Ruhnn Holding Ltd
Q4 2019 Earnings Call Transcript

Published: 13 Jun 2019

[Operator:]

Hello, ladies and gentlemen. Thank you for standing by for Ruhnn Holding Limited’s Earnings Conference Call for the Fourth Quarter and Full Fiscal Year of 2019. At this time, all participants are in listen-only mode. Today's conference call is being recorded.I will now turn the call over to your host, Mr. Sterling Song, Senior IR Director of Ruhnn. Please go ahead.

[Sterling Song:]

Thank you, Anna. Good evening, everyone. I am Sterling Song, and welcome to Ruhnn Holding Limited earnings conference call for the fourth quarter and full fiscal year 2019. As a reminder, this conference is being recorded. The company's financial and operating results were issued in a press release earlier today and are available online. You can download the earnings press release and the finance from the company's email distribution list by visiting the IR section of the company's website at ir.ruhnn.com.Min Feng, our Founder and Chairman of the Board of Directors; and Zhenbo Chi, our CFO, will begin with some prepared remarks. Following the prepared remarks, Lei Sun, our Founder and Director and CEO; Ms. Chao Shen; our Founder and Director; and Ms. Mac Zhou, our VP, will also join us for the Q&A session.Before we continue, please note that today’s discussion will contain forward-looking statements made out of the Safe Harbor provision of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's accurate results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's registration statements on Form F-1 and other filings as filed with the U.S. Securities and Exchange Commission. The company doesn't assume any obligation to update any forward-looking statements except as required by law.I will now turn the floor over to Ruhnn Founder and Chairman of the Board, Min Feng. Min Feng will deliver his remarks in Chinese followed immediately by English translation. So, Min Feng, please go ahead.

[Min Feng:]

[Foreign Language] Thank you everyone for joining Ruhnn’s very first quarterly and annual earnings conference call as a public company. This year continues to be a milestone year for us as we successfully completed our IPO on the NASDAQ Global Select Market on April 3, 2019.We would like to thank your shareholders, partners, KOL, customers, [indiscernible] for long-term support and trust has allowed us to continue our journey to execute our growth strategies and strengthen our leadership position in China’s KOL e-commerce market.[Foreign Language] We are pleased to continue our rapid growth trajectory in the fourth quarter of fiscal year 2019 with total GMV recording RMB648.3 million, this represents 81.3% year-over-year increase from the year ago period. For the full fiscal year 2019, total GMV increased 39.9% to RMB2.9 billion, and the total revenue increased 15.4% to RMB1.1 billion. This outstanding performance clearly demonstrates the strength and the viability of our business model as well as our strong execution capability.More specifically, we believe our performance was driven by the following. Our effective KOL cultivating capabilities, creative product marketing, diverse monetization channel, cutting edge technology and big data analysis, synergistic supply chain and the market yield of revenue stream opportunities in the KOL economy market.[Foreign Language] In the fourth quarter of fiscal year 2019, platform GMV as a percentage of total GMV continued to grow reaching a 42.9% compared with only 7.8% for the year ago period. Looking ahead, we aim to operate in a more asset-light manner and accelerate the expansion of our business. And as a platform model, we'll continue to improve our comprehensive Internet KOL identification, cultivation and support activities to grow our top-tier and established KOL pool. In addition, we plan to collaborate with a great number and a variety KOL simultaneously, while further optimizing our cost structure to realize our target.[Foreign Language] As of March 31st, 2019, the total number of people have reached 128. We provide professional training and support to new KOL only after evaluation and selection and is consistent in the development of their distinctive public persona as well as provide digital marketing to enhance their popularity.As a demonstration of the success of our model, our KOL launcher is growing and enhancing healthy with their fans following popularity and the purchasing power of their target audience continue to grow.We design and match distinct product from different KOL to market over their social media channel based on each KOL's distinct character which in turn take us further of their individual fan bases.At the same time, we leverage multiple e-commerce marketing tools to enhance customer buying power. We already develop anonymity and flexible KOL marketing model. We also continuously and rigorously adjust marketing strategy based on the real-time interactions between our KOLs and their fan as well as the market's feedback we capture.Further benefiting their advanced technology and big data platform, we continue optimizing our product selection and marketing programs. In addition, we are investing in various AI solution such as fashion, AI beta, and AI trend. The vast amounts of data we collect and analyze on a daily basis has allowed us to better understand consumers' changing taste, collect real-time business intelligence, monitor the activity of our existing KOL, and identify and discover talent. As a result, we're able to improve supply chain efficiency, monetization, and online store operation capability.Our robust financial performance for the fourth fiscal quarter was also fueled by our strong and reliable supply chain and a data analysis capability. Our supply chain data is synchronized with our self-developed software [indiscernible] to ensure transparent and a stable production delivery time. In addition our efficient and smooth cooperation with more than 800 suppliers have drive our big data analytics, have formed our uniquely flexible supply chain.[Foreign Language] Our strong KOL marketing capability, advanced technology and big data analytics has enabled us to lead the KOL [Technical Difficulty] partner for the increasing number of new regional brands in China providing them comprehensive services ranging from design, marketing and supply chain management.As of March 31st, 2019 we operated with and promoted products of 632 brand and a 132 third-party online stores compared with 166 brands and 6 third-party online stores as of March 31st, 2018.[Foreign Language] We also continue to present our close relationship with our strategic partner and significant shareholder; Alibaba, benefited by the Advanced Technology Support from Alibaba. We'll leverage on the supply chain of Cainiao and Taobao and support from the third-party merchant.Ruhnn is committed to becoming a corporation platform for emerging fashion brands in China. We also work with our important shareholder including, Weibo and [indiscernible] for further business expansion in KOL live broadcasting.In addition we keep exploring ways to further our collaboration with such social media platforms as Tik Tok, Kuaishou, and little red book driving the innovation in emerging e-commerce businesses to enhance our core competitiveness.[Foreign Language] As the largest KOL for especially in China and the pioneer KOL e-commerce industry, Ruhnn is well-positioned to capitalize on the growth prospects in China’s huge addressable KOL economy market.The total net revenue generated from China’s Ethernet KOL economy market is expected to reach approximately RMB525.3 billion by 2022 according to event report. The Internet KOL e-commerce and the KOL advertising and marketing services will grow rapidly in the next three years according to the same source.Further, we believe Ruhnn will benefit from China’s new e-commerce law, which was implemented on January 1, 2019. Failing to support and promote the Pentagon fund developments of e-commerce industry in China.We expect further to leverage our KOL e-commerce pricing strategy to grow our revenue and expand growth market once the law is fully implemented. Looking ahead to fiscal year 2020, we will continue taking advantage of promising market opportunities and our core competence to accelerate our growth.As we mentioned earlier, Ruhnn raise approximately US$125 million from the IPO. As of March 31, 2019 our cash position remains strong with cash and cash equivalents as well as the restricted cash recording RMB103.8 million. In addition, our operating cash inflows have constantly improved in the last few years.The sufficient and strong cash positioned together with our healthy cash flow have laid a solid foundation for further business expansion. With new confidence in maintaining our leading position in China’s KOL e-commerce industry and are dedicated to bringing long-term value to our shareholder.With that, we will now turn the call over to the company’s Vice President, Mr. Mac Zhou, who will read the prepared remarks on behalf of our CFO, Mr. Zhenbo Chi to provide an update on our financial performance for the fourth quarter and the full fiscal year 2019. Mac, please.

[Mac Zhou:]

Thank you, Mr. Feng and hello everyone, I will begin with some key financial highlights for the fourth fiscal corner. As Mr. Feng mentioned, we continued our rapid growth momentum in the fourth quarter of fiscal year 2019 with GMV increasing by 81.3% from a year ago period.Meanwhile, we achieved robust topline growth in the quarter with net revenue increasing by 20.7% and in particular, revenues from the services through the platform model increasing by 315.7% from the year ago period. Further, we narrowed our net loss attributable to Ruhnn with a significant decrease of 53.3% from the year ago period.Our close ties with our shareholder Alibaba, vast resources of total stocks, strong supply chain management capabilities, rapid growth of our KOL fed base advanced technology to enhance e-commerce marketing efficiency and a diversified monetization channels were the key drivers for our strong topline growth.Now, let's move on to detailed quarterly financial performance. As discussed, GMV increased by 81.3% year-over-year to RMB648.3 million. The increase, were primarily due to the increase of GMV in the platform model. Net revenues increased by 20.7% year-over-year to RMB237.3 million, primarily attributable to the increase of revenues from services through the platform models.Revenues from product sales through the full-service model, increased by 1.4% year-over-year to RMB186.9 million. The increase was primarily attributable to the sales growth of the stores opened in the name of the Company’s top-tier KOLs and it was partially offset by the transformation of the business model of some online stores opened in the name of the Company’s emerging and established KOLs from the full-service model to platform model.As a result of such transformation, the number of the Company’s online stores decreased to 56 as of March 31, 2019 from 86 as of March 31, 2018 and the number of the Company’s KOLs serving the full-service model decreased to 14 as of March 31, 2019 from 33 as of March 31, 2018. On the other hand, GMV from the Company’s online stores opened under top-tier KOLs that were in operation in the entire period of fiscal year 2018 and 2019, increased by 31% in the fourth quarter of fiscal year 2019, compared with the same quarter of fiscal year 2018.Thanks to the rapid growth of GMV. The percentage of the GMV facilitated by our top-tier KOL’s decreased to 47.8% in the fourth quarter of fiscal year 2019, strong 66.3% in the same quarter of fiscal year 2018. In particular, the percentage of GMV facilitated by one of our top-tier KOL [indiscernible] equate to 39.6% in the fourth quarter of fiscal year 2019 from 51.2% in the same quarter of fiscal year 2018.Revenues from the services through the platform model increased by 315.7% year-over-year to RMB50.3 million, the increase was primarily attributable to an increase in a number of KOLs under the platform model and an increase in a number of the brands with which we cooperate in our advertising and marketing business.Cost of revenues increased by 18.0% year-over-year to RMB181.5 million. The increase was in line with the business expansion. Gross profit increased by 30.5% year-over-year to RMB55.7 million, as we continue to grow the business. Gross margin increased to 23.5% compared with 21.7% for the same quarter of last fiscal year. The increase was primarily due to the increased proportion of the company's net revenue attributable to the services under the platform model, which exhibit higher gross margins than product sales, and an increase in the gross margin of the company’s services under the platform model due to KOL service fees as a percentage of the services revenues being lowered. The increase was partially offset by a decrease in the gross margin of the company’s product sales under the full-service model due to discounted sale of certain apparel and cosmetic products.Total operating expenses decreased by 11.2% year-over-year to RMB90.7 million. Fulfillment expenses decreased by 2.9% year-over-year to RMB27.8 million. Sales and marketing expenses increased by 38.5% year-over-year RMB47.3 million. The increase was primarily due to the increased expenses of KOL incubation, cultivation, content production and training in order to support increased activity of the company’s KOL sales and advertising business.General and administrative expenses decreased by 60.3% year-over-year to RMB15.6 million. The decrease was primarily because there was a provision made against advances paid to a certain supplier of RMB11.6 million in the fourth quarter of fiscal year 2018.Loss from operations decreased by 40.9% year-over-year to RMB35.3 million. Net loss decreased by 55.1% year-over-year to RMB28.7 million. Net loss attributable to Ruhnn decrease by 53.3% year-over-year to RMB29.4 million. Basic and diluted net loss per share was RMB0.09 or US$0.01 compared with basic and diluted net loss per share of RMB0.20 for the same quarter of last fiscal year.Now, let's turn to some financial updates for full fiscal year 2019. GMV increased by 39.9% year-over-year to RMB2.9 billion. The increase was primarily attributable to reduce strong increase in the GMV in the platform model. Net revenues increased by 15.4% year-over-year to RMB1.1 billion. The increase was primarily attributable to the increase in revenue from the services through the platform model.Revenues from product sales through the full-service model increased by 3.3% year-over-year to RMB942.8 million, the increase was primarily attributable to the sales growth of the stores opened in the name of the Company’s top-tier KOLs. The increase was partially offset by the transformation of the business model of some online stores opened in the name of the Company’s emerging and established KOLs from the full-service model into platform model.Revenues from the services through the platform model increased by 329.6% year-over-year to RMB150.7 million, the significant increase was primarily attributable to an increase in a number of the KOLs under the Company's platform model and an increase in the number of the Company’s brands -- of brands the Company cooperated with in its advertising and marketing business.Cost of revenue increased by 16.8% year-over-year to RMB751.4 million. The increase was inline with the business expansion. Gross profit increased by 12.4% year-over-year to RMB342.0 million.Gross margin was 31.3% compared with 32.1% for fiscal year 2018. The slight decrease was primarily due to the decreased gross margin of the online product sales as a result of discounted sales of certain apparel and cosmetic products. The decrease was partially offset by the increased proportion of the Company’s net revenues attributable to services under the platform model, which had higher gross margins than the full-service model, and an increase in the gross margin of the Company’s services under the platform model as service fees as a percentage of the Company’s services revenues was lowered.Total operating expenses increased by 12.7% year-over-year to RMB425.0 million. Fulfillment expenses increased by 27.3% year-over-year to RMB127.3 million the increase was inline with the business expansion.Sales and marketing expenses increased by 40.7% year-over-year to RMB205.7 million, the increase was primarily due to the increased expenses of KOL incubation, cultivation, content production and training in order to support the increased activities in the Company’s KOL sales and advertising businesses.General and administrative expenses decreased by 29.8% year-over-year to RMB92.0 million. The decrease was primarily because there was a provision against advances paid to a certain supplier of RMB26.3 million in fiscal year 2018.Loss from operations was RMB82.8 million compared with RMB72.4 million for fiscal year 2018. Net loss was RMB86.2 million compared with RMB90.2 million for fiscal year 2018. Net loss attributable to Ruhnn decreased by 28.4% year-over-year to RMB74.5 million. Basic and diluted net loss per share was RMB0.03 or $0.03 U.S. dollar compared with the basic and diluted net loss per share of RMB0.33 for last fiscal year.As of March 31st, 2019, we had cash and cash equivalents of RMB90.0 million and restricted cash of RMB13.9 million compared with RMB9.7 million and RMB21.2 million, respectively as of March 31st, 2018.In summary, we are pleased to achieve robust operational and financial performance in the fourth quarter and full fiscal year 2019. Our focus going forward is to improve operational leverage and enhance economy of scale while at the same time, accelerating forward to add maximize growth potential.This concludes our prepared remarks. We will now open the call for Q&A. Operator, please go ahead.

[Operator:]

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Thank you. The first question comes from the line of Vicky Wei of Citigroup. Please ask your question.

[Vicky Wei:]

[Foreign Language]Well, thank you management for taking my questions. And I have three questions. The first one is how many top KOLs currently in the market that engaging advertising as you comment and what is the current competitive landscape in KOL business? What does management seeing competition from other spectrum such as live streaming et cetera?And my second question is about the macro condition and recent shopping festival, so does company see any positive impacts on the increase usage of live streaming promotions such as in the June 18 shopping festival of merchants and – but in terms of the macro conditions. Are there any adverse impacts on the consumption sentiment and the advertising sentiment due to macro?And my third question is about financials, the company gives any guidance about the top KOLs store – performance and will company give any update of the profits stipulated timing of the company? Thank you.

[Ming Feng:]

[Foreign Language] I will translate for Mr. Feng. When we talk about the market size of the whole internet KOLs economy, it is a market of more than RMB100 billion. So it is a huge market. And also this market is increasing by an annual rate over 50%. And so that – actually that we are facing a kind of a historical market opportunities. But still that's our observation is that this market is highly fragmented, and which means there are lot of small players in this market.And Ruhnn is the largest internet KOL facilitator, and we are a builder of fashion brands and currently we take a market of roughly 5% of the whole internet KOL facilitator. But we only take 5%. We are already the largest. So according to our observation the number of our internet KOL, well we are kind of -- we have as many as 120 internet KOL, and the number is growing rapidly. So this is the current market situation and there is a huge room for our growth in the future.When we talk about the Y-o-Y or less read book actually we are -- we have close bonds with almost all social media platform, which means that we provide the internet KOL, and we also give them the high quality content and then we can secure. They are a large group of fence around the Internet KOL.So in connection with our resources on the social media platform, we are able to fully utilize our commercial and the brand resources in that whole ecosystem. And according to our understanding of the social media platform and our capabilities in supply chain and monetization, we can not only help our concept get internet KOL to monetize our traffic from the social media platform, we can also help for those internet KOL with short-term limited coverage of counteract. We can help them or even other MCN organization to enhance their efficiency in monetization. So in other words, we didn't see any exceeding in our limitation in our markets and we are very much confidence about our market position.[Foreign Language] Actually, that the live streaming for to promote sales has been an important way to monetize the content. And we have seen a lots of KOL will take this opportunity to communicate with her fans. And we have also seen that this channel has been an important player -- has played a important role to enhance the efficiency of the communication and also to enhance the conversion.Especially, the live streaming in RD to promote the sales has been a very important event in the whole year and many of our Internet KOL will participate in these live streaming activities. Actually that we have a very large Internet KOL talent pool, which could help us to reach out to a vast base of our fans. And also that this live streaming provides us a kind of a diversified way for us to monetize our traffic on the social media platform.So as a conclusion, this live streaming will apparently enhance our competitive advantage and is this live streaming to promote sales that we believe on 6/18 day, we will have very kind of optimistic result. Of course, according to the current macro economic, we have seen in some Internet companies that the revenue from the advertising has been adversely affected.However, according to our results in this quarter, our revenue in the platform model has kind of increased by more than four times. So apparently, this is -- I think this is primarily attributable to our large room of internet KOL talent pool. And so we have seen a clear trend that a lot of companies they have increased their budget on the marketing over the social media platform. And that's the reason why we have achieved robust growth in our platform revenue.[Foreign Language]Okay. For the profitability of those online store of our top-tier KOL, actually the profitability has been clearly proven. So -- and we foresee that along with the implementation of the China e-commerce law. Our profitability of those online stores of our top-tier KOL will be further enhanced. And also, that we have seen some -- the VAT rate in China has been decreased from 15% to 14%. So this will significantly increased our profitability of the online store operated by us.And if we are talking about the -- our platform model, as we have just mentioned the proportion of the platform revenue has increased significantly. And actually for the platform model, we're operating in an asset-light manner. So that's the reason why that we could achieve a rapid growth rate of the platform model and we can also enjoy a higher gross margin. So as a result, we are very much confident to achieve profit in the fiscal year of 2020, of course, but excluding those one-off effect such as the possible ERP asset plan.When we talk about the recent -- our internet KOL did improve so far that we have signed internet KOL talent as many as 128. And we have seen many people performing, actually significantly exceeding our expectations. I just take one recent example of a KOL called Cody [ph] and her contribution of GMV in recent months has exceeded RMB10 million just in one month. So actually this is the first months of her performance. So actually that we have seen a lot of kind of KOL performing very, very, very well. So, we will still [ph] that some rapidly expand our internal KOL reserve and to secure our overall position in this industry.So, Vicky I think that we have responded to our questions.

[Vicky Wei:]

Thank you.

[Operator:]

Thank you. The next question comes from the line of [Indiscernible] of UBS.

[Unidentified Analyst:]

Thank you managements for taking my questions. I have two questions in both Chinese and English.[Foreign Language]My English version of the questions include; one is that, can management share any new thoughts on why we are cutting the number of KOLs for service model aggressively? Second question is how should we fully utilize all KOL capacities of top model? Thank you.

[Min Feng:]

Well, as you know, Ruhnn has two businesses one is 1P full service model and the other is 3T, a platform model. There are two kind of business is complementary, and we have realized monetization through the two ways. Well, for the – for our full service model, which is more difficult for Top Tier KOLs who has more fans, who has a large fan-based while, the platform model more simple for established or emerging KOLs, of course that begin their carrier and has a comparatively smaller fan-based.So strategically in order enlarge our KOLs talent pool, we cultivate and incubate a lot of new or emerging KOLs. So it was new emerging KOLs. The best – but the more simple way for them to monetization is to put them in the platform model, while for our Top Tier KOLs Ruhnn platform, we believe the full service model or the 1P business model – the their monetization efficiency will be much higher.As you know since January 1, 2019 the e-commerce law in China, it was fully put into implementation. While in this process, we find the platform model will be much simple for established and emerging KOL.

[Operator:]

Thank you. The next question comes from the line of [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Good evening, management. Hello? Hello?

[Mac Zhou:]

Hi. Please go ahead. Hello?

[Unidentified Analyst:]

Good evening, management. Hello. I have three questions on the headline of KOLs. I just wondered if all the KOLs cultivated by yourself or you will send some mature KOLs and how should we think about the growth patterns in the future cultures? This is my question. Thank you.

[Ming Feng:]

[Foreign Language] Historically, that we have been very successful in incubating amateur which means that kind of an amateur with very limited fan-base and we can incubate them and we can help them to be professional and to start their career within a very short period. And in the future, we will continue to take full advantage of our strong incubation system. And also, we will also fully leverage our vast resources of our top our shops and our connections and the commercial resources to help those KOL not necessarily have a long and complete contract with us.We can help the KOLs of other MCN organization by providing them with correct or appropriate product and to help them to do the marketing and to do the sales. This is what we do. This is why we have achieved a vast rapid growth in the platform model in this quarter and we believe our goals growth value will continue.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Thank you. No question as at this time. Please continue.

[Sterling Song:]

Okay. Since there are no further questions, I would like to turn the call back to the company for closing remarks. So thank you again for joining us today. If you have any further questions, please free to contact Ruhnn’s Investor Relations department through the contact information below. This concludes today's conference call. Thank you everyone. Thank you for joining us. Thank you.

[Operator:]

This concludes this conference call. You may now disconnect your line. Thank you.