested in the precision advertisements and demand is good, especially video account advertisement that is increasing very good. And our revenue has come down, it's CNY 867 million, came down by 28.3% and our revenue from subscription solutions decreased by 31%. And the cost has come down by CNY 234 million. So the overall loss have narrowed by CNY 57 million. So the decline is 7.6%. This compared to our peers is rather similar. The gross income -- gross billing from merchants has a 9.4% increase. It is a CNY 380 million of income is down by 4.5%. Now part of the reason is the Merchant Solutions, our finance and our collection has come down because with finance leasing because our -- we have taken the initiative to shrink that business. And this is because the overall economic cycle is showing some budget control. So we see a 50% decline. The advertising has come down by 16%. And with gross billing, this is relatively slow when compared to gross billing. This is because we see big changes in the 2024 platform strategy. This change -- the discussion and announcement of this change started only in March and April. So with the upper stream adjustment of the discount rate, so we will need time to deploy that strategy change. So because of this time difference, you will see that the net commission will -- when compared to the same period last year, you will see a smaller number. Now with business adjustment, the Smart Retail, Weimob retail will -- you will see some very good increase in this first half. We have a 62% increase -- 62% contributed 18% increase. So this is -- this shows that we have been focusing on this business. Given the uncertainties of the external economy, we are controlling our costs. We -- our team head count has dropped by 4,580 to 3,900, that's a 14% decrease. And our costs have also come down by 19%. This CNY 670 million included CNY 660 million of compensation for the employees. As of 2024 middle, we have CNY 7,470 million of assets. We also -- our short-term loans, including the April this year, we have convertible bonds and the short-term bank loans is at CNY 1.17 billion. And this is a free cash flow loan. Our overall advertisement increase, income has been growing healthily. Our overall customer -- collection from customers is good. So our loan and liabilities are kept stable. There's no bad debt concern. We have also optimized our cash flow and cash management. 2023 H2 to H1 of this year, our cash flow continues to be possible -- to positive. And with our free cash flow continues to be positive. Now let's take a look at our revenue. As far as revenue is concerned, we have already said that after the COVID, economy has been facing a lot of uncertainties. The recovery is rather flat. So sales are coming down. The merchants are controlling the expenses. So we have taken the initiative to adjust our strategy. We are adjusting the subscription budgets of direct sales company, direct sales, city and small and medium firms. So all in all, it has an impact of -- it has an impact of CNY 178 million of our revenue. And our overall ARPU is stable with a further expectation of stabilizing of the revenue and we anticipate ARPU to come back to a previous level. Our advertisement income continues to be good. The first half, we have a 19.4% growth in our gross billing. The Tencent ecosystem has increased by 19%. And the video account advertisement has increased by 78%, a very evident improvement. And we have a 24.5% decrease in Merchant Solutions. That's because of DSO and some other business we have taken initiative to shrink that. And the new policy change in the platform also has a very big impact. And it will take time for us to practice the same policy with our customers. So -- and this will take a little time. So in 2023 H1, the advertising revenue is 5.7% in the first half of this year. This has come down to 3.7% in 2024. This ratio -- net ratio has come back to 4.1%. However, it is still lower than what we had planned. We anticipate that in the second half of the year, there's still room for further discounts to our customers. So after we -- we can now take a look at our overall gross profit. Because of revenue fluctuations, there will be impact to our gross profit margin. If we take a look at 2022, since 2022, each half year, the fluctuations of Merchant Solutions and Subscription Solutions, since it has gone from 61% to 59% and then rebound to 2023 H2 66%. And with the first half this year, it has come down to 60%. This is Subscription Solutions. Now after taking off the impact of [ hiding ] heading, we still continues in 83% as a total. So this is in line with our anticipation. Now with Merchant Solutions, we have advertising revenue and TSO revenue as well as financial revenue. The share of this would have an impact to the overall gross profit margin. So in this diagram, you will see that advertising revenue. Its fluctuation actually is aligned with the overall fluctuation of our revenue composition. And with the first half, the subscriptions are facing headwinds. So the adjusted loss from the second half of 2022 reaching the peak, then it started to narrow. In 2021 H1, the adjusted loss is -- as far as 0.5 and our free cash flow continues to improve. Now since from 2022 H1 with the net outflow and with advertising cash flow through our proper management of cash flow, we have optimized to reach a positive cash flow of CNY 365 million. So overall, we have a positive cash flow and that includes a CNY 20-odd million of finance costs. Now 2024 first half, subscription and merchant businesses face external challenges. The revenue is not as high as we had expected. However, the overall costs have been -- loss have been able to come down. And that's because we took initiatives to adjust our strategy and reduce our costs. The subscription losses from 2024 H1 with a negative CNY 430 million. It has come down to CNY 150 million this year. So that's because of our cut in cost and that has narrowed down our losses. In 2023 to 2024 we have continued to keep a lean team and cut our administration cost. The merchant net profit has come down from CNY 180 million in 2023 to CNY 110 million in H1 of 2024. And this, our net profit -- our increase in gross billing has -- bring an additional CNY 70 million of net profit. At the same time, because of the platform policy change and the lag -- the gap in the timing, so that has also caused a drop in revenue of CNY 120 million. So regardless whether the scale size or overall the team efforts, I think we have actually achieved a lot. And there has been surprised changes in policy and the platform that we did not expect. In the next half, we hope that our strategies can address the changes in the policy. So this is our overall financial situation for the first half. Upcoming, I'll pass the floor to you, our investors, for any questions that you may have.

The first is from [ CSLA ], [ Mr. Yan ].

I have 2. The first one is that I'd like to ask how does the company look at the Weixin shops and the video account? What are the impacts that they have on us? And also with the cloud computing companies, they are adding on -- adding up accelerating on the CapEx to capture the AI opportunity. So how does the company -- what's the company's view about the commercialization of our AI products and the trend?

Weixin small shops. This product has been there very early on. It's developed by Weixin platform. And after it has been launched, this product has become the video account shops. Now the e-commerce as it relates to video accounts has all become -- has come back to the open platform. So this product has always been there. I think its impact to our business because upcoming, we are facing -- we are targeting Smart Retail, Weimob retail to our medium or large customers. However, with this -- the product that you just now ask is more targeted to small customers. So it does not bring a big deal of impact to us. And the positive thing that it brings is with the Weixin small shops. I would guess that Tencent would pay more attention to its e-commerce business and they hope that this Weixin Xiaoshangdian would become an even more important product, just like the video account. So with the circle of friends, [indiscernible] and also other functionalities, it can be integrated amongst different mobile apps. So this is a very good trend for overall Weixin e-commerce. So for us, apart from advertising, it also can benefit our -- some of our products. This can also be in opportunities for us. We can launch some of our special products in the Weixin little shops. Some of our marketing tools and marketing products can be used there. Now with small applications and also small shops, these are the 2 products that can be connected. Overall, we think it's more -- there's more advantage than there is negative impact. So with the overall Tencent e-commerce ecosystem, it's a good thing. The Weixin small shop has not disclosed a lot about their plans to the open market. So these are just my guesses. Now as far as our commitment and investment to AI, I have already said that AI is a very important component of our strategy. And that's with the SaaS within the SaaS-2, [ Wei SaaS ] products facing individual designers as well as the WAI MI product that faces individual web designers as well as WAI Pro that faces -- that offers customization for large customers. So our AI product mix is quite comprehensive, which is something that we would rely on to expand our international business. Now with commercialization of AI products, I think looking at the broader scope, the commercialization of AI products is still at its very early stage because despite it has very evident strength in efficiency, however, it has -- I don't think we have reached the critical mass yet in order to have a strong impact on customer behavior. We already have several hundred of customers with WAI Saas that is starting to be paying customers. And the same applies to WAI MI. And with WAI Pro, some large customers are also paying customers. I think the overall customer behavior and customs and when AI can -- becomes a part of the working process of the customers that they cannot do without, then that would bring the critical mass point. And of course, we are positive about the future. But then we think -- we still need to wait a little time.

Our next investor is from CICC, Mr. [ Jan Shaden ].

I have 2 questions. First is, we see that in the first half of this year, you have taken the initiative to decrease low quality and small and medium businesses. And also the adjusted net losses have evidently narrowed. So with this initiative, what is -- do you expect the impact to continue into the next half of the year? And how about the cash flow for the second half? What is your outlook? My second question is about going abroad, international expansion. Mr. Sun you had said that you will be making some efforts there. So what products and which markets would we be focusing on? With -- do we have an outlook or an expectation for the medium term about the size of our international business?

Thank you very much. Excellent 2 questions. First of all, regarding our overall income. We think that in the second half, I think we can expect a stable or maybe even small growth when compared to the first half. So in the first half, for the low-quality and not profitable business abolitions, I think that work is almost done. So we can expect we can expect the second half to be better than the first half. But then could compare year-on-year, there will still be some decline. With the Merchant Solutions, we are still communicating with Tencent about their strategy. However, I think our Merchant Solutions will grow. So in the next half of the year, our income growth would mainly come from Weimob retail, I think that growth would continue to be stable. And our new income like service fees and interface calling fees, these will bring income into the second half. As of next year, you will see a [indiscernible] expect because we will just be increasing or introducing these fees and it takes time for the market to take it. So as of next year, I think you can expect several tens of millions of revenue coming in from these fees. And with the AI income, the WAI MI revenue is also a source of income. Now with the perfect optimization of our products, we will step up on the marketing of it. And therefore, we can expect some revenue from AI products. So with the second half, we expect our overall revenue to be better than the first half. And as far as cost is concerned, I think we have cut what we can. And we have optimized our team in the first half of the year, so into the next half, I don't think we will take further action, say, in the first half, some of the work that staff that has been taken out were doing will no longer be there. So we anticipate our financial performance as far as cost is concerned will even be better than the first half. As far as international expansion is concerned, we have done a lot of research from Southeast Asia to Middle East. In the end, we did not choose to focus on the Middle Eastern market because this market focuses on the big customers and when we need a very good local connections for us and for our -- it is not something that is aligned with our strength. And e-commerce in Southeast Asia has just started. So it's digitization and the smart model development has not reached a stage where people can -- are willing to pay for it. And the -- and the market -- Southeast Asia market is very widespread and the intention to pay is like that in China, people don't want to pay. Now with Japan, it doesn't offer a very good medium- long-term prospects. So we think that with PIG for model focusing for small and medium customers, I think this is the way that we should go. And the e-commerce in South America is developing very quickly. However, North America is the most mature market. So all in all, we think the North American market is more suited for us. So we want to offer a smarter, more efficient and a more simple product for that ecosystem. So with the small and medium product merchants, it would be forced to use a very complicated and very expensive products. So what we wanted to offer is some simpler products that is ready for -- to be used when plugged in. So -- and this can offer them a lower cost. So things like open shop tools, we would target the North American market with these products, simpler products and relying more on AI because I think the North American market has already been there for 20 years. So they cannot very quickly embrace AI as a whole. So this is a window whereby we can introduce a more AI-reliant product and -- because for them to switch strategy is very expensive. So this is an important strategy for our international expansion. Now with the TMS model, if that's successful, then the revenue, the space for increase in revenue is big. So we have about USD 10 billion if we can have only a very small fraction of that market, it's already a very big business. So this can then be most another very important strategic attempt of the company apart from AI.

Because of time constraint, we will close our call here. So on behalf of the Weimob management, I thank you all for attending. If you have any further questions, please contact the company's team. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]