Secoo Holding Limited
Q1 2019 Earnings Call Transcript

Published: 13 Jun 2019

[Operator:]

Hello, ladies and gentlemen. Thank you for standing by for Secoo Holding Limited's First Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Jingbo Ma, Board Secretary of the company. Please go ahead, Jingbo.

[Jingbo Ma:]

Hello, everyone and welcome to the first quarter 2019 earnings conference call of Secoo Holding Limited. The company's results were issued via Newswire services earlier today and has been posted online. You can download the earnings press release and sign up to the company's distribution list by visiting the IR section of our website at ir.secoo.com. Mr. Richard Li, our Founder, Chairman and the Chief Executive Officer; and Mr. Shaojun Chen, our Chief Financial Officer, will start the call with their prepared remarks, followed by a question-and-answer session.Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risk and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the company's registration statement on Form F-1 and Form 20-F as filed with the U.S. Securities and Exchange Commission.The company does not assume any obligation to update any forward-looking statement, except as required under applicable law. Please also note that Secoo's earnings press release and this conference call includes discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Secoo's earnings press release contains a reconciliation of the unaudited non-GAAP measures to the audited most directly comparable GAAP measures.I will now turn the call over to our Chairman and CEO, Mr. Richard Li. Please go ahead.

[Richard Rixue Li:]

Hello everyone and thank you for joining us today. We are pleased to speak of 2019 with strong first quarter results highlighted by GMV of approximately RMB 2,206.5 million up 97.1% year-over-year while achieving total revenue of RMB 1.18 billion, 46.5% increase from the year ago period exceeding our guidance. Our dedicated team has made significant progress in expanding the omnichannel boutique lifestyle platform driving sales growth and broadening brand partnerships. We are confident in our diversified growth strategy global roadmap across our upscale supply chain and a decade of sustainable competitive advantage that further strengthen our leadership in the global luxury lifestyle industry.Enter in Q2 2019 we will continue our efforts to expand direct brand collaborations and a deepening brand relationships. While Secoo platform has become increasingly appealing to upscale brands as the value propositions of trendsetting boutique lifestyle platform has been well received. From the beginning of 2019 to date they have established a new direct partnership with 220 brands. Notably we are extremely excited that Secoo has entered into a contract with the Prada Group to offer Prada and Miu Miu products starting from June 2019 following Prada’s strategy based on distribution control and brand image protection.Other direct brand partnerships include Fossil, Ralph Lauren, Dsquared, Just Cavalli, Guidi, Marie Mercié. Moreover we added more than 40 brands to our beauty products pathway appealing to female shoppers. Especially Cha Ling’s limited-edition as well as the exclusive launch of the limited addition cross over between TONYMOLY and MOSCHINO which took place on the Women's Day shopping event spurred a wave of purchases. In our digital product category catering to Generation Y and Z consumer needs Secoo introduced a few cut edge digital brands as well as [indiscernible] JmGO. Also Secoo participated in the market launch of new high-end digital products such as [indiscernible] that will honor the [indiscernible] MOSCHINO additions.We continued strategic efforts to create fascinating marketing campaigns and activities in order to increase Secoo's brand awareness while enabling international and domestic high end fashion brands to engage Chinese luxury brand consumers with new retail experiences. Leveraging off our innovative marketing efforts the number of our active customers in the first quarter increased by approximately a 89.6% year-over-year to 305,000 and 33 of which are paying members. For instance since April Secoo has been working with various high profile international brands to co-host Secoo's Extraordinary Week Marketing Campaign. Participating brands include French fashion, footwear and luxury brand Rover-Vivier, high-end business travel and lifestyle brand too. This synergy collaboration of Secoo's omnichannel resources and each participating at upscale brand in this extraordinary event brings a more engaged and animated shopping experience to consumers.In addition Secoo in line with a number of high-end digital and home appliance brands showcased product at 2019 AWE, Appliance World Expo in mid March. This brands include SONY, GOOVIS, GoPro, JmGO to name a few. This high profile marketing event was set to promote brand recognition in the high-end consumer electronics sectors which also illustrate our strategic initiative in the upscale digital and home appliance category. Also in April Secoo continued to host Secoo's Gentlemen's basketball sales campaign and [indiscernible] watch shows primarily focusing on high-end men's brands. We are delighted that the event achieved excellent sales result and positive feedback from the market.They have always been attaching great importance on expanding the online [ph] experience to all consumers. Through our operating centers they offer a variety of definitely [ph] activities for all customers and fashion lovers. In April our Becky’s Choice lifestyle show hosted in collaboration with top fashion blogger Becky launched its grand opening at Secoo’s offline retail center in Beijing. This event was the first stop of Secoo Bloggers Thematic Shows, in partnership with key opinion leaders in the fashion space, bringing the boutique lifestyle experience of domestic fashion blogger to the high-profile constituencies. They expect to continue working with more famous bloggers to launch a series of thematic show in the future.Secoo in April watch exhibition opened at Beijing Experience Center as the grand finale of Secoo Watch Show. In this event watch lovers were able to try on the latest design of 2019 in valuable second handed unique items as well as limited additions. This experiential activities in offline centers enhanced the interaction between our consumers and us and further amplifies Secoo's brand influence offline. Additionally we remain steadfast in global expansion efforts with partnershipping with our L Catterton Asia to jointly develop the Southeast Asia market. In April 2019 Secoo school formed a strategic collaboration with CÉ LA VI, a luxury catering and entertainment brand featured with pubs, lounges and restaurants, to develop offline high-end lifestyle market together leveraging each party’s core strengths.Turning back to our online platform we completed multiple optimization and upgrades for our platform and systems during the first quarter. This upgrade includes redesign of the Discovery Channel featuring new tools for interactions such as topics, events, reviews, and comments which greatly enhance the user time spent and user stickiness on our platform. We also launched the Discovery Channel within the Secoo morning programs to broaden user engagement. In particular as results of the redesign, the number of content pool increased 150% and the commercial rate of product description page improved ten-fold. Secoo is penetrating into content driven social e-commerce by progressively dynamic and visual content on its channel [ph].To support the brand and stores on it we also upgrade our payment system and online store management system through technology advancement to have them improve operating efficiency. In addition we launched the e-store function on both Secoo's online model and premium program model featuring delivery charge and the discount with our management tools. Moreover these stores over 10 new function tools to strengthen our premium programs for sales distribution and launched Secoo's new smart retail system since it has been connecting up Secoo's online stores and offline supplying chain. New content and new features helped our partnering brands and stores instantly improved their operation efficiency and delivered a richer streamlined product browsing and shopping experience for our customers.As the boutique lifestyle platform that provides users with access to numerous brands, Secoo has been striving to extend value-added services to these brands. In the first quarter of 2019 enabling across the advertisement business and Secoo further grow rapidly serving 14 brands in total including nine luxurious brands. As of today our marketing and advertising business has established the cooperation with three major luxurious groups. In the first quarter combination projects include removal and their advantage, Panera [ph] and Dunkiel [ph] and the Richmond Group.April 11, 2019 -- the 2018 that paper on digital marketing trend for online luxurious consumers was released at the 2019 Second China Luxurious Retail Innovation International Summit. This is the third consecutive year that Secoo cooperated with them on developing insights into high profile consumers. Looking forward Secoo will continue to expand and deepen its strategic resources allocation [indiscernible] including gourmet foods, tourism, sports, centering around the philosophy of leaving refined and sophisticated products. In the future Secoo will execute this multifaceted developmental strategy providing premium products and secure a lifestyle services to consumers in China with mission to promote upgrade of the luxurious industry in China.With that I will now turn the call over to our CFO Mr. Shaojun Chen who will discuss our key operating metrics and financial results.

[Shaojun Chen:]

Thank you Richard and hello everyone. We are pleased that our first quarter financial performance continued to carry forward a strong growth momentum. During the quarter we reported net revenue of RMB 1.18 billion, a 46.5% year-over-year increase which exceeded our guidance. As merchandize gross margin increased and revenue from marketplace and other services continued with them our gross profit margins in the first quarter of 2019 jumped up 470 basis point to 21.1% from 16.4% in the same quarter last year benefitting from economies of scale and enhanced gross margins we continued our positive momentum on the bottom line delivering the net profit for the eleventh consecutive quarter.Now I would like to walk you through our detailed financial results in the first quarter of 2019. GMV increased by 97.1% to RMB 2.21 million for the first quarter of 2019 from RMB 1.12 million for the first quarter of 2018. Total number of orders increased by 111.6% to 647.6 thousand for the first quarter of 2019 from 306.1 thousand for the first quarter of 2018.Total revenue for the first quarter of 2019 increased by 46.5% to approximately RMB 1.18 billion from RMB 8000 this was mainly in first quarter of 2018 primarily attributable to the continuous expansion of our operation or a lush offerings of merchandise and services combined and effective marketing activities driving the growth in our total active customers and total number of orders served during the period.Cost of revenues increased by 38.2% to RMB 927 million for the first quarter of 2019 from RMB 671 million for the first quarter of 2018. The increase of cost of revenue was lower than increase of total revenues mainly due to the improvement of our purchase and buying power and increase in the proportion of platform services business in total revenue. Gross profit increased by 88.3% to RMB 348 million for the first quarter of 2019 from RMB 132 million for the first quarter of 2018 primarily due to the gross margin increase in our merchandized sales as well as our market based sampling and other service revenue increase. Gross margin was 21.1% for the first quarter of 2019, increased by 470 basis point from 16.4% for the first quarter of 2018. Operating expense increased the 109% to RMB 227 million for the first quarter of 2019 from RMB 109 million for the first quarter of 2018.Now I would like to walk you through the company's expense items in detail. Our fulfillment expense increased by 72.1% to RMB 45.6 million for the first quarter of 2019 from RMB 26.5 million for the first quarter of 2018. The increase was primarily attributable to the increase of sales volume which resulted in increased packaging and general expense, third party payment completions, as well as the increased stock compensation and benefits during the period.Our marketing expense increased by 95.3% to RMB 112 million for the first quarter of 2019 from RMB 57.3 million for the first quarter of 2018. The increase was primarily due to the increase in marketing promotions both online and offline, marketing expenditure for newly expanded product categories as well as the increase in stock compensation and benefit expense.Technology and content increased by 30.5% to RMB 23.1 million for the first quarter of 2019 from RMB 17.7 million for the first quarter of 2018. The increase was primarily due to the continuous investment in our technology department. Our general and administrative expenses increased by 560% to RMB 46.2 million for the first quarter of 2019 from RMB 7 million for the first quarter of 2018. The increase was primarily attributable to a recovery of a receivable previously charged off in the first quarter of 2019, and the increase in professional fee, staff compensation and benefits as well as office expense during the period.Our income from operations was RMB 21.4 million for the first quarter of 2019, compared with RMB 23.3 million for the first quarter of 2018. Operating profit decreased by 8.2% in the first quarter of 2019, compared with the first quarter of 2018, due to the combined impact of revenue growth, higher gross margin, and the company's continued advance investment in marketing, product pathway expansion, and staff in all business sectors. The recorded net income of RMB 15.8 million for the first quarter of 2019, compared to RMB 25.9 million for the first quarter of 2018 primarily attributable to the increase in interest expense from our convertible bonds.Now for our second quarter of 2019 outlook. The Company currently expects total net revenues for the first quarter of 2019 to be in the range of RMB 1.47 billion and RMB 1.57 billion, which would represent an increase of approximately 20.5% to 28.7% on a year-over-year basis. The above guidance is based on current market conditions and reflects the Company’s current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Carson Lo of Nomura. Please ask your question.

[Carson Lo:]

Hi, management. Thanks for taking my questions. I have one question about strategy going forward. So we see some of our peers focusing on the penetration of lower tier cities users now. So, just want to know what's the management view on this given we are more on the P. membrane segment, so will Secoo also try to penetrate to the users in lower tier city and if so what kind of strategy or approach will management take in this regard?

[Richard Rixue Li:]

According to our CEO Richard Li, the tax rate importance to our business development in the tier two and tier three and other lower tier cities. They have been developing the market in the tier two and tier three cities a while ago. For example the open offline experiences in -- continued during 2017 and 2018 through a proportion of the customers from the tier two and tier three cities has been increasing in terms of total customer number of growth rate higher than that of tier one cities. Currently our number of customers from both traditional tier one cities including Beijing, Shanghai, Shenzhen, Guangzhou, and the newly carved tier one cities such as Hangzhou, Chengdu, Chongqing, Nanjing account about 50% of our total user base. The rest of the users are mostly from the second and third tier cities and also other cities. They believe that there is a broader market for the high-end products in the tier two and tier three cities and they are in fact be penetrating into this market through integrated online and offline model such as the online process of advertisement distribution and offline high end product store collaborations as well as the cross over corporations such as corporations as the tour. So that's quite competent and also quite valuable on the tapping to those kind of cities.

[Carson Lo:]

Thank you management for your answers.

[Operator:]

[Operator Instructions]. As there are no further questions now I'd like to turn the call back over to the company for closing remarks.

[Jingbo Ma:]

Thank you once again for joining us today. If you have further questions please feel free to contact Secoo Investor Relations through the contact information provided on our website, The Piacente Group Investor Relations. Of course information is also on our website.

[Operator:]

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