111, Inc.
Q2 2021 Earnings Call Transcript

Published: 27 Aug 2021

[Operator:]

Good day, and thank you for standing by. Welcome to the 111, Inc. Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. . Please be advised that today's conference is being recorded. . I would now like to hand the conference over to your first speaker today, Ms. Monica Mu. Please go ahead.

[Monica Mu:]

Thank you, operator. Hello, everyone, and thank you for joining us today for 111's second quarter 2021 conference call. On the call today from 111 are Dr. Gang Yu, Co-Founder and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman and CEO; Mr. Luke Chen, CFO of our major subsidiary; Mr. Harvey Wang, COO; Ms. , SVP of Investor Relations and Business Development; Ms. Monica Mu, Investor Relations Director; and Mr. Alex Liu, Finance Director. As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. The company's earnings press release was distributed earlier today and, together with our earnings presentation, are available on the company's IR website at ir.111.com.cn. Before we get started, let me remind you that this call may contain forward-looking statements made under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which would cause actual results to differ materially. For more information about these risks, please refer to the company's filings with the SEC. 111 does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. Please note that all numbers are in RMB and all comparisons refer to year-over-year comparisons unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year-over-year basis. With that, I will turn the call over to our CEO, Mr. Junling Liu.

[Junling Liu:]

Good morning, and good evening, everyone. Thank you for joining our 2021 second quarter earnings call. For the benefit of those who are new to the 111 story, I would like to take a moment to summarize our business. I'll also cover our recent operational performance before handing the call over to Luke to discuss the financials. We will include our prepared remarks with guidance for Q3 2021, after which we will open up the call for Q&A. From the very beginning, 111 has been on a mission to transform and advance the health care services industry in china through technology by connecting patients with medicines and medical services. We have already achieved significant progress in this mission over the past decade with the establishment of 3 innovative technology platforms

[Luke Chen:]

Thank you, Junling. Moving to the financial section on Slide 13 of the PPT we have posted on our website. You can see the details of the second quarter 2021 results from slides 14 to 16 of our presentation. I would like to highlight a few key figures and financial metrics and our focus on year-over-year comparisons. All numbers are in RMB unless otherwise stated. Total net revenues for the quarter grew 86.5% to RMB 3.0 billion, which was at the higher end of our guidance range. Our B2B segment revenue grew 99.2% to RMB 2.9 billion, reaching a new record high for segment revenue in a quarter. Our B2B -- B2C segment revenue was down 23.9% to RMB 127 million year-over-year. The decrease in our B2C segment growth was primarily attributable to the Q1 and Q2 2020 being unusually strong quarters for B2C segment as we were selling higher volumes of pandemic-related PPEs. We expect this downward trend will be reversed as we launch several initiatives to accelerate the growth of this segment. Our B2B gross margin was 3.8%, up from 3.4%, while our B2C gross margin remained stable at around 20%. The improvement in gross margin of our B2B segment reflects our ability to continuously improve the margins while maintaining substantial top line growth. Overall, our gross profit grew by 58.8% to RMB 134.6 million, and the combined gross margin was 4.5%, down from 5.2% a year ago. This decrease was primarily attributed to our B2B segment growing at a faster pace than the B2C segment. Total operating expenses for the quarter were up 82.2% to RMB 323.4 million. As a percentage of net revenue, total operating expenses for Q2 2021 decreased to 10.7% compared to 10.9% in the same quarter last year. Fulfillment expenses as a percentage of net revenue for the quarter was 2.8%, up slightly from 2.7% in the same quarter last year. This was mainly attributable to the costs associated with opening new fulfillment centers and upgrading our existing facilities to support our growth. As these new and expanded facilities reach full capacity, we expect the fulfillment expenses to decrease. Sales and marketing expenses as a percentage of net revenue for Q2 '21 were 4.4%, down from 5% in the same quarter of last year. G&A expenses as a percentage of net revenue was 1.7%, down from 2.4% in the same quarter last year. Technology expenses accounted for 1.7% of net revenue, up from 1.1% in the same quarter last year. This was primarily driven by an increase in the number of personnel in R&D and IT teams. We believe that continuing to invest in our team and technology and service offerings in the area of digital health, big data and SMART supply chain will strengthen our market-leading position. As a result, non-GAAP net loss attributable to ordinary shareholders in Q2 2021 was RMB 118 million as compared to RMB 78.8 million in the same quarter last year, which accounted for 3.9% of net revenue, down from 4.9% a year ago. As to the guidance for the third quarter 2021 on Slide 18, the company expects total net revenue to be between RMB 3.31 billion to RMB 3.55 billion, representing a year-over-year growth of approximately 40% to 50%. In addition to growing our top line, we are laser focused to growing our margins. We expect the trend on margin growth outpacing revenue growth to continue as we keep making stride towards becoming profitable. It should be noted that this outlook is based on the current market conditions and reflect the company's current and preliminary estimates of the market and operating conditions as well as consumer demand, which are subject to change. Please refer to slides 21 to 23 of the Appendix section for our selected financial statements. A quick note on our cash position. As of June 30, 2021, we had cash and cash equivalents, restricted cash and short-term investment of RMB 1.2 billion, largely unchanged from March 31, 2021. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

[Operator:]

. Your first question comes from the line of Xipeng Feng from China International.

[Xipeng Feng:]

Okay. This is Xipeng from CICC. Congratulations on the company progress. Well, I have 3 little questions, actually, and my first question is about policies. Well, as you may notice, the health care and Internet industry suffered from several newly implemented policies in the most recent several months. So I just wonder, in your opinion, what is the impact of China's recent policies on the Internet and health care industry or even through the company? And my second question is, what is the primary factor behind your B2B growth -- profit growth? What will be the main growth driver in the future? And my third question is, how do you propose to continue on both your revenue and gross margin growth?

[Junling Liu:]

Yes. Thank you, Xipeng Feng. I think I'll take your first question with regards to the policy in the recent months. I actually spoke a bit about it in my script. And, I mean, obviously, especially in recent weeks, we have seen a lot of those developments in the policy area. As I said in the past and during the call earlier, that those policies are more intending to address the antimonopoly, the anticompetitive practices, et cetera. And obviously, the government has a great ambition to curb the cost of health care. That is quite related to us. As far as we are concerned, we like and welcome those policies because we are in the business to help the government to reduce the health expenditure. We want to make things more transparent. And we want to digitize the overall health care industry. And obviously, with our technology-enabled platforms, we're in a position just to do that. So on the anti-monopoly and anticompetitive practices, that is really music to our ears because we actually believe that the industry needs to have a fair playing field. And what the government is actually doing is to have leveled or in the process of leveling the playing field to enable companies -- or many companies, including ours, to compete in a good environment. So overall, we view those policies as very, very positive. It is going to be a tailwind for 111 instead of a headwind for 111. I'll pass on to Harvey to answer your other questions.

[Harvey Wang:]

Yes. On your second question regarding the B2B margin, yes, our margin -- B2B margin improvement mainly comes from the following actions

[Xipeng Feng:]

Okay. That's very clear. And I think we can be excited on the future achievement of the company. Congratulations again on the company progress.

[Operator:]

Your next question comes from the line of Zoe Bian of Citi.

[Zoe Bian:]

This is Zoe Bian from Citi. I have 3 questions. The first is, are there any updates on your partnerships with pharmaceutical companies in the second quarter this year? The second one is about the 1 Health Membership program. The program has already partnered with over 10,000 pharmacies. How integrated are these partnerships? And how much revenue or profit do you expect in the future? And what's your future plans to develop this business? My third question is, can you share more color on the technology expenses recently?

[Gang Yu:]

Okay. Probably I'll take the first and the third, okay? So talking about our partnership with pharmaceutical companies, we have made a tremendous progress during the past quarter. As Junling had mentioned in the report, that we have reached direct sourcing relationships with 381 global pharmaceutical companies compared to 259 at Q2 last year. So this is quite a progress. As people know, that it takes a long time to build such a direct sourcing strategic partnership. Not only that, we also introduced -- just this quarter alone, we introduced 4 innovative drugs into our cloud direct-to-patient management system, including Dupixent from Sanofi, Taltz from Eli Lilly, Verzenio also from Eli Lilly. As you can see that the first one we started was Trulicity brand from Eli Lily. Now we have 3 heavyweight, innovative drugs, all selling on our unique platform. We also have donafenib from Zelgen. So as we are accelerating the partnership with the pharmaceutical companies, we provide -- we are really the choice for commercialization. Also, let me take the third question. You asked about what we invest on technology, okay? We heavily invest on our technology team and our system development, okay, especially in the following areas. Number one is assortment management. We want to introduce a full category, but we need to decide what to be sourced internally, what to be offered by our partners, what to be offered by our marketplace partners. So those are needed to be decided by our assortment management system. We invest on Price Intelligence System. We have a team that works on big data analytics, offering our decision support tools. We continuously upgrade our supply chain management system. And also, we build SaaS tools. So this is why we increased our service revenue, okay? We build SaaS tools for pharmaceutical companies as well as for pharmacies. For example, for pharmacies, we have a CRM system. We have an O2O sales management system for pharmacies, where we build a system for their -- for them to manage their sales reps. We have also built a digital marketing system. So we have built a lot of systems. This is also reflected by 18 patents we have received during the past half year. Let me turn the second question to Harvey.

[Harvey Wang:]

Yes. So regarding the 1 Health project, it is a very strategic project, which is also a very important part of our S2B2C model. There are now more than 11,000 pharmacies have joined this 1 Health program through a digital franchise model. And these pharmacies have paid us digital services fee to use our SaaS-based tools, including the CRM tool and also SaaS-based O2O tools. They are also enjoying the benefit from the centralized procurement and also enjoying a much more competitive price. And this program, as I just mentioned, is a very important portion of our S2B2C model and we are now connecting pharmaceutical companies with pharmacies on product commercialization and as well as we are connecting those pharmaceutical companies through those pharmacies with the end patients or consumers through our CRM tools. And it becomes an online/offline closed loop. Thank you, Zoe.

[Operator:]

Next question comes from the line of Richard from Ideate Investments.

[Richard Gao:]

This is Richard Gao from Ideate Investments. I got 2. The first one is, do you have any plan to further expand your supply chain coverage? And the second one, what's the status of your STAR Market IPO?

[Gang Yu:]

Okay. I'll take the first question. I think Luke will update you on the second one. Yes, we are -- currently, we have 8 fulfillment centers in the 8 major cities in -- across the country, and we plan to double our fulfillment center throughput capacity in this year. And also, we will continue to offer better logistics services, including -- currently, we provide within 24 hours delivery in 890 cities and even same-day delivery in 12 major cities. Luke, you want to take the second question?

[Luke Chen:]

Yes. We are still working on the listing in the STAR Market, and we're still analyzing the policy updates for the STAR Market. So we will disclose and update the status according to SEC rules. Meanwhile, we will be focusing on improving margin and reaching profitability. Rich, I hope we answered your questions.

[Operator:]

Your last question comes from the line of Junjie Huang of HSBC.

[Junjie Huang:]

This is Junjie from HSBC. I hope to ask 2 questions on behalf of Rachel Yang. So our first question is on the service-related revenue, which had a very strong growth. So could you please help us break down the growth drivers? And do you think that this will become a significant source of revenue in the future? And our second question is on the bottom line. So we can see that our non-GAAP net loss ratio has decreased significantly to 3.9% this quarter. We're just wondering on our progress, if this even will accelerate.

[Gang Yu:]

For your first question regarding services-related revenue, yes, we are offering services to our upstream and downstream partners, including the marketplace vendor services, online medical consultation, cloud and e-prescription services and digital commercialization to those pharmaceutical companies and also supply chain management, et cetera. We will continue to expand our services offering with the expansion of our S2B2C platform and also with the launch of more and more SaaS-based tools in this S2B2C platform.

[Luke Chen:]

And Junjie, it's Luke. Let me answer your second question. Improving our bottom line will be a key focus for us going forward. In this quarter, we have already made strides in improving our margins as well as improve our internal operating efficiency. Now the efficiency came from many factors, showed our strong commitment and represented efforts in optimizing our offerings in the area like better assortment management, best pricing, lead operations and high efficiency of our BD team via application of our SMART tools. So we expected to see continued improvement in our net loss with a goal of breaking even within the next 12 to 18 months. So Junjie, I hope we answered your questions.

[Operator:]

As there are no further questions, I'd now like to turn the call back over to the management for closing remarks.

[Monica Mu:]

Thank you, operator. In closing, on behalf of the entire 111 management team, we'd like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting us in China, please let us know. Thank you for joining us today. This concludes the call.

[Operator:]

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