Quhuo Limited (QH) Q2 2020 Earnings Call Transcript

Quhuo Limited  (NASDAQ: QH) Q2 2020 earnings call dated Aug. 27, 2020

Corporate Participants:

Annia Sun — Director of Investor Relations

Leslie Yu — Chairman, Director and Chief Executive Officer

Wenting Ji — Chief Financial Officer

Analysts:

Thomas Chong — Jefferies — Analyst

Paul Mitchell — Nomura — Analyst

Darren Aftahi — ROTH — Analyst

Lin Yong — Haitong International — Analyst

Gal Biran — TF — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, welcome to Quhuo’s Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a Q&A session. Today’s conference call is being recorded. If you have any objections you may disconnect at this time.

I would now like to turn the conference over to your host for today’s conference call, Annia Sun, Investors Relations Director of Quhuo. Please go ahead.

Annia Sun — Director of Investor Relations

Thank you, operator. Hello, everyone. Welcome to Quhuo’s second quarter 2020 earnings conference call. The Company’s results were released earlier today and are available on our IR website.

On the call today are Leslie Yu, Chairman and CEO; Co-Founder, Zhen Ba; and CFO, Wenting Ji. Leslie will review business operation and Company highlights followed by Wenting Ji, who will discuss financials and guidance. They will both be available to answer your questions during the Q&A session that follows.

Before we begin, I’d like to remind you that is all [Phonetic] made now contain forward-looking statements made under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations and current market and operating conditions and relate to events that involve known or unknown risks, 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 statements. For the information regarding this and other risks, uncertainties and factors is included in the Company’s filing with U.S. Securities and Exchange Commission. The Company doesn’t undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law.

With that, I will now turn the call over to our Chairman and CEO, Leslie Yu. Please go head.

Leslie Yu — Chairman, Director and Chief Executive Officer

Thank you, Annia, and thank you all for joining our first earnings call as a public company. Our IPO in July marked a significant milestone for our Company. Since 2013, Quhuo has become the largest workforce operational solution platform in China, and it was ranked Number 1 in the on-demand food delivery solution market.

We are very excited to report strong operational and financial growth for the second quarter.

While the outbreak of COVID-19 has been challenging for the economy in China, we have seen that on-demand platforms are still being open and are in constant need of our workforce. In the last quarter, our total revenues increased by 33% year-over-year to about RMB547 million. Our gross profit margin continued to improve to 11%. We have benefited from the rapid recovery of lifestyle service platforms, as COVID-19 related restrictions were lifted during the second quarter, and we took advantage of the rising adoption of online shopping by consumers and accelerated our online penetration of the grocery and the fresh food shopping category.

We quickly extended our services scope to our existing clients, Meituan and Eleme. In order to satisfy the occurring demand for fresh food delivery services, we fulfilled 345,000 delivery orders for groceries and fresh food, which is about 95% quarter-to-quarter increase from the first quarter. As of the end of this quarter, we expanded our services to 952 service areas, covering 75 cities, across 27 provinces in China, and the number of average monthly delivery orders increased to 24 million, which is about 46% year-over-year increase and 44% increase quarter-to-quarter.

Our extensive national-wide service network and our facilities enabled us to explore more opportunities for growing our customer base. We have established relationships with several B&Bs, large hotel chains and leading property management companies, and going forward, we will leverage this relationship to further extend our service scope and expand our customer base.

While our businesses that are offering ride-hailing and housekeeping recover, we will continue to expand into new cities and develop new relationships with customers. We elevated our service offering to another level by providing ride-hailing and housekeeping solutions with no limits on service area. During the second quarter, we expanded our ride-hailing solution service and housekeeping solution service to new cities. From a micro-standpoint, we established relationships with ride-hailing companies and new housekeeping customers. In contrast with on-demand delivery and share back maintenance, our drivers and housekeepers spend more time interacting with customers and end-customers. This allows our customers to have a clear understanding of the high-quality service and the unique customization we provide.

As an industry-leading platform, we provide premium services that significantly outperformed cloud soft [Phonetic] facilities, in terms of service quality, customization and operational efficiencies. Consumers are increasing and recognizing the cost-effective benefits of our premium services and are waiting to pay the service fee for the value it provides.

This concludes my prepared remarks, I will now turn the call over to our CFO, Wenting Ji, [Phonetic] who will discuss our key financial results for the quarter.

Wenting Ji — Chief Financial Officer

Okay. Thanks, Leslie. Hello everyone. Welcome to Quhuo’s second quarter 2020 call. Please be reminded that all amounts reported here will be in renminbi, unless that is stated otherwise.

Our revenue were RMB547.6 million, an increase of 33.5% year-over-year. The increase mainly came for our on-demand food delivery solutions, whose revenues were RMB541.3 million, increasing by 34.8% year-over-year, mainly due to our continuing expansion into new geographic markets and the rapid growth of new service offerings, for example, our grocery and the fresh food delivery, which contributed revenues of RMB2.6 million during the quarter. Gross margin for on-demand food delivery service improved significantly from 3.3% in the first quarter of 2020 to 11.3% for this quarter, relatively stable compared to — compared with 11.8% in the second quarter of 2019.

Revenues from shared-bike maintenance solutions decreased by 32.8% to RMB4.6 million, compared with the second quarter of last year, primarily due to the decrease in geographic coverage as we strategically scaled back operations in few cities where it underperformed and the adverse impact of COVID-19 pandemic on the overall shared-bike business as a result of government-mandated quarantine measures. However, we have seen a meaningful recovery as the revenue increased by 111.6% compared with the first quarter of this year. We also saw a material growth in the gross margin of shared-bike maintenance solutions, which improved to 21.4% in the second quarter from 11.9% in the first quarter of this year and 12.9% in the second quarter of last year.

Revenues from ride-hailing solutions were RMB1.3 million, representing a decrease of RMB6.7 million from RMB1.5 million — sorry, representing a decrease of 16.7% from RMB1.5 million in the second quarter of 2019, primarily due to the preferential rental policy we offered to our ride-hailing drivers on the platform during the COVID-19 outbreak, following the industry-wide relief measures.

Revenues from housekeeping solutions and other services were RMB379,000, representing an increase of 560.9% from RMB57,000 in the second quarter of 2019, mainly due to the increases in the number of our collaborations with industry customers and service offerings. We expect the growth trend will continue in the third quarter.

The overall gross margin was 11%, relatively stable compared with 11.8% in the second quarter of 2019 and representing significant increase from 2.8% in the first quarter of 2020, which underscores the strength and flexibility of our platform, as well as our ability to recover quickly. General and administrative expenses were RMB29.5 million, an increase of 32.9% compared with the second quarter of 2019. After excluding the effect of share-based compensation, the professional service fees related to the IPO and losses incurred relating to a lawsuit, the general and administrative expenses would have increased only by 25.6% from RMB18.1 million in the second quarter of last year, and as a percentage of revenue, it would have declined to 4.1% from 4.4% in the second quarter of 2019. That means we are seeing unit cost savings along with business growth and we expect that trend will continue going forward.

The adjusted EBITDA was RMB40.3 million, relatively stable as compared with RMB42.1 million in the second quarter of 2019. Our adjusted net income was RMB21 million, representing a turnaround from the adjusted net loss position of RMB20.3 million in the first quarter of 2020. And so, we will endeavor to improve our profitability further.

I think this concludes our prepared remarks. Thank you for your attention. We are now happy to take your questions. Operator, please go ahead.

Questions and Answers:

Operator

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]

We have our first question from the line of Thomas Chong from Jefferies. Please go ahead.

Thomas Chong — Jefferies — Analyst

Yeah. Thanks management for taking my questions. My question is about the long-term outlook regarding the food delivery orders — and on food delivery orders as well as the supply of delivery winders over the next two years? And a follow-up on that is about the competitive landscape as well as the trend on autonomous delivery and the impact to our business over the next two years. Thank you.

Wenting Ji — Chief Financial Officer

Sorry, operator. We couldn’t hear comments what she — what he said. Can you please let him to repeat again in Chinese?

Operator

Mr. Thomas Chong, could you please ask your question in Chinese. Your line is open. Thank you.

Thomas Chong — Jefferies — Analyst

[Foreign Speech]

Leslie Yu — Chairman, Director and Chief Executive Officer

Yeah. Thanks for the question, and this is Leslie. I’m the CEO of Quhuo. And food delivery, we are continuing the growth trend, and while ride-hailing solutions service, we will quickly recover from the COVID-19 impact, and we expect housekeeping solution will have strong growth and — in the latter two quarters. By the end of the year, we can not only say the growth of the food delivery, but can have the opportunity to say to increase the proportion of ride-hailing and housekeeping in our financial report.

Wenting Ji — Chief Financial Officer

Hi, operator. Can you please take the next question?

Operator

Certainly. We have our next question from the line of Paul Mitchell from Nomura. Please go ahead.

Paul Mitchell — Nomura — Analyst

Hi.

[Foreign Speech]

I will translate myself in English. Good morning, management. How could we reconcile the food delivery per — revenue per orders trend, which declined to CNY7.4 [Phonetic] this quarter versus this RMB last year, whereas food delivery platform such as [Indecipherable] year-over-year increase into all the delivery cost. Thank you.

Wenting Ji — Chief Financial Officer

Hi. I’ll answer this question. This is Wenting, CFO of Quhuo. Yeah, you are right. The average price revenue per order for this quarter is RMB7.4 and the corresponding quarter of last year is around RMB8. And yeah, as I understand that you mean — what you think — which I think is that, our price is declining where May trends delivery cost is increasing, right? I think that, that’s not apple-to-apple comparison between our revenue and the May trends delivery cost, because we are doing — we’re just in the primary — premium delivery service part, and we only answer the geographic coverage. We — and the — we only cover our 75 cities as — in terms of the geographic coverage, and that only accounts for a very small percent — part compared to Meituan’s the whole picture. So I think the mix is different and the price is quite different in different cities and different regions. So, yeah, that’s why I think that there is the — that difference between our cost and Meituan’s dealer cost. I hope that answered your question.

Paul Mitchell — Nomura — Analyst

Thank you.

Operator

Thank you. We have our next question from the line of Darren Aftahi from ROTH. Please go ahead.

Darren Aftahi — ROTH — Analyst

Hi. Good evening. Congrats on being public, and thanks for taking my questions. Could you just talk about maybe a little bit more granular, the monthly trends you saw across the second quarter in food delivery, and then how those trends maybe have continued into the months of July and August thus far?

Wenting Ji — Chief Financial Officer

Yeah. For the past two quarters, the first quarter and second quarter, we’ve already seen the — have seen those trends that the order — both the order and the revenue of on-demand food delivery is increasing month-by-month. And we can — yeah, and for the next two quarters, I think, the trends will continue, and definitely the revenue and the order for third quarter will higher than second quarter. And yeah, that’s the trend.

And normally for…

Darren Aftahi — ROTH — Analyst

Great. Thank you.

Wenting Ji — Chief Financial Officer

Yeah. Normally in a year, third quarter and the fourth quarter will be relatively similar — will have relatively similar revenue compared to — yeah, and that will definitely be higher than the first half of the year. Thank you.

Darren Aftahi — ROTH — Analyst

Great. And then maybe one more. With your new IPO proceeds, Leslie, strategically like, where do you kind of plan to maybe invest this money, Top 2 or 3 strategic priorities?

Leslie Yu — Chairman, Director and Chief Executive Officer

Yeah. Thanks for the question. This is Leslie. And I’m Chinese, and China has an old saying and we call that [Foreign Speech] translated into English, we call it, “Food, clothing, shelter and transportation,” which represent the four vitally needed components in people’s life. And currently, we are already accessing the food section by food delivery, transportation by ride-hailing and the shelter by housekeeping. Food delivery is the highest frequency service type, which actually help ride-hailing and the sales of housekeeping to easily to expand. So the whole service and — which needed by the people in the residential area will be focused by Quhuo. And currently, we will more focus on ride-hailing and housekeeping. And we already established a relationship with the large-chain [Phonetic] companies, blue-chip companies and the B&Bs and hotel chains, and we expect that the money we raised from the IPO will help us to expand faster and more profitable in these two areas. Thank you.

Darren Aftahi — ROTH — Analyst

Thank you.

Operator

Thank you. We have our next question from the line of LIN Yong from Haitong International. Please go ahead.

Lin Yong — Haitong International — Analyst

Hi. Thanks management for taking my question and congratulations on such a first set of results since your IPO. So, my first question is more about regulatory environment. I was wondering, if there is any risk in terms of regulatory or any benefit from the regulatory environment on our business going forward. I just wanted to understand if we — the management can share some views on this. Thank you.

Leslie Yu — Chairman, Director and Chief Executive Officer

Sorry, I will try to make it clear. And the regulation you mentioned is about which regulation?

Lin Yong — Haitong International — Analyst

No. I’m just wondering if there is any regulations that is beneficial for us. For example, if there is anything to do with the hiring or anything to do with the regulatory environment that is beneficial for our business operations.

Leslie Yu — Chairman, Director and Chief Executive Officer

Yeah. I see. Yeah, sorry for misunderstanding. And actually, Quhuo is the largest workforce operational platform in China. So recently and especially after the COVID-19 and the China government issued quite a beneficiary regulations for workforce. And we consider workforce operational platform actually is there [Phonetic] a huge market, especially for the industry we are in which is life service industry. But there is obviously that huge results with the cost of buy down even demand of time content for the service matched. For example, peak time for ride-hailing is in the morning, and for food delivery is in the noon. So how to reduce this with and make each individual workforce to be better, that is one of the major objective of Quhuo’s workforce platform.

So encouraged by these beneficiary regulation and also based on our Quhuo platform management system, we are able to adapt the workforce to provide a service for multi-service scenarios and the delivery standard and the cost trend to service product to end consumers. So if we, specifically, about the beneficiary, which can be — and consider the likes tax waiver and which will help us and also help our workforce to have better working environment. Yeah. Thank you.

Lin Yong — Haitong International — Analyst

Thanks, Leslie. Just a quick follow-up. I understand the beneficial regulations. Do you think this is coming from more central government or this is coming from local government? Thank you.

Leslie Yu — Chairman, Director and Chief Executive Officer

I think it’s guided by the central government, and also for each local government they answer issues via local support and policies, and which may be varied from different cities.

Lin Yong — Haitong International — Analyst

Thank you. I’ll hop back into queue. Thank you.

Leslie Yu — Chairman, Director and Chief Executive Officer

Thanks.

Operator

Thank you. We have our next question from the line of Gal Biran from TF [Phonetic]. Please go ahead.

Gal Biran — TF — Analyst

Hello.

[Foreign Speech]

Leslie Yu — Chairman, Director and Chief Executive Officer

[Foreign Speech]

Yeah. I would like to answer the first two questions and the next question will be answered by my Co-founder and partner Barry [Phonetic]. And first about this workforce and then maybe we call this a blue collar. If we want to solve the problem, we call this employment. And first, we needed to define what are the demand request. So the demand from our customers from the end-consumers, actually they want is constant, standard and service quality. And which means, if we let this each individual act on their mind and act differently, which will not meet the requirement of the demand of the service market.

So Quhuo overseas that these cities are huge market. But if we cannot solve the problem to make each individual to be able to output standard service product, the answer will be the mismatch between the demand and the supply. So based on the Quhuo cloud management system and our strategic objective is to use — is to cost effectively transform each individual to be able to output standard-of-service quality products to the service market, which including our current customers and also which including the end-consumers. I think that’s the essential part to solve the employment problem, and answer is benefit as a workforce and can make their life better and make them grow.

And the next question, and I’ll pass to our co-founder, Barry.

Unidentified Speaker —

Hello, everyone. This is Barry. I’ll answer the question Number 2 about the stability of our blue-collar labors. First of all, in our Company, we create a lot of opportunities for their career development. First from vertically in the on-demand food delivery business, because we are in a faster expansion and in volume and also geographic coverage. So there is a lot of the management position being created. So they always have the opportunity to develop into a station partner or even city partner.

And also, because as you know, a lot of labor in China has come from Tier 4 and Tier 5 cities. They work in Beijing and Shanghai, because our expansion in geographical coverage, there is always opportunity for them to go back to their home town and take this job. So vertically, in the industry, we create opportunity for them. And horizontally, we have different business carrier development opportunities, for example, we can — when they work as on-demand food delivery guy, they always have opportunity to work as ride-hailing driver, and they have the opportunity to introduce their relatives to work with us as a housekeeping ladies.

And so, our scale and our trick is to create career development opportunities for them, because when they stay in our platform, we can always find different opportunity for their personal development. Their carrier developments can be satisfied. That’s our trick of how to make our labor stable on our platform.

I think that answers the question.

Gal Biran — TF — Analyst

Okay. Thank you. And I just received a request from the background, and I needed to translate your two question. My first question is, as a leading company in blue-collar labor operation and management, how do you use the development of the blue-collar flexible employment market potential, and leverage to over safe comparable companies what are the Company’s strategical position and development goals given the [Indecipherable]?

And my second question is, we can say that blue-collar employees are having mobile and the difficult to manage. Can you share our advantages and experience in major of risk management, [Indecipherable] and the development of our talents? Yeah, thank you.

Annia Sun — Director of Investor Relations

Hi. Hello, operator. Can you please take the next question.

Operator

[Operator Instructions] We do not have any questions at the moment. I would like to hand the conference back to our speakers today, Miss. Annia Sun, please go ahead.

Annia Sun — Director of Investor Relations

Thank you, operator. Thank you again for joining on today’s call, and thank you for continued support of Quhuo. We look forward to speaking with you again soon. Thank you, everyone.

Operator

[Operator Closing Remarks]