BlueCity Holdings Limited
Q3 2020 Earnings Call Transcript

Published: 2 Dec 2020

[Operator:]

Good day, ladies and gentlemen, thank you for standing by and welcome to BlueCity’s Third Quarter 2020 Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now, I'll turn the call over to Lingling Kong, Head of Investor Relations of the company. Ms. Lingling Kong, please proceed.

[Lingling Kong:]

Thank you, operator, and hello, everyone. Welcome to BlueCity’s third quarter 2020 earnings conference call. Joining us today are Mr. Baoli Ma, Chief Executive Officer; and Mr. Ben Li, Chief Financial Officer. We released results earlier today. The press release is available on the company's IR website at ir.blue-city.com as well as from Newswire services. A replay of this call will also be available in a few hours on our IR website.

[Baoli Ma:]

Hello, everyone. Thank you for joining our earnings conference call today. We finished the third quarter on a strong note, with total revenue of RMB297.6 million, up 47.3% year-over-year and total paying users of 494,000, up 43.8%. Notably, we generated positive adjusted net income for first time. This result demonstrates our ability to drive steady and healthy growth, still improving monetization capabilities and strong execution. In addition to solid organic growth, we further strengthened our leadership position in the LGBTQ community. We have developed a portfolio strategy that provides different products and services through acquisition and expansion to other subgroups and geographies. Let me share with you our latest breakthroughs on those fronts. First, acquisition. Today, we have completed the acquisition of Finka, a leading gay social networking app in China targeting younger generation. We are excited about this strategic acquisition. Finka complements our Blued app both in functionality centered on dating and swipes and in user demographics. With this acquisition, we have further strengthened our leadership and dominance in the LGBTQ community. But more importantly, it has enabled us to enrich our product metrics by injecting younger and more training elements into our community. We are confident in their future development and look forward to building a complementary business and strategic synergies.

[Ben Li:]

Thank you, Mr. Ma. And thank you, everyone, for joining our call today. As Mr. Ma just mentioned, we delivered another strong quarter with impressive business development and solid financial growth. Total revenues were RMB297.6 million, up 47.3% year-over-year. Gross profit was RMB96 million, a significant increase of 61.7% from the same period of last year. Gross margin was 32.3%, 2.9 percentage points better than 29.4% in the same period last year. Notably, we generated positive adjusted net income for the first time, which was a remarkable improvement, as it demonstrated the potential of our business model and our capability to grow in a profitable manner. We announced the Finka acquisition at the end of November. Finka is a geo-social networking app that uses you a swipe feature in which users swipe left for dislike and swipe right to get matched with other nearby men. Finka complements Blued, which is focused on building the community as a whole and connecting people in a much broader sense. Finka users are mostly millennials that live in the first and second-tier cities and who would like to pursue a better quality of life. As such, they are more willing to pay for high-quality services. As of September 2020, the Finka app had approximately 3 million registered users, with average monthly active users and daily active users about 1/10 of Blued. As we integrate Finka, we will accelerate its growth by providing financial support and technological and operational assistance. Specifically, with Finka's features more appealing to overseas users, who share similar profiles, we see huge growth potential for Finka to expand overseas, backed by our years of experience on global expansion and operations. Likewise, Finka will add younger members and fresh ideas to the community, which will further optimize our product and service offerings, enabling us to drive further monetization opportunities. Turning to our recent development in operations. We continue to develop resources to improving operating efficiency. We also invested in technology innovations to improve the user experience, as always. In August, we rolled out a BlueCity original short video series called, Dear Sirs. With 7 episodes, it tells same-sex love stories from 7 different angles. The series has generated over 33 million views as well as numerous interactions within Blued and other social networking apps.

[Operator:]

. Our first question comes from the line of Laura Champine of Loop.

[Laura Champine:]

It seems in this quarter that live streaming posted very strong growth. But your guidance for the fourth quarter seems to indicate a slight slowdown. Can you give more color around the dynamics on live streaming revenues in both Q3 and heading into Q4 on -- specifically on the growth trajectory?

[Ben Li:]

Thanks, Laura. This is Ben. Do you mind that I just do a quick translation to -- of your question to Mr. Ma? Okay. . Thanks, Laura. Yes, we do have a very strong quarter of live streaming revenue contribution in the third quarter as opposed to last year. But we do see the management also have a very clear additional vision that with the COVID-19 impact here in China gets less negative and everything is back to norm right now. So people would like to spend -- consume less time online, in general. So we do see, in the fourth quarter, that might be impacted to some extent. And that is one of the critical reasons we would like to just hold the same guidance for the whole year, Laura.

[Laura Champine:]

Another interesting dynamic for me anyway was that MAUs declined but your paying -- sequentially. But your paying customers grew very rapidly. How did you drive the migration towards paying users? And what drove the slowdown in MAU growth?

[Ben Li:]

Sure, Laura. I will do the translation to Mr. Ma first. .

[Baoli Ma:]

.

[Ben Li:]

Laura, actually, made some quick brief answers, and I will add more color based on his statements. So Mr. Ma -- actually just explained that one of the -- your statements, why the MAU this quarter seems slow down. The main attribution is just because we do have some challenges for marketing online or offline in India due to the geopolitical issue well-known globally. And given that part was not even being monetized in history, so it does not actually affect our revenue contributions globally. But it does impact the MAU, but no impact to the revenue side. That's one quick background for the detailed answers before we go into details. And then number two, that mentioned that given we are right now the number 1 market share player, we do have our competence that to have the strong engagement based on the strong belongs of our users. So our users could be allocated from time to time, over time, quarter-over-quarter based on our interesting and attractive features introduced on this platform. Number three is that our team, the management actually keep developing new features on this membership model that we keep improving the users’ interface and feelings enjoy on this platform, in general. So that's a quick brief to your question, Laura.

[Operator:]

I'll move on to the next question from the line of Mei He from U.S. Tiger Securities.

[Mei He:]

. So I have 2 questions. First, about live streaming business. In this quarter, we have seen that live streaming app grew, both Q-o-Q and Y-o-Y, what is the reason behind and how in the future stand, meanwhile live streaming revenue streaming costs down a lot both Q-o-Q and Y-on-Y. So what is the reason behind? And how would you look to sustain? Secondarily, on Finka acquisition. So if we have completed the acquisition, how will Finka impact our financials in terms of revenue or profit the next quarter or next year? What is the potential of higher monetization factor for Finka?

[Ben Li:]

.

[Baoli Ma:]

.

[Ben Li:]

Should I do the translation? Okay, to anyone online that regarding the 2 questions just mentioned by Mei He from Tiger Securities, and answered by earlier -- at earlier stage. The question number 1 in regards to the ARPPU growth and revenue growth, the reason, and also the live streaming revenue-sharing slowdown -- sorry, been decreasing over time and the reason and the target. Okay. The key reason for ARPPU growth and also live streaming revenue, in total, high growing, it's just because the investment actually keep enhancing our operation for live streaming by developing more features to attract more attention from the online platform users in general. And we also do see that with this enhanced operation methodology applied over time we are getting more and more attractive acquisition rates from the live streaming through the DAU and MAU in general. And that's the key driver for the ARPPU and also the total revenue from live streaming. And the target of the management is definitely that given we are right now already the market number 1 player of this LGBTQ community platform globally, we do have the strong negotiation power to the live streamers from time-to-time. And at this time last year, we still had around something between 66% to 70% revenues share with live streamers. And right now, all based on the management's efforts over the 4 quarters, just to specify that we have successfully achieved to make it down around below 60%. And we are still trying every effort trying to bring that down to somewhere in between 50% to 55% in next several quarters. So that is our tactics to enhance our gross margin by lower down the live streaming sharing with the live streamers. The second question regards to the Finka's general financial performance through the next quarter and for the quarters in 2021 and also the business model, diversity of this Finka product. Speaking of that, currently, everything just is complete from the paper acquisition rights. And we are right now in the merging sector of this deal. And everything has been audited right now according to the GAAP requirements, and we are going to share with detailed information as requested sometime later. That said, still, the total revenue annually is on the level of RMB100 million or something, in general, for sharing information purpose only. And the monetization pie retrofits from Finka were made also by live streaming, but with a very stronger Blued app that the membership services, in general. Yes. I think that's a quick brief of the questions and the answers.

[Operator:]

Next question comes from the line of .

[Unidentified Analyst:]

Yes, it's a strong quarter as you -- as your company turned profit this quarter. So my question on the expenses side. So if we deduct SBC, and your adjusted OpEx ratio was 30% and declining sequentially and also on a yearly base. So can this trend continue? And one, can you achieve the operating leverage on sales and marketing, as we can see, the sales and marketing is still accounted for nearly 20% of your total revenue. So -- and in particular, you just acquired Finka. So when can you realize the synergy with the acquisition?

[Baoli Ma:]

Okay. Great. Now just for efficiency of translation, do you mind, Brian, just conducting English to answer all questions?

[Unidentified Analyst:]

Sure. No problem. Thanks.

[Ben Li:]

Okay. In general, our share-based compensation cost for this quarter actually touched base on -- touch based on the P&L in total, is around USD 20 million or something. So that was huge, but that was just a non-cash accounting treatment, in general. And most of them actually just in G&A. So excluding them, you will conclude a very promising OpEx as a percentage of total revenue growth. What I can tell you that this is very promising, but we do not see it's going to just keep decreasing in this kind of pace. Just because during the IPO process, I think we're conducted over a year or so that we do enhance a lot by building up -- strengthening our corporate governance, procurement process, election, selection, tenders process, et cetera. That was actually the legacy of our enhancing our corporate governance from the period passed by. And this is just starting to impact from the quarter recent -- in recent quarters. But we do not see that will just be a norm in next quarters onwards. So yes, the result was promising, but we do not see it was going to be as aggressive as this pace in future sales. Still, we are going to optimize our operation cost as potential of total revenue, in general. Yes, it is going to decrease, but not in that aggressive pace. That's the answer to this question. And regarding the S&M, as a percent of total revenue, you mentioned 20%. The management holds strong confidence that if we are going to grow bigger, we have to spend more. So the percentage as in my last quarter earnings statement that I mentioned that 20% of is just healthy and as acceptable by the management for S&M as a percent of total revenue. So we are going to -- especially we are going to be a global company. So we are going to keep that level of percentage of the revenue for marketing and sales, in general, yes, in future quarters onwards. For the synergy, I assume you were asking about for the cost and G&A, OpEx, et cetera, for that synergy. Certainly, yes. We -- according to the agreed terms, we are going to merge our functional departments post IPO, but we'll keep operate the Finka brand and business separately or independently for next several quarters, definitely. And we are going to optimize our human resource, to optimize our finance department and also the legal procurement, et cetera, et cetera. Yes, of course, we are looking at a very significant opportunity that if we just to combine the two procurement process together that we definitely have a very stronger negotiation addition to deal with the vendors, in general, especially for these IT-related, like the cloud, like the content modulation machine, et cetera, et cetera. Brian?

[Operator:]

Ladies and gentlemen, in the interest of time, we will now take the last question from Bo Pei from Oppenheimer.

[Bo Pei:]

. And then I'm going to translate for myself. So I have 2 questions. The first one is about LESDO and Finka. And we acquired LESDO in August. So I'm just curious about our overseas expansion plan like we mentioned in our prepared remarks for Finka, we going to promote this app in the overseas markets. So I'm just wondering if we have similar strategy for LESDO? And then the second question is, our overseas M&A strategy. I mean, since our IPO of 2 MAUs in China. So I'm just curious about our M&A strategy in the overseas market? And then is the global pandemic kind of is slowing down our efforts in overseas market, in general?

[Ben Li:]

.

[Baoli Ma:]

.

[Ben Li:]

Okay. I'll do the translation for the first two questions regarding -- in general, the status quo of LESDO, which we acquired in this summer. And also any overseas expansion plans for LESDO, in general. So answered that, post-acquisition, the management has making great efforts to make the user growth of LESDO. And as earlier mentioned during the prepared remarks, that we have -- the MAU of LESDO has actually increased by 1.2 times over those several months, post-acquisition. Based on the product enhancement and also the -- some limited marketing activities, we achieved this kind of results. Thus, with the half year marketing activities conducted later, the management has a strong confidence that LESDO is going to be even stronger form, in general. Specifically, I think this December, we are going to introduce the live streaming features in LESDO. Regarding the overseas strategies for LESDO, according to statement, that, yes, we are going to go overseas to service the underserved global lesbian market. That said, still, our first priority is trying to win the market number 1 share player in China. So our tactic is trying to do China first, as number one, then move to overseas. We see that is not in the long-term future. So that is our general plan. And my own add up to you, Pei Bo, regarding our general geography overseas expansion plan, under such COVID situation, is not -- again, our mission is trying to be an international LGBTQ community lifetime demand service provider. So we will never stop expanding internationally globally oversea-wise. So that is our -- like our strategy, likely law of our general plan. That said, under such current situation, not just the COVID, but also the geopolitical issues related recently this year, that you can see from our earlier prepared remarks that we actually are trying to compensate alternative options through Latin America market. It's also a very attractive market, which we just recently introduced our new products into those markets. So we -- let's wait one or two quarters to see how that performed, which the management do have a strong confidence in that regard. That's the question -- that's the answer to your question number one, Pei Bo. .

[Baoli Ma:]

.

[Ben Li:]

Pei Bo and everyone else on the line, again, I would like to highlight before I go into the detailed answer translation to just announced statement that our mission of this company, this platform, is trying to present ourselves as an international global success service provider to serve the global LGBTQ community, in general. So the second question from Pei Bo regarding M&A strategy oversea-wise, actually, it does have some interconnection with our global expansion plan, in general. So answered this question from two aspects. Number one, I’m pleased to say, as answered, about if there is a existing strong market-dominant player that we would like to explore any acquisition opportunities with them, first, in order to save efforts and save time to acquire the customers, in general, in that market. If that new territory market does not have a presentable good-looking target, our strategy for that market is trying to do by ourselves, either to develop a new featured product or sector, copycat our international version of Blued, in general. So that is the statement of our global expansion. M&A is only one of the options, in general. My own add up for this aspect Pei Bo is that it's not just a restriction from the COVID, but also from many other aspects like geopolitical issue. We view exactly China-U.S. tension, even India tension, et cetera, et cetera. That's also a quite challenging for a China company going abroad. I believe everyone understands that. And also, the cost. I mean, cost does not really just only related to the economic cost, but also the efforts cost that even maybe the data protection cost like the in Europe, et cetera, that echoes just now stated that are our three tactics to go abroad. That's the consideration for how we go abroad, either by acquisition or organic growth. The second aspect stated by is that we do have a clear globalization strategy, in general. Number one is that we are going to keep solid expand, enhance our strong presence in APAC territories to keep dominating these markets by developing new features, by doing more sales and marketing online, offline and to help people -- to help users get more engaged, et cetera, et cetera. Number two is that we do find another alternative market, Latin America, and we just entered into that market proactively since this quarter. And we do see -- by this quarter, I mean, the fourth quarter this year. And we do see, to-date, the data, the KPI resulted from Latin America is quite promising. And we are taking serious study in this market to keep developing new features and doing more operations proactively, in general, to get that market to a more promising stage. So number three is that, as mentioned that, of course, the North America and Europe, the users actually, they were very, very good users. They are willing to pay. They are more well-advocated, and they are good users. So definitely, again, back to my earlier mentioned law of this company that we are going to be a success international company. We have to face the challenging to be moving to North America and Europe sometime, in some way. And from now on, and even 2021 or 2022, we -- management already has a serious dialogue internally in preparation to try to get conquered -- sorry. I don't know that word, not conquered -- trying to get some meaningful first step in that mentioned North America and Europe markets. Pei Bo, that's the answer to the second question. Operator?

[Operator:]

Thank you very much. Seeing no more questions in the queue, let me turn the call back to CFO, Ben Li, for closing remarks.

[Ben Li:]

Thank you, operator, and thank you all for participating on today's call and for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect your lines.