Secoo Holding Limited
Q3 2018 Earnings Call Transcript

Published: 4 Dec 2018

[Operator:]

Hello, ladies and gentlemen. Thank you for standing by and welcome to Secoo Holding Limited's Third Quarter Conference 2018 Earnings 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, Ma'am.

[Jingbo Ma:]

Hello, everyone and welcome to the third 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, 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 measures. Secoo's earnings 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:]

Hello, everyone and thank you for joining us today. We are pleased to present yet another strong set of financial and operating results for the third quarter of 2018. As the leading integrated online and offline luxury product and lifestyle platform in China, we continue to experience growing demand for our upscale products and services from our high-end customer base during the quarter. This is clearly demonstrated by our strong third quarter result, as our GMV increased by 57.4% year-over-year to RMB2.19 billion and our total revenues reached approximately RMB1.57 billion at 60.1% year-over-year. We believe that our ability to leverage our premium and diverse products in the service offerings, along with our superior technological capacity collectively enables us to gaining a deep foothold across the value chain reaches our core capacity and position us well to capture the rapid growth and a significant market potential within our industry. During the latest Singles' Day shopping festival that we regarded as Golden Sales Season across China's e-commerce site, we successfully achieved our sales target, with November 11th one-day sales increasing by a 140% year-over-year. At the same time, a variety of marketing efforts contributed to higher growth in our premium customer base. We continued our efforts to broaden and deepen our brand relationships to increase Secoo's influence and capabilities among Chinese luxury and fashion consumers. From the beginning of the third quarter to date, we expanded our direct collaborations with 97 new brands, including a number of renowned international fashion designers such as Calvin Klein's high-end line, Calvin Klein 205W39NYC to R. M. Williams, DIESEL, Nicole Miller to Alberta Ferretti, Philosophy, and Mikael D, as well as high-end lifestyle brands such as Villeroy & Boch featuring classic German ceramics and Marshall featuring speaker products. Further, LVMH, new organic skincare brand, Cha Ling also participate on Secoo's platform. The continuous expansion of a strategic alliance is a core strategy that has to increase our brand values, as well as strengthen our capability for moving forward to the next level. Since the beginning of the third quarter, we have established more meaningful collaborations with leaders in the high-end consumer space. In September, we designed -- we signed a memorandum of strategic partnerships with SASSEUR Group, a leading operator of outlet malls in Asia. Based on this long-term strategic and comprehensive partnership, both parties will leverage each other's respective resources and expertise to drive growth in omni-channel retail networks and jointly explore new luxurious business initiatives to offer premium luxury shopping experience for consumers in China. We believe this partnership will boost our leading market presence. Further, in November, Secoo established a strategic partnership with Will's Group, China's leading premium fitness lifestyle brand. The partnership allows both Secco's and Will's Group's customers to benefit from reciprocal membership privileges. Both parties will also leverage their respective strengths and resources to drive high-end fitness services. It is worth noticing that both Secoo Group and Will's Group has strategic investment from L Catterton, which now also has a strategic stake in Secoo. Overall, the partnerships with SASSEUR Group and Will's Group demonstrates Secoo's strategic initiative to diversify its lifestyle portfolio offerings to meet the increasing demand for luxury products and services in China. These collaborations are expected to further broaden and deepen Secoo's merchandise and lifestyle portfolios, and the infrastructure to develop a superior lifestyle platform for Secoo's premium customers. Notably, in October, the West End of London's most iconic department store, Liberty London, which is well-known for its cutting-edge fashion and luxurious trends joined Secoo's platform to launch a online store in China, enabling Liberty London to offer luxury bags, leather products, gifts and stationaries to Secoo's premium customers. They believe this partnership reflects the mutual strategy of both companies to permeate the global luxurious space by offering unique and distinct product and services to Chinese customers, who increasingly use fashion and luxury to express their lifestyle and identity. Leveraging the partnership, Secoo will be better positioned to increase its customer base and purchasing activities. Also in September, we formed a partnership with Feelunique, Europe's largest online beauty retailer, to launch a dedicated a Feelunique branded cosmetics store on our platform. Through the partnership, Feelunique will provide Secoo's customers with access to about 50 highly sought-after international brands to further expand our beauty and cosmetics product portfolio. Now, I would also like to highlight Secoo's recent category expansion into arts and culture heritage. In July, Secoo formed the strategic partnership with two iconic museums in China, Shanxi History Museum and Xi'an Museum. By leveraging these partnerships and their extensive resources, we believe we will be well-positioned to play an important role in protection of Chinese cultural relics and in the development of Chinese culture heritage-focused artisanal designs and creative products and services. Furthermore, in November, Secoo teamed up with Tokyo MX, a Tokyo-based television station to host a tradeshow in Tokyo for traditional Japanese craftworks. At the same time, we formed a strategic alliance with Tokyo MX to launch a signature flagship store on Secoo's platform, aiming to provide Chinese consumers with a high-quality collection of eminent traditional Japanese craftworks. Also, Secoo attended the inaugural, China International Import Expo held in November and entered into a strategic partnership agreement with the Philippine Trade and Investments Center and the Mongolian delegation. Secoo also signed cooperation agreement with numerous high-end brands from the U.S., U.K., France, Italy, Australia and Korea at the expo. We are proud that Secoo is successfully increasing its brand awareness and deepened its customer insights in the luxury consumption and services market through leading-edge strategies and activities with our innovative marketing efforts and increasing offerings designed to appeal to younger users. We have been able to continuously entice new customers and grow our active customer base. During the third quarter, the number of our active customer increased by 91% year-over-year to a record high of 300,000. To further increase our brand influence among the younger generation, Secoo joined a number of popular entertainers and artists to promote their own signature brands and designs. For example, in October, Yang Shuo, [indiscernible] all participated with Secoo to launch the cobranding products, our designer labels, our placement activities. We also collaborated with a famous photographer, Chen Man, in the major series of high-end fashion and luxurious photograph featuring Secoo's image to further improve Secoo's brand recognition. In September, we co-hosted the inaugural best [ph][/ph] of China Festival in Beijing. This grand event, featuring a fusion of tradition and fashion, gathering many Chinese master, artisans, traditional craftsmen and some of the most cutting-edge Chinese designer brands. Staying in Beijing and the focus in brand awareness, our rapid customer growth and enhanced customer engagement within our platform, we experienced a continuous increase in the advertising sales during the quarter. More specifically, we achieved five times the sales from the same period of last year. Our advertiser base expanded in terms of both, number and segment, with a variety of top-tier brands like Huawei, Land Rover, Smart, Dunhill, COFCO, Haier, and DBS Bank. We remain focused on innovation and on enhancing our technological capacity in order to pursue ever more effective and efficient operations and achieved sustainable growth. In the third quarter, combined with the extensive resources and experiences throughout Secoo's omnichannel platform are enabling Eco Cloud and build a brand [indiscernible] analytic product helped rewarding for getting users that will help drive customer engagement in our offline experience centers. We also updated our global supply chain system to optimize the user experience. We are establishing fully integrated system SaaS, PaaS and IaaS system to further expand our global supply chain and supplier network. Secoo is committed to continuously invest in big data analytics and insights into high-end merchandise and the customer base and consumption schemes. As we are constantly optimizing machine learning algorithm, help us locate high-end customers. In the meantime, we are also going to use a deep learning and neural network and natural language processing to train our high-quality data to construct a product-based knowledge graph to enhance the effectiveness and efficiency of automatic product recommendation and recovering on the platform. In summary, 2018 has been a challenging year, both in terms of the global macro environment and the domestic Chinese economy. Against this backdrop, we are delighted and heartened by the solid operational and financial performance that we have delivered this year. Our connection in both Secoo's future prospects and our growth momentum is as strong as it has ever been, because we are confident that Chinese customers desires and capability to pursue a better and higher quality life are as strong as they have ever been. With our continued effort to strengthen our operational capacity to provide better products and services to our customers, we are optimistic about our growth for the foreseeable future. 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 third quarter financial performance continued to demonstrate a solid growth momentum. During the quarter, we reported net revenue of RMB1.57 billion, a 60.1% year-over-year increase, which exceeds our guidance. We exhibited healthy profitability, with income from operations and net income increasing by 125.3% and 31.7%, respectively, on a year-over-year basis, validating from enhanced operating efficiency and delivered net profit for the ninth consecutive quarter. We are encouraged by our third quarter performance, and are confident that we will finish 2018 on very solid footing. Now, I'd like to walk you through our detailed financial results in the third quarter of 2018. GMV increased by 57.4% to RMB2.19 billion for the third quarter of 2018 from RMB1.39 billion for the same period of last year. Total number of orders increased by 59.7% to 594,000 for the third quarter of 2018 from 372,000 for the third quarter of 2017. Total net revenue for the third quarter of 2018 increased by 60.1% to RMB1.57 billion from RMB982 million in the third quarter of 2017, primarily attributable to our last offering of merchandise and service, combined with our creative and effective marketing activities, driving the growth in our total active customers and total number of orders served during the period. Cost of revenue increased by 59.7% to RMB1.3 billion for the third quarter of 2018 from RMB916 [ph] for the third quarter of 2017, which is in line with our increase of total net revenue and GMV. Gross profit increased by 58.8% to RMB217 million for the third quarter of 2018 from RMB170 million for the third quarter of 2017, primarily due to the gross margin increase in merchandise sales, as well as our platform and other service revenue increase. Operating expenses increased by 47.2% to RMB199 million for the third quarter of 2018 from RMB135 million for the third quarter of 2017. Now, I'd like to walk you through expense items in detail as follows. Our fulfillment expenses increased by 62.4% to RMB 41.9 million for the third quarter of 2018 from RMB25.8 million for the third 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. Our marketing expenses increased by 71.9% to RMB111 million for the third quarter of 2018 from RMB64.3 million for the third quarter of 2017. The increase was primarily due to the increase in our marketing and brand-value promotions, as well as staff compensation and benefits expenses. Technology and content development expenses increased by 21.1% to RMB21.2 million for the third quarter of 2018 from RMB17.5 million for the third quarter of 2017. The increase was primarily due to the increase in staff compensation and benefits expenses. Our general and administrative expenses decreased by 7.2% to RMB25.9 million for the third quarter of 2018 from RMB27.9 million for the third quarter of 2017. The decrease was primarily attributable to the increase of IPO-related expenses during the quarter of 2017. Our operating income for the third quarter of 2018 was RMB70.3 million, representing 125.3% increase from RMB31.2 million for the third quarter of 2017. Non-GAAP operating income, which excludes share-based compensation expenses, increased by 101.9% to RMB74.3 million for the third quarter of 2018 from RMB36.8 million for the third quarter of 2017. We recorded income tax expenses of RMB9.2 million in the third quarter of 2018 compared to RMB0.8 million for the third quarter of 2017. We recorded net income of RMB44.9 million for the third quarter of 2018, increased by 31.7% from a net income of RMB34.1 million for the third quarter of 2017. As a result of incremental finance expenses, income tax expenses and foreign exchange loss, our net income growth was slower than operating income growth during the period. Non-GAAP net income, which excludes share-based compensation expenses increased by 23.4% to RMB49.0 million in the third quarter of 2018 from RMB39.7 million in the third quarter of 2017. Net income attributable to ordinary shareholders of Secoo for the third quarter of 2018 was RMB43.9 million compared to a net loss of RMB5.6 million for the third quarter of 2017, which was primarily due to the accretion of preferred shares in the third quarter of 2017, comparing to nil in the third quarter of 2018. Basic and diluted net income per ADS were RMB0.87 and RMB0.84, respectively, for the third quarter of 2018, compared to a net loss per ADS of RMB0.30 for both in the third quarter of 2017. Basic and diluted non-GAAP net income per ADS were RMB0.97 and RMB0.94, respectively, for the third quarter of 2018, compared with basic and diluted non-GAAP net income per ADS of RMB2.14 and RMB1.98, respectively, for the third quarter of 2017. As of September 30, 2018, the company had cash, time deposits and restricted cash of RMB1.27 billion. Now for our fourth quarter of 2018 outlook. The company currently expects total net revenue for the fourth quarter of 2018 to be in the range of RMB1.9 billion and RMB2 billion, which would represent an increase of approximately 35% to 42% 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:]

Sure, ma'am. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have our first question coming from the line of Karen Chan from Jefferies. Please go ahead.

[Karen Chan:]

I'll go ahead and translate myself. So, my first question. Wondering if management can give us an update on your strategic partnership with LVMH and JD, when do we expect our flagship store to launch on JD and how will the two work together in terms of logistics and Internet finance? My second question is regarding the very strong growth we saw in active customer this quarter. Wondering what drives that and what's the breakdown between the existing and new customers? My last question is about the gross margin, where we know there was a sequential -- a slight sequential drop this quarter. Wondering what caused that, and how should we think about gross margin and operating margin trend going into fourth quarter in 2019? Thank you very much.

[Richard Li:]

Thank you. After co-investment from our capital and JD, we are working under cooperation among the parties. There were already some progresses. Meanwhile, some operations are still under discussion. For instance, the high-end cosmetics brand, Cha Ling, LVMH and luxury footwear brands; New Balance [ph], Giuseppe Zanotti, are now available on Secoo already. We signed a strategic partnership between Secoo and China's leading outlet, SASSEUR Group, invested by the L Catterton as well. Both parties are working closely in the area of products, members and integration of online and offline channels. In addition, Secoo also entered into a strategic partnership with the high-end fitness brand, Will's Group under L Catterton. By integrating the respective membership benefit, the cooperation will promote the growth of the high-end fitness business by leveraging each party's advantages. Interconnection of the technology products and inventory, Secoo are in cooperation of its flagship store on JD. The cooperation of installment payments business between both parties is now in the last stage of contract negotiations. Going forward, we will be pleased to share this follow-on important progress with you. The total number of active customers in this quarter has reached 304,000, a significant year-over-year increase of 92.4% from this quarter last year then the number, 158,000. Our marketing -- new marketing strategies and activities were the drivers for this beyond expectation growth of the active members. For example, during the July 7th anniversary promotions, we invited the young idol group, NEXT7 for endorsement, which attracted a large group of young customers to join the promotion. Edison Chen, we have made several innovative marketing attempt on the news today and OEMs. Moreover, the collaboration among various online and offline partners also increased the market presence and customer conversion rate. The proportion of new and old customers in this quarter is around 15% to 50%. Growth of the whole customer base was not only from the new customers, but also from our existing customers. The contribution amount and the purchase frequency of existing customers were also high. Therefore, we still believe that the continuous growth of new and existing customer base is the main driver for our GMV growth. In the future, we will continue to promote the growth of new customers, as well as improve customer experience to encourage higher purchase frequency from existing customers. That will increase the company's overall GMV. In the long run, we hope that our gross profit margins will reach around 25%. As Q4 is the peak season for promotion, we aim to remain around 17% to 18% for the Q4 gross margin. In 2019, we expect our gross margin to increase 1% to 2% to a month around 19%. We have some ways to improve the gross margins. First is to continue to adjust the product mix. Second, to develop more direct collaborations with brands, which will also include gross margins. Third, the increase of platform business and the advertisement business.

[Karen Chan:]

Thank you. Thanks very much.

[Operator:]

Thank you. We have our next question coming from the line of Ms. Daisy Yu from Huatai. Please go ahead.

[Daisy Yu:]

Hi, management. Thanks for taking my questions. I have two questions here. The first one is regarding to the GMV mix. We see a very strong GMV growth this quarter. So, can management share with us the GMV mix or the revenue mix by categories, such as watch, bags, apparel and others? And which category will be our focus in the coming year? And my second question is regarding to the sales and marketing. So, can management share with us more detail about the marketing strategy going forward, and how should we think about the trend for sales and marketing spend in the fourth quarter and for the next year?

[Shaojun Chen:]

For the Q3, the watches takes 25%, the bags takes 17%, the apparels and footwear takes 30% and the jewelries takes 16.5% and the miscellaneous other product category takes around 12%. We plan to control the sales and marketing expense around 7% to 8% of the revenue. We will continue to invest in branding and marketing, customer acquisitions and member service to further sustainable investment of the company. It is the second year that we participated in Singles' Day shopping festival, we achieved a year-over-year growth of 140% [ph] on November 11th. Q4 is the traditional peak season. We will invest more resources to accomplish the Singles' Day, Black Friday, the global inaugural festival on December 17 and the Christmas promotions, especially the Global Luxury Festival on December 17. We hosted for seven consecutive years. This year seasonal office promotions will be offering potential treatment to our members, and we hope to develop more successful practice to further pace membership program into the future.

[Daisy Yu:]

Thank you. Thank you. That's very helpful.

[Operator:]

Thank you, Ma'am. As there are no further questions, I would now like to turn the call over to the company for any 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, whose information is also on our website.

[Operator:]

Thank you, Ma'am. This concludes the conference call. You may now disconnect your phone lines. Thank you.