Uxin Limited
Q3 2018 Earnings Call Transcript

Published: 21 Nov 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to Uxin’s Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded. If you have any objections you may disconnect at this time. I will now turn the call over to Nancy Song, Investor Relations Director of Uxin. Please go ahead.

[Nancy Song:]

Thank you, operator. Hello, everyone. Welcome to Uxin third quarter 2018 conference call. Today, DK, our Founder and CEO; and Zhen Zeng, our CFO will discuss our financial results for the third quarter. Following the prepared remarks, Henry Tsai, our Head of Corporate Finance will join DK and Zhen to address any questions. Before we start, I’d like to remind you that our statements today will contain forward-looking statements that we make enter the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on management’s current knowledge and assumptions about future events that involve risks and uncertainties, which could cause actual results to differ materially from our expectations. Uxin does not undertake any obligations to update any forward-looking statements, except as required under applicable laws. For more information about the potential risks and uncertainties, please refer to the company’s filings with the SEC. With that, I will now turn the call over to our CEO, DK please.

[Kun Dai:]

Thank you, Nancy. Hello, everyone. We are pleased to report another strong performance for the third quarter of 2018. Our focus on providing a broader selection of used car, digital transparency and a one-stop solution continues to translate into an outstanding user experience and a growing demand from both consumer and dealers. We again delivered our robust top-line growth with revenue up 60% year-over-year, which exceeded the high-end of our guidance. This reflects the increase in the transaction volume number of loans facilitated and the take rate during the quarter. Our 2C business remained the premium gross driver for the business. The revenue for our 2C business, including both transaction facilitation and the loan facilitation increased by 109% year-over-year. Transaction volume for our 2C business reached 129,000 used cars, up 53% year-over-year. This is equivalent to GMV of RMB10.2 billion. Our transaction facilitation take rate was 1.4% compared to 0.7% in Q3 last year. The increase reflects the strength of our brand and the pricing power as well as increasing traction of our service among users. As a result, our transaction facilitation revenue increased by 165% year-over-year during the quarter. Loan facilitation continued to important for consumer and increased together with the growth in volume and the transactions. The average service fee rate for loan facilitation increased to 6.9%, up from 6.1% a year ago with loan facilitation revenue growth by 96% year-over-year. The increase in service fee rate was mainly due to the ongoing diversification of our loan products. We also enhanced our risk management through NOIs of large volume of transaction and the user behavior data collected by our platform as well as enhancement in our pre- and post-financing management capability. This leads to an improvement in our M3+ delinquency rate to 1.43% as of the end of Q3, 2018 from 1.53% as of the end of Q2 this year. Now, let me share some updates on key area of our operation before Zhen give greater detail on our financial performance shortly. First, in reaching selection of used car, Uxin is dedicated to providing consumer with the broadest selection of used car from different regions across China. As of the end of third quarter, we had 290,000 cars available to be purchased real-time via our network. Second, digital transparency. We are also committed to setting the industry benchmark for transparency by standardized and digitalizing used car inspection and increasing the accuracy of used car evaluation. Through our standardized and proprietary inspection process and the recently launched VR-enabled online car-building experience, we differentiated our service by bringing a more professional and interactive experience to our user. In addition, our Manhattan pricing system analyze data from over 5.8 million cars inspection and 1.8 million transactions to accurately estimate used car value. This enable us to reduce information gap between sellers and buyers and bring much greater price transparency. Last, but not least. We continue to focus on making Uxin a one-stop service platform. On top of offering a broad cross-regional selection of used cars, we are also able to provide car financing options, arrange title transfer and used car delivery with the support of our service and fulfillment network. This broad niche of offerings enables us to deliver a seamless and comprehensive used car purchasing experience on one platform. With our determination to enhance value proposition for our users, we are confident that we can extend our market leadership in China undeserved the used car market and buildup sustainable business over the long term. Now I’d liked to turn the call over to our CFO, Zhen Zeng, to talk through our financials. Thank you.

[Zhen Zeng:]

Well, thanks DK. Hello, everyone. Thanks for joining us. Now let me walk you through our financial performance in the third quarter of 2018. Note that all numbers are in RMB unless otherwise stated. Also please note that some numbers I refer to our non-GAAP. You can find a reconciliation of these numbers in our earning release. In the third quarter, total revenues increased by 50% to RMB864 million from RMB541 million in the third quarter of 2017. The increase was a primarily due to the increase in the transaction volume, amount of a loan facilitated and the take rate, particularly from our 2C business. Filing down to our 2C and 2B business units. 2C transaction facilitation revenue was RMB 139 million, an increase of 165% from RMB 52 million in the third quarter of 2017, primarily due to a 53% increase in the transaction volume and a 35% increase in GMV of used cars sold through our 2C business. Our 2C transaction facilitation take rate was 1.4% in the third quarter of 2018, up from 0.7% in the third quarter of 2017. 2C loan facilitation revenue increased by 96% to RMB 474 million, primarily driven by the increase in the volume and amount of loan facilitated. Our service fee rate was 6.9% during the quarter, up from 6.1% in the third quarter of 2017. The increase in service fee rate was primarily driven by the ongoing diversification of our loan product with more payment and the down payment options. The attach rate of the loan facilitation service remained relatively stable at around 46% in the quarter. In terms of our 2B business, our 2B transaction facilitation revenue reached RMB 191 million, representing an increase of 21% year-over-year, primarily due to the increase in take rate. Our take rate for 2B transaction facilitation was 4.5% in the third quarter of 2018, up from 3.2% in the third quarter of 2017. As we noted last quarter, we have adopted a different approach to serving customers with car selling needs. Excluding this impact, our B2B business achieved 18.6% year-on-year growth in the number of transactions. Cost of revenues increased by 56% year-over-year to RMB 305 million for third quarter of 2018 compared to RMB 196 million in the same period last year. The increase was primarily due to the increase in the number of the personnel engaged in our car inspection, quality control, customer service and after-sales services as well as the cost of title transfer, registration and fulfillment expenses, which was in line with the increase in our transaction volume. Gross margin was 65% in the third quarter of 2018 compared to 64% in the same period last year. Total operating expenses was RMB 1,102 million. Non-GAAP operating expenses, excluding share-based compensation, was RMB 1,025 million, representing a 40% increase year-over-year. Sales and marketing expenses increased by 40% year-over-year to RMB 755 million compared to RMB 541 million in the same period last year. The increase was primarily due to an increase in the number of employees, which was partially offset by the decrease in the branding expenses. Branding expenses decreased to RMB 211 million. We also saw an increase in conversion efficiency, which was more accurate customer targeting and a ramp-up of sales consultant productivity. As a result of increasing operating leverage, sales and marketing expenses, including share-based compensation expenses, as a percentage of total revenue, decreased to 88% during the quarter from 100% in the third quarter of 2017. G&A expenses increased by 3% year-over-year to RMB 266 million in the third quarter of 2018 from RMB 259 million in the same period last year. The increase was primarily attributable to the increase in the number of employees and offices expenses, which was partially offset by the decrease in the share-based compensation expenses. G&A expenses, excluding the impact of share-based compensation expenses, was RMB 190 million, representing 22% of total revenues in the quarter compared to 23% in the third quarter of 2017. The R&D expenses increased by 68% year-over-year to RMB 82 million in the third quarter of 2018 from RMB 49 million in the corresponding period last year. The increase was primarily due to the increase in salary and benefit expenses of employees engaged in research and development as well as the expenses related to the development of our IT business. R&D expenses, excluding the impact of share-based compensation expenses, was RMB 82 million, representing 9% of total revenues in the quarter, at the same level of quarter 3 of 2017. We are confident that our increase in operating leverage and prudent approach to expense management will continue to improve our profitability over time. Gains from the guarantee liability was RMB 2.4 million compared to a loss of RMB 19 million in the prior year period. The slight gain was the result of a relative stable delinquency rate compared to that of the second quarter of 2018. Loss from operations in the third quarter of 2018 was RMB 543 million compared to a loss of RMB 523 million in the prior year period. Non-GAAP loss from operation, which excludes the share-based compensation expenses, was RMB 466 million compared to RMB 385 million in the same period last year. Non-GAAP loss from operations or a percentage of total revenue was 54% in the third quarter of 2018, decrease from 71% in third quarter of 2017. The change in fair value of derivative liability was 0 in the third quarter of 2018 compared to a loss of RMB 238 million in the same period last year. We no longer see any impact of derivative liability as the preferred share was converted into ordinary share at the time of IPO. Net loss in quarter 3 2018 was RMB 594 million compared to a net loss of RMB 766 million in the prior year period. The narrowed net loss was primarily due to the decrease in loss from the fair value change of derivative liability. Non-GAAP adjusted net loss, which excludes share-based compensation expenses, was RMB 517 million in the quarter compared to a loss of RMB 390 million in the prior year period. Non-GAAP adjusted net loss as a percentage of total revenue was 50% in quarter 3 of 2018, decrease from 72% in the third quarter of 2017. Now, turning to our cash position. As of 30th September of 2018, Uxin had cash and cash equivalents of RMB 677 million compared to RMB 292 million at 31st of December 2017. The company also had restricted cash of RMB 1,838 million compared to RMB 1,617 million as of 31st of December 2017. Finally, turning to the guidance. For the fourth quarter of 2018, we expect the total revenue to be in the range of RMB 1.02 billion to RMB 1.06 billion. This forecast reflects the company's current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks.

[Nancy Song:]

Thank you, Mr. Zeng. Operator, please right now, open now the call for questions.

[Operator:]

[Operator instructions] Our first question comes from Eddie Wong from Morgan Stanley. Please ask your question.

[Eddie Wong:]

Thank you for taking my question and congratulations on the good results. So I have 3 questions. The first one is about the 2C business take rate. We have witnessed a quite impressive increasing trend of 2C take rate this year. Especially for the third quarter, take rate increased around 20 bps sequentially, while the volume growth was also higher than that of the year's second quarter. So will you please give more details about how you are managing to achieve this and how we could expect the take rate trend in the fourth quarter and onwards? This is my first question. And my second question is about the delinquency rate. The third quarter delinquency rate also improved 10 bps versus the second quarter. So also, I would like to management give more details about how we can achieve this and how is the trend in the next few quarters. On a separate note, I noticed that the restricted cash balance at third quarter-end, actually are quite similar at the -- versus the second quarter-end. So I'm just wonder if there is any -- I mean, the -- our auto finance partners have lowered their requirements in terms of the deposit as a percentage of the outstanding loan balance we facilitated. So basically which means that if there's any -- the more favorable terms from this -- our auto finance partners. This is second one. And the last question is about the overall market because we have noticed that the new car industry demand in the third quarter has been weak. So do you expect any impact from this weak demand to the used car industry in the short term? Although so far, I think our third quarter volume growth and fourth quarter guidance seems quite immune from this weak demand in China, but just want to hear your thoughts about any -- the -- thoughts of the weak new car auto demand, the impact to the used car industry? Thank you.

[Kun Dai:]

Okay. Thank you, Eddie. This is DK. And, all right, we get all three questions. I think I would like to take your question three first and then just -- okay. Is that okay? I turn into Chinese and Henry will help me to translate. Okay. [Foreign Language]

[Henry Tsai:]

Sure. Thanks, Eddy. I think, number one, that was a great question. New cars obviously saw an impact on the broader economy in Q3 focused -- and with all new cars worldwide trend actually declined in 2018. Now obviously, as we look in our business in used cars, we feel that used car environment is a lot more constructive than new cars, especially when a lot of consumers are very focused on affordability, which actually plays to used car strength.

[Kun Dai:]

[Foreign Language]

[Henry Tsai:]

And then in terms of our home business, we feel that our model is unique in a way whereby we are providing users with a great, new coverage of experience by moving people's buying behavior from offline to online. So that will actually accelerate our own growth. And also with our strength and scalability of business model, we continue to expand our market share. So we feel that not only is used cars more constructive than in broader new car environment, we will continue to outgrow the broader used car market as well.

[Kun Dai:]

Okay, Zhen Zeng.

[Zheng Zeng:]

Okay, Eddie, Michael here. So I would like to address your concern on take rate and delinquency rate and also the cash. So for the 2C take rate drivers in this quarter, our 2C transaction facilitation take rate was 1.4% compared to 0.7% in the same period last year. This is mainly because we have been enhancing our service capabilities to better cater to car buyers' different needs. This also demonstrates consumers' higher appreciation of Uxin's unique value proposition. That is, a broader car selection enabled by the cross-regional transactions and a better car condition and the price transparency and one-stop services. With this integrated offering, we have been able to gain greater pricing power while increasing scale. This also enables us to deliver more value to dealers as we help them increase inventory turnover efficiency. And for the loan, our service fee rate for our loan facilitation also increased to 6.9% in this quarter compared to 6.1% in the third quarter last year. This is mainly because we provided more diversification selection of loan products to meet various consumer needs and continue to optimize our loan product offering mix. And for the long run, we are confident that we can continue to increase our 2C take rate by adding more value-added service and optimizing our product mix. And for the delinquency rate improvement, so in this quarter, our M3+ delinquency rate continued to improve as we are enhancing our rate management capability as well as the pre- and post-financing management capability. We're also taking a prudent approach to providing assessment, especially when entering new fields. As China's largest used car transaction platform, Uxin has aggregated massive transaction and user behavior data as well as used car condition data. We have a deeply understanding not only of the -- also for the people, which gives us unique advantages in evaluating used car residual value and assessing user credit risk profile. As we're expanding our used car financing business, we have also accumulated rich experience in risk management and optimizing our pre- and post-financing management capabilities. So we will continue to invest and strengthen our risk management system and strive to enhance spread performance to loan facilitation through our platform.

[Kun Dai:]

For your last question for the restricted cash, our financing partner has been pleased with the credit performance of our user and our collateral management capability. As a result, we have been able to negotiate a better term with them such as deposit values required to hold advanced escrow accounts. We are confident that -- as they learn more about our platform and get more confident of our track record, we will be able to continue to improve the terms. In addition, we are looking for a new way to work together with financing partners that will enhance our liquidation -- liquidity position. We will have more on this for you in the coming quarters.

[Operator:]

[Operator Instructions] As there are no questions at this time, I'll hand the call back to Nancy. Please continue.

[Nancy Song:]

Thank you, everyone, for joining today’s call and for your continued support for Uxin. We look forward to speaking to you again in the near future. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.