Secoo Holding Limited
Q2 2018 Earnings Call Transcript

Published: 6 Sep 2018

[Operator:]

Hello, ladies and gentlemen. Thank you for standing by for Secoo Holding Limited's Second Quarter 2018 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 second quarter 2018 earnings conference call of Secoo Holding Limited. The company's results were issued via newswire services earlier today and are posted online. You can download the earnings press release and sign up for the company's distribution list by visiting the IR section of its website at ir.secoo.com. Mr. Richard Li, our Founder, Chairman, and 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 risks and uncertainties. As such, the company's 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 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 statements except as required under applicable law. Please also note that Secoo's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measure. Secoo's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our Chairman and CEO, Mr. Richard Li. Please go ahead.

[Richard Li:]

[Foreign Language] Hello, everyone and thank you for joining our 2018 second quarter earnings conference call today. [Foreign Language] We are pleased to deliver yet another quarter of solid operational and financial results, highlighted by year-over-year growth in total revenue and GMV of 55.5% and 44.7% respectively. Our robust results in the second quarter reflect our achievement in effectively improving our customer shopping experience on both Secoo’s online and offline platforms through our broadened product and services offerings and enhanced technological capacities that’s reaffirming our leading position in the luxurious retail consumption market in China. [Foreign Language] I’m sure that most of you are aware of our previous announcement that Secoo has recently received a USD175 million investment in the form of a convertible note from L Catterton Asia and JD.com and has entered into separate business co-operation agreement with both companies. We’re delighted to establish this new alliance with the leading giants and are excited by the prospect of this global industry leaders in helping us with the tremendous resources and the expertise. The well-established relationship allows Secoo to gain invaluable brand recognition, attract more leading fashion and luxury brands to a platform and into deep business collaboration. Therefore, further boosts Secoo’s influence and capabilities among Chinese luxury and fashion consumers. As China’s luxurious consumption continues to be one of the biggest growth driver in the global luxurious market, we will endeavor to provide superior luxurious shopping experience for our premium customers and further capture the rising demand for high end product and services in China. [Foreign Language] Recently, we launched our June 18 and July 07 promotion events, celebrating our 10th anniversary. Benefiting from the two promotion events, our second quarter saw a significant increase in active users which jumped 97.6% year-over-year and demonstrates expanding power of our brand and marketing strategy. Additionally, in the second quarter of 2018, a young Chinese idol group, NEXT7, endorsed for our June 18 and July 07 events as our celebrity spokesmen. Through the endorsement, we gained valuable brand awareness and further expanded our brand’s influence among China’s younger generation. [Foreign Language] With our continued efforts to expand our platform, during the second quarter, we added direct collaborations with 35 international top tier fashion and luxurious brands, such as Stella McCartney, Alexander Wang and Richard Ginori, an acclaimed Italian Porcelain Brand. In the Chinese heritage design category, we also expanded collaborations with 120 more brands, featuring in Chinese traditional elements, covering garment, jewelry, arts and craft and tea categories. Additionally, Mulberry, a leading British lifestyle brand with internationally acclaimed quality and design, officially joined Secoo's platform in early August. For Mulberry’s debut on our platform, Secoo was named as the exclusive online partner for a Mulberry limited-edition bag, Amberley, for the Chinese Valentine's Day. The establishment of these new relationships with premium brands demonstrated our strategic focus on strengthening our product portfolio to better engage with and serve our premium customers. [Foreign Language] We remain committed to establishing solid relationships with leading partners in the fashion and luxury industries to gain invaluable brand recognition and further strengthen Secoo’s leader position in the sector. In July, we entered another strategic partnership with Shandong Ruyi Group, a global leader in textile technology and fashion garment industries, which owns an extensive portfolio of global fashion and luxurious brands, including Sandro, Maje, Cerruti 1881, Gieves & Hawkes, Kent Curwen. Through our partnership, both companies will leverage respective resources and expertise in branding technology network and channel management to jointly establish a global omnichannel fashion supply chain with a variety of fashion and luxurious retail innovation, ranging from big data solution to intelligent manufacturing in order to offer unique first in class shopping experiences for our premium customers. Also, in the second quarter, we entered into collaboration with 88 European buying agent shops, mostly covering apparel and footwear categories, to improve our global supply chain capacity and increase depth of inventory. [Foreign Language] We also signed a business partner with Starbucks China, Secoo customers are able to redeem their Secoo membership rewards on the Secoo APP for electronic Starbucks coupons, which can then be exchanged for Starbucks products in more than 3,400 Starbucks stores in China nationwide. This is yet another example of our efforts to optimize our premium membership benefits and enhance the loyalty of our members as well as further increase Secoo’s brand exposure and awareness. [Foreign Language] As a part of our offline expansion efforts, in the second quarter of 2018, Secoo expanded cooperation with eight high-end properties and real estate developers across China, including well known enterprises such as Beijing Vanke and Gemdale Property Management Group. We aim to expand our offline presence by targeting high end real estate property owners and boost our brand awareness with these premium customers. [Foreign Language] We are dedicated to strengthening our technological capacities in pursuit of operational expense. In June, we announced that we started applying the block chain technology for the authentication of certain merchandise sold on the Secoo platform. That Secoo has become the first e-commerce company in China to utilize block chain technology for product application in the luxury industry. [Foreign Language] The increase of Secoo brands influenced [indiscernible] or advertising business. As of today, we added a variety of top brands to our advertising clients, including Martell, Porsche, Volkswagen CC, Kerry Properties and China Red Star. Furthermore, our big-data-driven marketing and advertising solutions have already served 14 Internet leading brands, including NetEase Cloud Music, WeBank, and VIPKID. In addition to offering high quality exposure for the advisors, Secoo’s advertising division also provides with innovative value added services such as online flash sale, content marketing, social marketing as well as cross branding. [Foreign Language] In summary, we are delighted to continue our strong growth momentum both financially and operationally in this quarter. We are particularly excited about all the strategic alliances that we have been forming as they will enhance our capacity to continuously offer newer and better high end brands, products and services to our customers and build a competitive critical mass in our marketplace. We are confident this trend will continue into the foreseeable future and anticipate strong business growth in the second half of fiscal 2018. [Foreign Language] 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:]

[Foreign Language] Thank you, Richard and hello, everyone. [Foreign Language] We are pleased that our second quarter financial performance continued to demonstrate our solid growth trends. During the quarter, we reported net revenue of RMB1.22 billion, exceeding our guidance and grew gross margin by 1.8% from the same period last year. We remain focused on improving operating efficiency. For the second quarter of 2018, our non-GAAP net income recorded a 42.4% year-over-year increase and delivered net profit for the eighth consecutive quarter. [Foreign Language] Now, I would like to walk you through our detailed financial results in the second quarter of 2018. [Foreign Language] GMV increased by 44.7% to RMB1.65 billion for the second quarter of 2018 from RMB1.14 billion for the same period of last year. [Foreign Language] Total number of orders increased by 49.7% to 455,900 for the second quarter of 2018 from 304,600 for the second quarter of 2017. [Foreign Language] Total net revenue for the second quarter of 2018 increased by 55.5% to RMB1.22 billion from RMB784.7 million in the second quarter of 2017, primarily driven by the growth in our total active customers and total number of orders served during the period. [Foreign Language] Cost of revenues increased by 52.1% to RMB996.4 million for the second quarter of 2018 from RMB655 million for the second quarter of 2017, which is in line with our increase of total net revenues. [Foreign Language] Gross profit increased by 72.5% to RMB223.7 million for the second quarter of 2018 from RMB129.7 million for the second quarter of 2017, primarily due to the gross margin increase in our merchandise sales as well as our platform and other service revenue increase. [Foreign Language] Operating expenses increased by 63.8% to RMB167.1 million for the second quarter of 2018 from RMB102 million for the second quarter of 2017. These detailed operating expenses are discussed as follow. [Foreign Language] Our fulfillment expenses increased by 48% to RMB30.2 million for the second quarter of 2018 from RMB20.4 million for the second quarter of 2017. The increase was primarily attributable to the increase of sales volume and total number of orders fulfilled which resulted in increased delivery expenses, packaging costs and third-party payment commissions. [Foreign Language] Our marketing expenses increased by 79.4% to RMB89 million for the second quarter of 2018 from RMB49.6 million for the second quarter of 2017. The increase was primarily due to the increase in our marketing promotions as well as staff compensation and benefits expenses. [Foreign Language] Technology and content development expenses increased by 40% to RMB20.3 million for the second quarter of 2018 from RMB14.5 million for the second quarter of 2017. The increase was primarily due to the increase in staff compensation and benefit expenses. [Foreign Language] Our general and administrative expenses increased by 58.6% to RMB27.6 million for the second quarter of 2018 from RMB17.4 million for the second quarter of 2017. The increase was primarily attributable to the increase in staff compensation and benefit expenses, as well as professional consulting fees and office expenses incurred during the period. [Foreign Language] Our operating income for the second quarter of 2018 was RMB56.6 million, representing a 104.3% increase from RMB27.7 million for the second quarter of 2017. [Foreign Language] Non-GAAP operating income, which excludes share-based compensation expenses increased by 121.3% to RMB61.3 million for the second quarter of 2018 from RMB27.7 million for the second quarter of 2017. [Foreign Language] We recorded income tax expenses of RMB10.3 million in the second quarter of 2018 compared to nil for the second quarter of 2017. [Foreign Language] We recorded a net income of RMB36.4 million for the second quarter of 2018, increased by 26.4% from a net income of RMB28.8 million for the second quarter of 2017. [Foreign Language] Non-GAAP net income, which excludes share-based compensation expenses, increased by 42.4% to RMB41 million in the second quarter of 2018 from RMB28.8 million in the second quarter of 2017. [Foreign Language] Net income attributable to ordinary shareholders of Secoo Holding Limited for the second quarter of 2018 was RMB35.8 million compared to RMB142 million for the second quarter of 2017, which was primarily due to the accretion of preferred shares in the second quarter of 2017, comparing to nil in the second quarter of 2018. [Foreign Language] Basic and diluted net income per ADS was RMB0.71 and RMB0.68 respectively for the second quarter of 2018, compared to RMB9.47 and RMB3.38, respectively, for the second quarter of 2017. [Foreign Language] Basic and diluted non-GAAP net income per ADS was RMB0.81 and RMB0.78 respectively, for the second quarter of 2018, compared to basic and diluted non-GAAP net income per ADS of RMB1.92 and RMB0.68, respectively, for the second quarter of 2017. [Foreign Language] As of June 30, 2018, the Company had cash, time deposits, and restricted cash of RMB444.2 million. [Foreign Language] Now, for the third quarter of 2018, we currently expect. [Foreign Language] The company currently expects total net revenue for the third quarter of 2018 to be in the range of RMB1.34 billion and RMB1.37 billion, which would represent an increase of approximately 36% to 40% on a year-over-year basis. [Foreign Language] 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 Karen Chan from Jefferies.

[Karen Chan:]

[Foreign Language] I’ll go ahead and translate myself. So my first question, wondering if management can give us an update on the LVMH and JD investments and how that will help in expanding our direct brand collaboration, online traffic, acquisition, logistics and product sourcing. My second question is on the gross margin. We noticed a pretty good recovery in gross margin. Any reason behind that and how should we think about the long-term gross margin and operating margin targets. And my last question is on the active customers, we noticed that an accelerating growth in active customer this quarter, despite a very disciplined control on sales and marketing. What drives that and across different operational metrics, including active customers, order frequency, average spending per costumer, where do we see the biggest room for upside in driving GMV growth going forward? Thank you very much.

[Richard Li:]

[Foreign Language] So for your first question, we have signed the business cooperation agreement with L Catterton and we will accelerate the introduction of new brands into our platform. At present, we are already in discussion with some brands. We expect to make substantial progress in the third and fourth quarter of this year. We have also signed a business cooperation agreement with JD. The two parties will conduct the business co-operations in multiple areas such as sales, procurement, finance such as the [indiscernible], logistics and product authentications. As of right now, teams from both sides are negotiating and discussing the details. As to the trend, some business co-operations will officially start in the fourth quarter. [Foreign Language] Our gross margin for the quarter was 18.3%, up 1.8 points from the second quarter of 2017. The gross margin, the marketplace revenue and other service revenue all increased. Looking forward to the next two quarters, as it will be our promotion driven peak season, there will be more promotion activities. So, we expect to maintain a gross margin of around 17% to 18%. [Foreign Language] For the next one to two years, we will continue to increase gross margin with revenue of marketplace and advertisement and other services. We expect the gross margin to increase about 1% to 2% per year. [Foreign Language] At the same time, we do expect the operating margin will increase and coupled [ph] with the increase of revenue and gross margins. [Foreign Language] The driver for the company’s GMV will mainly focus on continuous growth of the active customers and repeated repurchase frequency.

[Operator:]

Your next question comes from the line of Alvin Jong from BNP.

[Alvin Jong:]

Hi, management. Thank you for taking my question. My question is about the ticket size [ph]. Could you elaborate how the ticket size trends going forward in the second half and also in next year, the year of 2019? [Foreign Language]

[Richard Li:]

[Foreign Language] So for next quarter, the average order size is in stable level around RMB3,600. So according to our market position and target group, we do expect that our average order size will retain between the RMB3,300 to RMB3,600. Thank you.

[Operator:]

Your next question comes from the line of [indiscernible] from Macquarie.

[Unidentified Analyst:]

Hi, management. Thank you for taking our question. I have two questions here. The first one is how is the company in the recent consumption momentum for luxury goods, is any category or specific brands showing some strength. My second question is, how is the company doing inventory management, is the inventory risk well controlled? [Foreign Language]

[Richard Li:]

[Foreign Language] So from the perspective of our old platform, the trend of high end consumption demand is still strong. So the customers desire and pursue for our brand and never change. So the user’s penetration in online shopping we think will continue to be strengthened and proceeds of personal sales will become more common. So, we think that’s the main consumption trend. Recently, we have also noticed some change in the macroeconomic situation, but we are convinced that [indiscernible] Chinese economy will continue to move forward and follow pattern and well prepared for the development. So currently, I do not have any information on any possible sales slowdown of specific brands. So if there is any update and accurate information, I will be delighted to share with you. [Foreign Language] So judging from the current product mix and inventory aging, we’re in line with our sales situation and the risks are under control. As to the commodity management, we have several professional warehouses and offline experiences in China and overseas and we manage our warehouse and logistics through the ERP systems. Moreover, we are going to launch our Oracle system, which will further improve our logistic efficiency. Thank you.

[Operator:]

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 any further questions, please feel free to contact Secoo’s Investor Relations through the contact information provided on our website or The Piacente Group Investor Relations.

[Operator:]

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