MOGU Inc. (MOGU) Q1 2021 Earnings Call Transcript

MOGU Inc. (NYSE: MOGU) Q1 2021 earnings call dated Aug. 24, 2020

Corporate Participants:

Rene Vanguestaine — Chairman and Chief Executive Officer

Qi Chen — Co-Founder, Chairman of the Board of Directors and Chief Executive Officer

Raymond Huang — Chief Strategy Officer

Analysts:

Charlie Chen — China Renaissance — Analyst

Sabrina Hu — Giffords — Analyst

Locky Lau — AJ Asset Management — Analyst

Veronica Chen — China Renaissance — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to MOGU First Quarter Fiscal Year 2021 Earnings Call. [Operator Instructions]

I would now like to turn the call over to today’s presenter, Rene Vanguestaine. Please go ahead.

Rene Vanguestaine — Chairman and Chief Executive Officer

Thank you, Michelle.

Hello, everyone, and thank you for joining us today.

MOGU’s earnings release was distributed earlier today and is available on the IR website at ir.mogu-inc.com as well as on the business wire services.

Before we begin, I’d like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the US Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management’s current expectations and the current market and operating conditions and relate to events that involve known or unknown risks, uncertainties or 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 statements. Further information regarding these and the risks, uncertainties or 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 statement as a result of new information, future events or otherwise, except as required under applicable law.

On the call today from MOGU are Mr. Shark Chen Qi, Chairman and CEO; Mr. Raymond Huang, Chief Strategy Officer; and Ms. Huiqing Ellie [Phonetic] Wang, Financial Controller. Mr. Chen will review the business operations and Company highlights, followed by Mr. Wang, who will discuss the financials. They will be available to take your questions during the Q&A session that will follow.

Now it is my pleasure to introduce our Chairman and CEO, Mr. Chen. Please go ahead.

Qi Chen — Co-Founder, Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Hello, everyone, this is Shark.

Thank you for joining us on the earnings conference call for the first quarter of fiscal year 2021 today. In the past quarter, we continued to execute our live video broadcasting or LVB e-commerce strategy and our LVB business regained strong growth momentum. GMV from the LVB business increased by 72.4% year-over-year to RMB2.3 billion during this quarter. The LVB business is an increasingly important business driver that account for 72.6% of the total GMP this quarter. Our dedicated effort on LVB business over the past four years has achieved remarkable results and we have accumulated significant amount of experience in building our ecosystem of KOLs and supply chain partners.

[Foreign Speech]

In the past few years, MOGU’s business has gone through a major transformation. We have established our KOL driven strategy with the goal of making MOGU live a truly differentiated experience. Unique experience creates differentiated value for our customers. As a result, the LVB business has regained growth momentum this quarter and became the main contributor to our total GMV. Compared with the traditional e-commerce model, the participation of KOLs leads to a lower platform take rate, which has also been reflected in our Company’s year-over-year change on revenue and cost. We believe that as the LVB business continues to grow and LVB GMV increases as a percentage of total GMV, the Company will resume revenue growth.

[Foreign Speech]

Our LVB buyers continue to grow steadily. In the 12 months ended June 30, 2020, the number of active buyers increased by 37% year-over-year to 3.7 million, and this users maintained consistently high stickiness. For example, active buyers watch LVB for an average of 71 minutes per day and on average on 21 days a month and their high participation in the platform also contributes to a 30-day repurchase rate of 91%, which reflects an unusual connection between users and KOLs that goes beyond the simple buyer-seller relationship. Users are also keen to express their love to KOLs and recommend KOLs to their friends around them. We are committed to further develop the sharing mechanism for users for our user acquisition. By designing incentive schemes and gameplay tools, we can help more KOLs get their fans to attract new fans through social network and the platform — our platform can acquire customers at a lower cost.

[Foreign Speech]

In terms of the host incubation, we have developed a comprehensive MOGU live host incubation and empowerment mechanism. There are many new hosts joining our mobile platform on a daily basis, and we can selectively work with the KOLs that have greater potential. In addition, we also discover new KOLs by continuously launching events than the competitions such as this year’s Super MOGU project [Indecipherable]. For KOLs at various stages in our incubation system, we match them with appropriate supply chain partners, empower them with innovative marketing tools and support them to grow with our strong operational know-how. The incubation system has proved to be very effective. The number of established KOLs on the platform has increased by 55% year-over-year.

[Foreign Speech]

Digital adoption is the key driver behind the supply chain evolution in the first half of 2020. More and more traditional manufacturers have joined the live e-commerce space and they have thrived due to the strong sector growth momentum. We onboarded many supply chain partners, bypassing middlemen and providing transparent pricing to eventually empower our KOLs to generate strong sales. In addition, we have also worked with nearly 1,000 brand merchants to further enrich KOLs’ product offerings.

[Foreign Speech]

We continue to empower our KOLs with supply chain and improve the efficiency of matchmaking between our KOLs and product. Our [Indecipherable] system is built to empower KOLs, supply chain partners, brand curators, distributors and MCM companies to participate in a more collaborative fashion. MOGU therefore has greater control over the suppliers.

[Foreign Speech]

In the future, the e-commerce LVB market will maintain strong growth momentum. More C2M factories, SMEs, Internet native brands will conduct their sales online through LVB. More and more customers will embrace this immersive shopping experience. We are very excited about the future of live video broadcasting e-commerce in China and our long-term growth prospect.

Thank you.

Raymond Huang — Chief Strategy Officer

Thank you, Shark.

This is Raymond, Chief Strategy Officer of MOGU. I would like to go through — thank you for joining our conference call today. Now I’ll walk you through our first quarter fiscal year 2021 financials. We believe year-over-year comparison is the best way to review our performance. Unless otherwise stated, all percentage changes I’m going to give you will be on that basis.

Let’s review the financials first. Our GMV for the first quarter of fiscal year 2021 was RMB3.1 billion, which increased by 25 — which decreased by 25.2% year-over-year. GMV for the first — first 12 months ended June 2020 was RMB16 billion, which decreased by 8.6% year-over-year. Our focus has been growing the GMV from live video broadcasting, which has increased by 72.4% during the same period to RMB2.3 billion. Our live video broadcasting business continues to increase as a percentage of the total GMV and has accounted for 72.6% for the first quarter. Active buyers for the LVB business in the 12 months ended June 30, 2020 grew by 37% to 3.7 million.

So let’s now turn to revenues. During this quarter, total revenue came in at RMB132.5 million, a decrease of 46.8% that was primarily due to 34.1% decrease in the commission revenue and 73.1% decrease in the marketing services revenue. The commission revenue decreased to RMB85.3 million, primarily due to the remaining impact of the COVID-19 pandemic on e-commerce logistics and demand for apparel as well as the restructuring of our business towards the LVB business. Commission revenue from the LVB business grew significantly and it was in line with the continued strong growth in the LVB associated GMV. Marketing services revenue, which is mainly generated from our marketplace business unit, decreased by 73.1% to RMB24 million which was primarily due to the remaining impact of COVID-19 pandemic and also the restructuring of our business mix towards the LVB business.

Now I will walk you through our major cost and expenses. Cost of revenue decreased by 19.5% to RMB48.8 million from RMB60.6 million in the same period of fiscal year 2020, and that was primarily due to a decrease in the cost associated with the decreased online direct sales. Sales and marketing expense decreased by 57.3% to RMB61.9 million from RMB145 million in the same period of fiscal year 2020, and that was primarily due to optimized spending on user acquisition and branding expenses. R&D expenses decreased by 48.4% to RMB29 million from RMB56.2 million in the same period of fiscal year 2020, primarily as a result of headcount optimization. G&A expense decreased by 31.2% to RMB23.5 million from RMB34.2 million in the same period of fiscal year 2020, primarily due to a decrease of share-based compensation expenses. Amortization of intangible assets decreased — increased by 9.3% RMB70.5 million from RMB64.5 million in the same period of fiscal year 2020, and that was due to the amortization of the broadcasting license acquired in September 2019. Loss of operations was RMB4.9 million — RMB94.9 million compared with RMB105.3 million in the same period of fiscal year 2020.

Net loss attributable to MOGU’s ordinary shareholders was RMB88.9 million. Adjusted net loss was RMB14.4 million. Adjusted EBITDA was negative RMB17.4 million. As of June 30, 2020, the Company had cash and cash equivalent, restricted cash and short-term investments of RMB1.05 billion.

In summary, the strong mobile live user engagement is the best endorsement of our KOL driven strategy. With the continuing rollout of our LVB business, we are seeing more KOLs joining our platform and more fashion supply chain partners onboarding our platform. Our transition into a KOL-driven and LVB first platform is gradually paying off, with strong growth momentum. As you have seen in this quarter, we have adopted a very disciplined approach in terms of sales and marketing and new user acquisition. We will continue to be — we will continue to be disciplined and deliver quality growth going forward.

So with that, we would like to open the call for Q&A. Operator?

Questions and Answers:

Operator

Your first question comes from Charlie Chen from China Renaissance. Your line is open.

Charlie Chen — China Renaissance — Analyst

Hi, Shark, Raymond, well, it’s Charlie.

[Foreign Speech]

Raymond Huang — Chief Strategy Officer

Maybe I will translate the question first, okay? So the question is that, it seems that [Indecipherable] has been growing quite rapidly in this quarter. So Charlie is wondering if we have any proven formula there or any proven tactics that we can incubate these KOLs.

Qi Chen — Co-Founder, Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

So, to answer your question, no, we don’t have a very specific proven formula in terms of incubating KOLs. I think we can draw reference — analogy to like maybe just entertainment. It’s very difficult to produce or to incubate a movie start with a proven formula. We don’t have the formula, and on one has that. But MOGU is a platform. But the advantage of being a platform is that we have massive amount of KOLs joining our platform on a daily basis. So from — on this platform, we can make sure that all the KOLs, they have the upward mobility, so they can always move up, and we provide them with a lot of training and supply chain empowerment.

So when they first join the platform, I think the most difficult part for them is that they need to acquire certain type of sales skill so that they know how to sell products. And secondly, they need to be matched with relevant and appropriate products so they can generate sales. And then third, I think when they grow to be more top tier KOLs on our platform, they need to compete with KOLs from all different platforms over Internet, so by then the platform is to provide them more unique products, more valuable products like what we have tried before the discounted brand products that is — some resources that they themselves wouldn’t be able to mobilize. So these are the key attributes we can empower the KOLs.

[Foreign Speech]

Yes. So the second question is about established host and how do we see the — the scale and magnitude going forward. We have delivered 55% year-over-year growth for the established host. So because we have a very specific tiering system for all the KOLs on the platform, so from K1 to K10, we have divided our KOLs by 10 different tiers. So we have deployed a lot of different strategies. So like each tier of the KOLs can benefit from very specific incubation program targeted for them. And we believe that going forward we will be able to deliver the same level of growth in terms of the — in terms of the number of the established hosts.

Charlie Chen — China Renaissance — Analyst

Okay. [Foreign Speech]

Raymond Huang — Chief Strategy Officer

Okay. Maybe, operator, we can move to next…

Operator

[Operator Instructions] Your next question comes from Sabrina Hu [Phonetic] from Giffords [Phonetic]. Your line is open.

Sabrina Hu — Giffords — Analyst

Good evening, management. Thanks, management for taking my question. MSP [Phonetic] on behalf of Thomas Chong. My question is that considering that Tao Bao has excellent supply chain management and a great user base, Douyin and Kuaishou has more KOLs. Could management comment on what’s the competitiveness of MOGU’s live video broadcasting business and is there any overlap on their customers? I’ll translate myself.

[Foreign Speech]

Qi Chen — Co-Founder, Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Sabrina Hu — Giffords — Analyst

[Foreign Speech]

Raymond Huang — Chief Strategy Officer

Yeah. Maybe let me just quickly translate the answer for the rest of the — the audience. So yes, we do — we do very closely monitor — we do very closely monitor all the other platforms that provide the same service. But I think our core value is really about are KOLs providing fashion decisions — fashion shopping decisions — help customers to make these fashion shopping decisions, and we can sell the clothes and do all this decision-making process. As you mentioned, I think Tao Bao currently has a very big supply chain foundation — because we are a smaller platform. So apparently, we can actually do more in-depth matchmaking between the KOLs and the supply chain partners. So that’s why our KOLs are actually more grateful on our platform and they are actually more loyal to our platform as well.

Speaking of Douyin and Kuaishou, I think these two platforms, there is no problem with them trying to monetize the audience through live video broadcasting in e-commerce, but I think fundamentally they are more like entertainment platform instead of shopping platform, and our customers come to MOGU with the mindset that this is a shopping place. So this mindset is a very, very important asset of ours, and I believe this mindset is also our key entry barrier when it comes to competition with other entertainment platforms.

Okay. Operator, we can take the next question.

Operator

[Operator Instructions] Your next question comes from Locky Lau from AJ Asset Management. Your line is open.

Locky Lau — AJ Asset Management — Analyst

[Foreign Speech]

Raymond Huang — Chief Strategy Officer

Okay. So maybe I’ll just quickly translate the two questions here. So number one is about the growth prospect of LVB. Apparently has delivered strong growth over the last quarter and it was our plan going forward. The other question is more about the customer acquisition strategy we have and what’s the, I guess the key — what was the outlook of the customer acquisition and also what percentage we should look at for the customers from WeChat. Locky, is that right?

Locky Lau — AJ Asset Management — Analyst

Correct, thanks.

Raymond Huang — Chief Strategy Officer

Okay. Sure. So maybe I’ll talk about the LVB first. So I think it’s very important to know that our previous quarter, LVB only grew at I think roughly 50%, and that was because of the COVID-19 situation. And apparently in the Q2 our growth rate actually pick up a lot, not just because I think COVID is partially behind us. We are seeing very strong recovery from Chinese — from consumption in general but also because we have more dedicated efforts in terms of supply chain empowerment. We help our KOL to resume to get back to work normal — in the normal situation as soon as possible. So I think in Q2, we have — we have done a lot of work in terms of helping the KOLs, and this will be our driver for the LVB business going forward. Supply chain empowerment is a very, very — highly correlated with the supply chain empowerment we provide.

Going forward, we wouldn’t be able to give very specific guidance, but we believe that –there are two things we can provide is that — number one is the overall market for LVB is very, very big. As we can see that, more and more customers are embracing this new immersive form of sales and people are generally very, very interested in trying out live video broadcasting in e-commerce. Number two, there are actually more supply chain partners working to [Indecipherable] thanks to the digital adoption — thanks to the digital adoption in China. So I think these two points added together were very positive on the — on the outlook for the LVB market.

And number two is the — it’s about us. I think you’re referring to the June 18 performance, right? I think — of course I think Q2 — Q2 is actually not a particularly — like good season for apparel sector. But I think we’re doing fine in the — in the second quarter. Our customer acquisition strategy [Speech Overlap] Locky, do you mind putting yourself on mute? I think that we’re hearing a lot of background noise. Okay. So the second question is about the consumer acquisition strategy. I think Tencent actually is [Speech Overlap] so going forward, customer acquisition strategy [Speech Overlap] and for the [Speech Overlap] program on the [Speech Overlap] I will continue to build more gameplay tools and marketing tools there to acquire customers.

Operator, we can move to our next question, please.

Operator

[Operator Instructions] Your next question comes from Craig [Phonetic] Chen from China Renaissance. Your line is open.

Veronica Chen — China Renaissance — Analyst

[Foreign Speech]

Qi Chen — Co-Founder, Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Veronica Chen — China Renaissance — Analyst

Hi. This is Veronica from China Renaissance. My question is regarding to the outlook for the second quarter this year. Well, since the third quarter this year is usually the low — low season within the year, so what activity are you naturally [Phonetic] anticipate in the third quarter and how is the plan for doubling [Indecipherable] in the fourth quarter this year?

[Foreign Speech]

Qi Chen — Co-Founder, Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Okay. As you know, Q3 is actually usually a low season for the apparel sector because you usually don’t have very strong appetite when it comes to fashion shopping and ASP is probably lower than the other quarters. And this quarter, specifically, we are more focused on expanding our categories. And so outside of apparel, and we will actually expand into — we will actually focus more on other categories that we — that is non-fashion related. For example, we actually probably sell like snacks, branded products or sometimes we even sell off-season — off-season products like down jacket from the winter. We actually sell them in Q2 and Q3. So these are the few tactics we use in the Q3 to mitigate the seasonality. And the Q3 is also a quarter that we emphasize on the — on the cost control. So we want to re-pace our team to be more prepared to embrace the Q4 this year.

Veronica Chen — China Renaissance — Analyst

[Foreign Speech]

Qi Chen — Co-Founder, Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Yes. So again, going to the — going into Q4, apparently in the Q4 the ASP is going to be higher. The total GMV is going to be much higher too. So we have — so going to September, we’ve actually a range of — a lot of — maybe just the trade fairs between the KOLs and supply chain partners when you use the magnitude of our Q4 GMV to mobilize more KOLs and to work with more supply chain partners so that they can generate greater sales. The partnership they form on the platform will remain — will stay there, and that’s going to — that’s going to help the MOGU platform to step up and to improve the magnitude of our total business.

Veronica Chen — China Renaissance — Analyst

[Foreign Speech]

Well, in this quarter we can see we did a good job in cost control and our non-GAAP net loss has narrowed. So how should we look at the margin in the following quarters, and should we anticipate the breakeven points within this year? Thank you.

Raymond Huang — Chief Strategy Officer

Yeah. So I think going to the financials, right, so apparently, you can see that we have adopted very disciplined approach in the Q2 this year, and our cost and expenses have significantly shrunk. This is because we want to be more focused, we want to be more focused and more discreet and prudent when it comes to customer acquisition strategy. So I think going forward, we wouldn’t be able to give a very precise date of breakeven. Of course, breakeven is always our goal, but we wouldn’t be able to give a very specific date or guidance on which quarter or which year we’re going to break even. But as you can see that we’re working towards that. I think you can see that we have achieved very significant efficiency in terms of the internal operations and all the relevant expenses have come down. So I think that should be — we should be on the right track.

Veronica Chen — China Renaissance — Analyst

Okay. Thanks, Shark and Raymond.

Qi Chen — Co-Founder, Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech]

Raymond Huang — Chief Strategy Officer

Thank you.

Operator

[Operator Instructions] I have no further questions at this time. I turn the call back over to the presenters for closing remarks.

Rene Vanguestaine — Chairman and Chief Executive Officer

Thank you, Michelle. This concludes our call tonight. Thank you, all, for joining us. Should you have any question or need additional information, please do not hesitate to reach out. Good night.

Operator

[Operator Closing Remarks]