Ecmoho Ltd. (MOHO) Q2 2020 Earnings Call Transcript

Ecmoho Ltd.  (NASDAQ: MOHO) Q2 2020 earnings call dated Sep. 15, 2020

Corporate Participants:

Gary Xu — Investor Relations

Richard Wei — Chief Financial Officer

Zoe Wang — Co-Founder, Chairman and Chief Executive Officer, Director

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Ecmoho 2020 Second Quarter 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. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your first speaker today, Mr. Gary Xu. Thank you. Please go ahead.

Gary Xu — Investor Relations

Thank you, operator. Hello everyone and thank you for joining us today for our second quarter 2020 earnings conference call. The company results were released earlier today and are available on the company IR website.

On the call today, we have Ms. Zoe Wang, Founder and Chief Executive Officer and Mr. Richard Wei, Chief Financial Officer. Ms. Wang will review business operations and the company highlights, followed by Mr. Wei, who will discuss financials.

Before we begin, we would like to remind you that this call may contain forward-looking statements made under the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current forecasts and the current market regulatory and operation conditions and relating to events that are involved known and unknown risks and uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company’s control, which may cause the company’s actual results, performance, or achievements to differ materially from those in the forward-looking statement. Further information regarding these and other risks and uncertainties and the factors is included in the company’s filings with the US Securities and Exchange Commission. The company 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 law.

I will now read through the prepared remarks for her.

Hello everyone. Thank you for calling-in in our 2020 second quarter earnings conference call. 2020 is a difficult year for all of us. According to NBS [Phonetic], in the first half of 2020, total retail sales fell 11% year-on-year, of which the first quarter fell 19% year-on-year and the second quarter fell 4% year-on-year. The online retail sales increased by 7.3% year-over-year in the fourth quarter of 2020. We are very happy to report stronger revenue growth in the second quarter with the revenue of $100 million, an increase of 15% year-over-year or an increase of 64% from the fourth quarter. Meanwhile, we also see significant improvement of operations such as inventory turnover days.

The sales growth in the second quarter was attributable to, one, the strong organic growth from our existing brand partners such as Wyeth Pharmaceutical, Harbin Pharmaceutical, Bayer, Wyeth Nutrition, Jiangzhong Shiliao, Perrier and Nestle. The revenue from healthcare supplements and foods segment increased by 45%, among which Wyeth Pharmaceuticals and Harbin Pharmaceuticals increased by more than 100% and the Puritan’s Pride increased by 48%. Wyeth Nutrition increased by 56% year-over-year; and two, our SKU increased from 6,209 at the end of 2019 to 7,432 and the number of co-operative rent increased from 70 to 78; three, the repurchasing rate rose from 35% from the end of 2019 to 37% this year — this quarter; four, our layout on R&D in the upstream of the supply chain began to contribute to the revenue.

Although we achieved the growth and the improvement in new sales, scale and operations, we still face challenges from pandemic. To increase consumers’ consumption confidence, we increased marketing and the promotions during event of 618 [Indecipherable], which resulted a low GP margin in the second quarter, around 17.2% flat with the first quarter, but down 5% from the same quarter last year. We believe with the rebound of our consumers’ consumption, power of our spending, marketing and promotion, we will return to normal levels under the GP margin, under the OP margin, we will recover accordingly.

As to our strategy play-out in future, we started to [Indecipherable] competitive barrier at a leading integrated solution provider in non-medical health and beyond this marketplace and actively deploying new growth driver; one, in the upstream of the industry trends, we plan to gradually invest in research and development companies in the health and the wellness industry. We plan to establish our research and development center in Sichuan province. Based on the capability of research and the production, we explore new services model and signed contract on research and customization. In future, we will continue to enhance investment on R&D in the upstream of the industry trends and construct demand-supply chain model, which we believe to contribute revenue from second half of the year.

Secondly, in the mainstream of our industry trend, we actively explore our strategy partner, expanding from public domain to private domain and established private domain marketing and the service companies in Guangdong and Xinjiang. With private domain channels, we also empower small to middle-sized offline stores by private applied provides SaaS and live stream to improve their competitiveness. Third, in the downstream of the industry trend, we built-up a complete mid-term for the consumer management and service, including pop [Phonetic], CRM, live-stream and private domain layout, which is estimated to see achievement in the second half year.

That concludes the prepared remarks. I will now turn the call over to Richard.

Richard Wei — Chief Financial Officer

Thank you, Gary. Now I would like to go over the second quarter 2020 financial results in more detail. We believe year-over-year comparisons are the best way to review our performance. All percentage changes I’m going to give will be on that basis unless otherwise stated. Once again, please note that all figures mentioned will be in US dollars.

Overall, our total net revenues increased by approximately 15% to $100.5 million. The increase was primarily driven by strong growth from mother and childcare products, health supplements and foods and personal care products. Gross margin was 17.2% compared with 22.2% in the year ago period. The decline in gross margin was caused by lower gross margin on products sold to one of the platforms as well as pandemic-related inventory loss.

Total operating expenses were $20.5 million compared with $17.2 million in the same quarter last year. Total operating expenses as a percentage of total revenues increased from 19.7% last year to 20.4% this year. In particular, fulfillment expenses as a percentage of total revenues declined from 5.3% last year to 4.6% this year, primarily due to lower unit expense we paid to third-party logistics providers. Sales and marketing expenses as a percentage of total revenues increased from 11.4% last year to 12.1% this year, primarily due to higher increases in platform fees and promotional expenses. G&A expenses as a percent of total revenues increased from 2.5% last year to 3.4% this year, primarily due to higher professional service fees, higher labor cost and insurance expense. R&D expenses as a percentage of total revenues decreased from 0.5% last year to 0.2% this year, primarily due to reduced headcount.

Operating loss was $3.2 million compared with an operating income of of $2.2 million last year. Non-GAAP operating loss was $2.8 million compared with non-GAAP operating income of $2.6 million last year. Non-GAAP net loss was $4.0 million compared with non-GAAP net income of $1.8 million during the same quarter in 2019.

As of the end of the second quarter, we had $68.5 million in cash, cash equivalents and restricted cash compared with $51.1 million at the end of 2019. Inventory days declined from 89 days in the first quarter to 54 days in the second quarter, primarily due to higher sales in the second quarter as well as our effort to improve working capital efficiency.

Turning to guidance. Based on current macroeconomic conditions and industry conditions, we will continue to focus on improving our working capital efficiency and improving our profitability including [Indecipherable] certain less profitable brands from our portfolio. As a result, for the third quarter of 2020, we expect total revenues to be approximately flat to down 5% from the third quarter of 2019. The above outlook is based on current market conditions and reflects our preliminary estimates, which are all subject to change.

This concludes our prepared remarks. Thank you. And operator, we’re ready to begin the Q&A session. Operator?

Questions and Answers:

Operator

[Operator Instructions]

Richard Wei — Chief Financial Officer

While we are waiting for — sorry.

Operator

Sorry. Please go ahead.

Richard Wei — Chief Financial Officer

Are there anyone on the line?

Operator

No, we have no questions on the line at this time.

Richard Wei — Chief Financial Officer

Sure. Okay. While waiting for questions, let me just read some questions that we received in email in the last couple of days and we’ll go through these questions. First one is, how has the COVID-19 pandemic affected the types of products that consumers buy from Ecmoho and what products [Indecipherable] in Q2 and what products do you expect to see high demand in the second half of this year. And additionally, how did pandemic affect industry consumer categories and the company?

Zoe Wang — Co-Founder, Chairman and Chief Executive Officer, Director

Okay. I will speak Chinese. [Foreign Speech]

Gary Xu — Investor Relations

I will translate Ms. Zoe’s answer into English. Consumer habits on online shopping have been captive because of pandemic meanwhile consumer would like to pay more attention on family and the personal health management with demand for health products and the depressed the demand for non-health necessities. Revenues from health supplements and food increased by 45% year-on-year, among which GSK [Phonetic], Harbin Pharmaceutical increased by more than 100%, Puritan’s Pride increased by 48% while the revenue declined by 9% year-on-year for Perrier and 33% year-on-year for A.H.C. which are both non-health necessities. And our total net revenue increased by 15% year-on-year in this quarter.

Richard Wei — Chief Financial Officer

Another question, I mean that is the way it is done. Zoe, please explain the company’s growth strategy and earnings drivers.

Zoe Wang — Co-Founder, Chairman and Chief Executive Officer, Director

Okay. [Foreign Speech] Gary?

Gary Xu — Investor Relations

I will have to translate it in English. As to our strategy laid out to future, we started two, three things, the core competitive barrier at a leading integrated solutions provider from medical health and wellness market and actively deploy new growth driver [Technical Issues] health-related companies and non-health-related companies who want to turn to health company to do R&D and produce customized product through our data analysis and the investments in manufacture and R&D. And second, in the mid-stream of the industry churn, we have invested in new channels and new capex. We also empower small-to-mid-sized offline stores by provider and live-stream to improve their competitiveness. And as of the end of second quarter, we already had more than 8,000 small-to-medium-sized offline stores. And the third, in the downstream of the industry trends, we invested into private domain, which would help to improve the consumer stickiness and the service satisfactory. Henceforth, we keep investing on SaaS, increasing of live-stream to empower the end-consumers and retailers. We believe that our current — strategically, we not only consolidate the company’s leading position in the non-medical industry, but also become promising [Indecipherable] in the coming years.

Zoe Wang — Co-Founder, Chairman and Chief Executive Officer, Director

Richard?

Richard Wei — Chief Financial Officer

Okay. Next question. For the upcoming Singles’ Day also known as 11/11 shopping event, what are brand expectations and how have brands promotion budgets changed compared to last year?

Zoe Wang — Co-Founder, Chairman and Chief Executive Officer, Director

Okay. [Foreign Speech]

Gary Xu — Investor Relations

Due to the pandemic, we think this year Singles’ Day 11/11 shopping event is the the year we think most attendees in the [Indecipherable] to a one brand and partner throughout the year, sales expectation, growth rate by increased marketing and promotion effort. Two, platforms have lower inventory to reduce risk due to the pandemic.

Richard Wei — Chief Financial Officer

Okay. Next question. There was a noticable decrease in inventory days at the end of Q2. Do you expect to maintain this inventory level? I’ll take this question. Our inventory days in Q2 was 55 days, which was a dramatic improvement compared with 89 inventory days in Q1 of this year and 64 inventory days in the same quarter last year. For Q3 of this year, we need to restock our inventory for the upcoming Singles’ Day shopping event and so we expect inventory days will be a bit higher compared to Q2 for the whole year. That’s actually a pretty good improvement compared with last year, our effort to improve our working capital efficiency.

Next question. Zoe, can you explain the company’s decision to make the Anze investments. What do you expect from Anze and how does it contribute to the company’s financial results and when can investors expect to see [Technical Issues] in these investments?

Zoe Wang — Co-Founder, Chairman and Chief Executive Officer, Director

Okay. [Foreign Speech]

Gary Xu — Investor Relations

As we mentioned, about new two investments in the upstream, in order to increase the competitive barrier, we have increased the investment in the upstream products, research and development and the production. We expect this part to start to contribute the revenue from Q3.

Richard Wei — Chief Financial Officer

Okay, thank you. Operator, are there any questions?

Operator

No. There are no questions on the line at this time.

Richard Wei — Chief Financial Officer

Okay. In that case, we will.

Gary Xu — Investor Relations

Okay. Thank you, operator. In closing, on behalf of the Ecmoho management team, we would like to thank you for your participation in today’s call. If you require any further information or are keen to visit us in Shanghai, please let us know. Thank you for joining us today’s this conference call. Thank you. Have a good day and good night.

Operator

[Operator Closing Remarks]