Good evening, ladies and gentlemen? Welcome to Weimob Inc.'s 2020 interim results conference call. A copy of their interim results announcement can be found and downloaded from the company's investor relations website at http://group.weimob.com/en/pages/relation. At this time, all lines have been placed on listen-only mode, and the floor will be open for questions following today's presentation. Joining us today on the call are Mr. Sun Taoyong, Chairman of the Board and Chief Executive Officer, and Mr. Cao Yi, Chief Financial Officer and Joint Company Secretary. This call will be conducted in Chinese and English. Before we begin, I would also like to remind you that the management's comments during the call will include forward-looking statements that are based on our current expectations.
All statements other than statements of historical facts during the conference call are forward-looking statements, which are subject to a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of the company. This presentation also contains some unaudited non-GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. Please do take a minute to read the risk factors and non-GAAP measures discussion in Weimob's 2020 interim results earnings release. I'll now turn the call over to Mr. Cao.
Thank you. Good evening and good morning? Great to see you here online, and hope everyone's safe and sound during this special period. On behalf of the management, we'd like to express our sincere gratitude to the investors for your interest and support to Weimob when we went through this challenging period. We firmly believe our mission in creating shareholder value, and it's your support that makes us work hard day and night. We've seen a lot of changes and challenges since the beginning of 2020. The change brought by the general economy and the challenges from COVID-19 has accelerated the digitization of merchants' business. Merchants realize more and more the importance of building up online sales channels and integrate with the offline business. Major platforms like WeChat have also sped up the commercialization of their ecosystem to accommodate more merchants' business.
In light of the opportunities, Weimob has also offering a range of SaaS solutions that target at e-commerce, retail, catering, hotel and tourism, and other industries to enable merchants to digitize their sales channels and enhance their customer acquisition efficiency. In spite of the headwind brought by the COVID-19 to the sales side, we have achieved solid growth in both of our business segments. Let's look at a summary of key financial performance. Excluding the impact of compensation due to SaaS sabotage events, adjusted revenue has exceeded RMB 1 billion in the first half of 2020, representing nearly 60% increase. Adjusted EBITDA increased by 38% to RMB 114.8 million. In the first half of 2020, SaaS revenue increased 39% to RMB 305 million, and target marketing gross billing increased 156% to RMB 4.6 billion.
We have continued sustainable growth in the number of SaaS paying merchants and have over 88,000 merchants by the end of June. Smart retail and smart dining are our two strategic segments. We have doubled our size in smart retail, with a total of 2,260 merchants. Within that, 457 brand merchants with average contract value exceeding RMB 227,000. The total revenue for smart retail segment is about RMB 46 million, with 7x increase year-over-year. In smart dining segment, revenue from the first half of 2020 reached RMB 22 million, with 69% year-over-year growth. By the end of June, we have a total of 6,500 merchants, with average contract value around RMB 16,000 per customer. Altogether, 26,000 merchants use our target marketing services to place ads, representing 33.5% increase year-over-year.
Capital market has become a very important support for the company's strategy to grow, not only by self-development, but also by investment and acquisition. In February this year, we announced a deal to acquire over 60% equity interest in Yazuo, a well-known SaaS company in the catering industry. After acquisition, we are integrating with Yazuo in creating a one-stop solution for large catering merchants that connects the online restaurant, CRM, POS, and ERP solutions. In April, we invested in a smart delivery SaaS company named Shangyu to increase our footprint in smart food delivery business. Recent years have also seen short video becoming a popular trend in marketing business. In April, we also invested in a startup company, Clipworks, to tap on the growth in short video-making business. Since our listing, Weimob has been getting more and more attention from the capital market.
In May, our stock has been included in the MSCI Index. During the month, we also completed $150 million convertible bonds issuance. In July, we have been selected as part of the Hang Seng Technology Index. We also work closely with our strategic partner in the first half of 2020. We became a member of Tencent's first SaaS Technology Alliance. After investment in Yazuo and Shangyu, we leveraged their competence in large merchant markets and smart food delivery markets to better grow in the SaaS catering segments. We also established an investment fund with Meridian Capital, so far the fund has participated in the investment in three startup companies. Next, I will talk more about the financial performance of the company in the first half.
In spite of the disturbance from COVID-19 and the weak general economy, we recorded a strong revenue growth in the first half 2020 with 60% year-over-year growth. Revenue from both segments increased significantly and both contributed to the total revenue growth. In terms of revenue dollar amount, SaaS represented 29% and target marketing represented 71%. While the number of paying merchants from SaaS business represented 77% of total merchants, the target marketing advertisers represented the rest, 23%. The split of number of merchants between the two segments is relatively stable. Meanwhile, both segments added more KA, namely large merchants, to the portfolio. The trend of improving operating efficiency continued in the first half as a percentage of operating expenses as of revenue further decreased to 47%.
In first half, excluding one-off items like fair value change in convertible bonds, compensation for SaaS sabotage events, and others, the adjusted net profit is RMB 52 million, 77% increase versus last year. A strong balance sheet is also important to our sustainable growth in future. By the end of June 2020, we have RMB 4.8 billion total assets and RMB 2.1 billion cash and cash equivalents, which secure the resources for future market expansion and strategic investments. Our next page is about the revenue. For the interest of time, I will not get into details on this page. The key message here is that although 70% of the total revenue comes from value-added service target marketing, SaaS merchants remain as a foundation for our business and represent 77% of the total merchants in our ecosystem. Next, let's deep dive into the two business segments.
First, for the SaaS business, revenue grow by 39%, mainly driven by the growth in Commerce Cloud. The number of paying merchants grow by 26% to 88,000, and the ARPU increased 10% to RMB 3,400 on a half-year basis. As one of our key strategies to move upmarket to add more KA merchants, we are looking forward that the investor not only pay attention to the total number of merchants, but also the quality of the merchants. Our ARPU growth rate slowed down in the first half, mainly because the growth of ARPU in Weimob and small retail has been partially offset by a lower ARPU from small restaurant and other products. Partly due to the COVID-19 impact and our one-time free period granted to merchants for smart retail and smart restaurant during the pandemic, and also partly due to the effect of consolidating Yazuo's revenue for just three months.
Next, let's move to the target marketing segment. Despite the changing environment and the weak economy, Weimob Inc.'s target marketing business maintained a strong growth in the first half. Gross billing increased 157% to RMB 4.6 billion, and revenue grew by 70% to RMB 745 million in the first half. The strong growth are mainly driven by both the increase in the number of advertisers and the average spend per advertiser. Number of advertisers increased 34% from 19,000 advertisers to 26,000 advertisers, and average spend increased 92% from RMB 92,000 to RMB 177,000 , reflecting not only a continued advertising spend from merchants, but also a change in merchant profile with more KA merchants. Among the total RMB 4.6 billion gross billing, RMB 545 million gross billing were booked revenue using the gross method, and the revenue booked is RMB 495 million.
The remaining RMB 4.1 billion is booked revenue using net method, and the revenue booked is RMB 250 million. The proportion of target marketing revenue under gross method increased from 64% in the first half 2019 to 66% in first half 2020, which impact the gross margin a little bit. We'll take a look at the gross profit and gross margin. The overall gross margin decreased from 55% in the first half 2019 to 49% in the first half 2020. A further deep dive into the gross profit split, we'll see gross margin of both segments decreased a little bit for different reasons. SaaS gross margin decreased from 81% to 76%, as the company has been continuously strengthening R&D investment in SaaS products in recent years, and therefore increased the cost of revenue in the current period.
Target marketing gross billing dropped five points to 38% in the first half 2020, mainly due to the slightly increased proportion of target marketing revenue on growth basis, which traditionally have relatively low gross margins. We continue to see a trend of improving operating efficiency. Operating expenses as a percentage of revenue further decreased from 56% in 2019 to 47% in first half 2020 after excluding the non-GAAP items. Operating expenses consist of mainly people cost, like sales, operating, management, and supporting staff, channel cost, and some promotion expenses. The increase in operating expenses mainly come from staff cost, including sales and marketing staff cost, which increased RMB 50 million, general and admin staff increased RMB 31 million. Related rental and property expenses, which increased by RMB 12 million, and promotion expenses, which increased by RMB 7 million, all in line with the business expansion.
As a result of the revenue growth and the improved operating efficiency, we continued to be profitable in the first half of 2020. The net loss from the financial statement for first half 2020 is RMB 546 million. However, the loss is mainly driven by fair value change of convertible bonds of RMB 496 million, compensation accrued due to the SaaS sabotage event of RMB 87 million, and other non-GAAP items. After excluding these items, we have an adjusted net profit of RMB 52 million in the first half 2020, which is 77% increase year-over-year. Because of the nature of convertible bonds, we do expect the more increase in the price of our convertible bonds in the future, the larger the fair value loss will be in the financial statement.
We will continue to adjust this item so that investors can see a better picture of our own business results. The compensation due to SaaS sabotage event will be a one-time event, and majority of the financial impact will be in 2020. Based on the latest facts, we estimate the net financial impact will be around RMB 87 million. This basically concludes my part of the introduction of the first half results. Next, let's invite our Chief Executive Officer, Mr. Sun, to talk more on the business and the strategy.
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Good evening. Welcome you all to this interim results performance meeting.
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First, let's go over about the overview of our business. In order for you to have a better understanding, I'd like to introduce about our business model first.
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Our main business mission is to help transform and upgrade the traditional companies and business, mainly including those e-commerce like Taobao and Tmall. Also the catering like the Meituan, and the tourism and hotel like Ctrip.
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Those all lead to several problems, like they cannot control the overall traffic and the data, they cannot directly connect our users. Also it has increasing CAC and also the high commission fee.
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Our solution is to have a multi-channel acquisition of the data and also to operate this private traffic from the platform such as WeChat, Douyin, Kuaishou, and Baidu.
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We can help our merchants to have a mastering of their data and the traffic, and can decrease their CAC, and also can have reduced commission.
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Right now, we have two businesses. One is SaaS products, and the other one is targeted marketing.
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There are three clouds in SaaS products. These are the Commerce Cloud, Marketing Cloud, and Sales Cloud.
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In the targeted marketing, we just target those advertisers from the Tencent platform like WeChat, Douyin, Kuaishou.
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Focus on SaaS products includes the e-commerce, retail, hotel, catering, local lifestyle and marketing.
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There are many like the landmark or benchmark merchants that are using our products in each category.
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In the first half of this year, our paying merchants number has increased by 26.4%, while the ARPU increased by 10.2%.
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Our attrition rate has increased a little due to the pandemic influence on the SMEs, but we think that the risk is still controllable.
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We will focus on the smart retailing, which is our main products or main focus during the 2019. This half of year of 2020, the retailing revenue has surpassed the whole of the 2019.
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Our target is mostly the chain merchants, therefore, their ACV this half a year have reached RMB 220,000.
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The number of our retailing merchants has increased from 217 merchants last year to 457 merchants this half year.
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Our merchants in terms of the ACV or attrition rate or the quality, they are all better than the SMEs previously.
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All our merchants and our customers are all landmark. There are many in the head part of our business.
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For example, in the home textile, we have lots of representative customers like the Mengjie, Fuanna, Boyang and the Mercury.
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We also have many typical and the head customers in the apparel segment. Like in the female apparel, we have JZ, Dazzle, Erdos, and ELLASSAY. In the male part, we have a GXG, [Cabbeen], and Mark Fairwhale, K-BOXING, and also have a Balabala and Annil in the children's department.
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For another example is about the beauty and makeup. We have [Non-English content], [ Cabbeen], [Non-English content] , and also the [Non-English content]
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We think that in terms of those luggage and also the apparel and the shoes, our target is 2,000 customers. Right now we have 500 customers.
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Besides that, we also have a shopping mall and the supermarket, for example, Walmart.
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Also our newly signed contract is with Starbucks. It is more than tens of millions of volume.
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We think that our share of the smart retailing will be increasing strength by strength and almost half of that.
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Another core part is smart catering.
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Through the acquisition of Yazuo, we have integrated the cashier, the ordering, payment, marketing and the supply chain.
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Up to now, we have five parts in our smart dining or smart catering. They are the restaurant, the Yazuo membership, and the cashier, and the cost stewards, and also the delivery.
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We have provided the three steps integration solutions for our customers and integrating the eat-in, the delivery, and also the e-commerce scenarios.
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Our customers will always prefer our integration solutions for them rather than the separate and the independent data that cannot be interchangeable.
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In the first half of this year, our smart dining has increased by 69%, accounting for 7% of our SaaS total.
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Our structure is more moved to room for the bigger and the medium companies, and our ASP has reached RMB 10,000.
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The number of our dining customers has reached more than 6,500 customers.
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Due to the pandemic effect, it has a huge blow to the catering industry. They have quite a reservation for the budget. I think that it will be much brighter in the second half of the year.
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The next part is the targeted marketing. It is very prominent. From the financial report, we can see that the number of advertisers has increased by 33.5% in the first half of this year. The ARPA has increased by 92.1%. Also the gross revenue or gross billing increased by more than 1.5x
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Also repurchase rates increased by 67.2%.
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The reason that why we still can achieve such a great momentum in the first half year is because we have provided the effects-oriented marketing.
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Also we have this original license that can give us more room to perform. For example, in Beijing and Guangzhou, there are two very major markets.
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Also we have made use of the mini program. For example, our typical customer is Wonderland. They are using quite a few Weimob mini program and advertisements, and has increased their sales a lot.
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We predict that it will maintain the rapid momentum in the second half of this year in terms of the sales volume on the advertisers, and it will last through next year.
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Due to the increase of those gross billing, we are quite positive about the revenue rate, since we don't increase our operating fee.
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Next part is the outlook.
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I will not go in detail about the core strategy, since you have all in our report.
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Maybe we will focus on the core strategy during the next three to five years.
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The first is we are going to move upmarket. We will gradually move to the bigger and the medium companies.
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Just like we have done in the restructuring of our retailing and also the catering.
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Also we will move in this direction in terms of the product strategy and investment.
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We have seen that compared with the others, the upper-market customers will have much more SPA, and their retention rate is much bigger, as well as their purchase amount increase. We think that in the future, those upper-market customers would have much more share of the value.
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The next trend is globalization. Right now we have already had the suppliers and the service providers in the other markets like Australia, Canada, Japan, South Korea, and Hong Kong, China.
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In the future, we will do more localization. For example, the language, and according to their habits and the local location, and we would increase more the globalization efforts.
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Also, we can make use of M&A to expand.
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The third one is to make it an ecosystem. We would use investment and M&A to cooperate with our strategy partnership to build up this ecosystem.
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We have found that there are many diversified demands and also scenarios so that we could have more various service to meet their demands.
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Currently, we have done a lot of outlay and arrangement in the ecosystem building up, like in CRM, in the catering, and also delivery.
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Last but not least, let's look at the eco-roadmap.
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We have used Tencent and other platforms like WeChat, QQ mini program, Douyin, Kuaishou to have the connections with the merchants.
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Also we provide SaaS and cloud service.
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In SaaS, we will provide four clouds: commerce, marketing, sales, and service.
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Right now we have Smart Marketing in the marketing cloud, and we have [Non-English content] in the sales cloud.
服务云目前我们还在布局中。
The service cloud is now coming to form.
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In the platform, we will build up the service market, the distribution market, and the live streaming platform.
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Also we will provide the added value service like advertisement, finance, operating and customized.
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Those are the overview and those outlook of our business. Now we come to the Q&A session.
Thank you for the presentation. Now we'll start the Q&A session. if you would like to arrange a question press zero one. To cancel a questions press zero two. Feel free to ask any question. First question is from Chris Fan, and he was asking, good evening, Mr. Sun? Do you think the WeChat new function, [Non-English content] influence the market share of Weimob SaaS products?
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I think that the influence is not so much since those customers that using the service of [Non-English content] is very rudimentary. They are basically those long tail customers with low threshold, but they are not our targeted customer. We are more into the medium and larger customers. Those small customers, they don't have much capabilities to pay, so they are still the entry level. However, we have the connected API with WeChat, so it is open source. If they can upgrade those small and medium customers, we can always using our Weimob SaaS products. Therefore, it is a one key connection, I think this [Non-English content] production actually is a positive for us, we don't think that's much of influence. Also it has been confirmed by [Non-English content] we are on the same page.
Our next question is from Zhao Liping at CICC. Your line is open, please go ahead.
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I have two questions. The first question is related to our channel partners, because the company are saying they are going to moving to focus more on KA. Then how is our channel partners development right now? What's our plan for the coming years? My second question is related to the integration of our investment in Yazuo. How's the feedbacks from our customer? How much is the smart investment, how much is the spaces for us to grow?
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[audio distortion] Let me translate. About this channel building. Yes, previously we are more dependent on our customers, those small and medium customers rely on our channel. We know that in the first half of the year, due to the not so strong market and also different cities have a different control management. This channel building is not so well-rounded, and more is about the direct sales. Our direct sales order have increased more than 100%, but the channel hasn't increased a lot. We think that about those key accounts, we mostly focus on the direct sales, and also reflect on the retailing and the catering. We can build up those ecosystem, including those upper and the downstream customers like the CRM and also the ERP, those vendors, and also would include those traditional consultancies to make it more diversified and varied.
About this KA, as I have said, we will use the core of the direct sales, to have increased their number and to engage more into their operating. In overall, the channels will be made use of the expansion in the smaller cities and the lower cities. In these SMEs, we think our portion will be 6:4, 60% is the direct sales.
For our KA, I think the direct sales would accounting for 80%, 8:2 distribution. About the investment and the M&A, we have finished the acquisition of Yazuo, and now we have integrated more functions like the cashier, the payment, the steward, the membership, and the supply chain, so that our customers can have the one-stop solution on Yazuo platform, and they can decrease this connection cost and also can integrate their data, and it will become empowering. We have seen that it is a very encouraging phenomenon for our customers, especially those three steps integration: the eating, the delivery, and the retailing. In the July and August, we have launched several activities in Hangzhou, Shanghai, Zhengzhou and other cities, and it has been well welcomed by our customers there.
We know that during the pandemic situation, the budget is limited, so probably it's not so quick investment into this business. However, we are mainly doing the integration of our products, but we think that we are quite positive about the second half year of the performance and the data.
Our next question is from Yang Liu at Morgan Stanley, p lease go ahead.
[Non-English content] The first question is regarding to the smart retail brand customer churn rate in the first half of 2020. The second question is about the SaaS billing monthly growth dynamic. And the third question is the cash flow for targeted marketing, especially given the AR account receivable and prepared expense is growing not as fast as the gross billing. We would like to have an update in terms of the cash payment policy from the major platform partners. Thank you.
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I'd like to answer your questions one by one. The first one is about the retailing. In the first half of year, our retention or the renew rate has reached 100%, even some of them have increased their purchase. We think that we could maintain the attrition rates at the single digit. The second question about the SaaS monthly billing. In February, we know that there are very bad blow for the pandemic phenomenon. In February it is almost ignorable. From March to May, it has a explosive increase. However, in June and July it has a downturn and back to normal. We think that in Q4, in the fourth quarter, we think there will be a busy season and it will then increase a lot.
In the whole year, we think that the SaaS billing we could maintain averages about 40%-50% of increase. About the third question about the targeted marketing. Yes, we know that Tencent have do a bit changes in their policies. For example, Toutiao and Tencent, they have more policies or strategies for those intangible points. Also their return rates is a little bit conservative. We think that the billing is increasing and also the KA share is increasing. We think that our marketing value has reached more than RMB 20 million. Since that the KAs acquisition cost and also the cost is not as big as the other smaller customers. We think that our net profit is very positive.
We think that because the operating cost will not increase a lot, and also we can reduce the cost, therefore, we think that to maintain a 35%-40% of increase is not a problem. Actually, we think that we can do better than that during the whole year. Also, we think that the market has undervalued our value only about 20%-30%. We think that it hasn't reflect our real value. We think that our ratio is about 50%-60%.
Our next question is from Liao Yuan at CITICS. Please go ahead. Liao Yuan, your line is open, p lease go ahead with the questions.
[Non-English content] Thanks management for taking my question. My question is about our SaaS business. How do we view the impact of the U.S. WeChat ban on our business, since American companies such as Walmart and Starbucks also are paying merchants on WeChat? Thank you.
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Thank you for your question. I have four aspects to answer you. The first one is that the international market right now doesn't account for too much share in our overall distribution. The second is that, if we want to expand it to the international markets, we probably will not use WeChat. We would more prefer the FB and Instagram and WhatsApp and the other international apps or the platforms. The third one is that, yes, Walmart and Starbucks are our customers, but they are the localized companies, not in the American or the Western market. The fourth, we think that the ban on WeChat is maybe has more effects on the trade aspects, not the normal business ones. Overall, we don't think that there will be a much bigger effect on us.
Our next question is from Stephen at Credit Suisse, p lease go ahead.
[Non-English content] The first question is about the market sizing for smart retail and smart catering, and how much market share that we expect the company can reach in the long term. Second question is on the expectation of the timing for breakeven for the SaaS business. Any key indicators that we should monitor to predict when that timing will come? Thank you very much.
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Yes, about the marketing share of those RMB 3 billion. I'd like to do a clarification. We said that we have 5,000 of the customers of those RMB 3 billion, and we have the customers in the apparel and the luggage or the bags segment, we have 2,000 of them, and they share the market of about 50%. We have other customers, like in the supermarket, in the shopping mall, and also in the luxury goods, and those accounting for 30%, including those, and the total market share is about 30%.
We see that the number hasn't changed, it's about 30%-40%. Then the second about the smart catering. The smart catering actually is not as higher or mature as the retailing, and also the market share is not as big as the retailing. Right now we have about 5,000 of customers, and their ARPA is about RMB 300,000- RMB 400,000. Also they have much more willingness, we think that the market is about RMB 1.5 billion-RMB 2 billion.
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Right now we are still about to break even. We are still in the input stage. We think that in order to have a very proper and healthy increase and to increase this R&D and the marketing input. We think that it will depend on the smart retailing and the smart catering, and the expansion of key accounts, KA, increase to a critical point. We can predict what is the cash flow and also what is the break-even point. Right now, we think that I'd like to add the answer for Liu Yang just now about the cash flow. The targeted marketing, the cash flow of the marketing is decreasing. At the same time, we have to maintain a rapid development and also to maintain a proper loss.
We have to increase the input in the R&D and also the expansion and increase of KA. We don't think that there will be a big problem of cash flow. However, in view of this unpredictable situation, it is hard to say.
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Our last question for today is from Yang Mingming at BofA Securities, p lease go ahead.
[Non-English content] The first question is how do you consider the current two models of commercial SaaS? We can see that we focus more on helping merchants realize digitalization and companies like Shopify focus more on the connections to help merchants do business. Both of these two models performed well. Will we adjust our strategy to both have in future? Another question is about the smart retail and smart restaurants, both focus on offline clients acquisition and service. How do we realize the economies of scale? [Non-English content]
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About your first question about our business model, we all know the business model of Shopify. It is including those they monetize the payments, the logistics, and also the commission. However, we know that in the U.S., the e-commerce and the mobile payment is not as advanced as in China. Also their logistics is not as solid as in China. The gross billing is actually not so high and the commission is not so high. I would think we could increase. However, we are starting from increase those traffic, and maybe we can also take some commission from that. Also we will add value for them as well, for example, in the distribution and in the live streaming. We think that in the long term, we are still the tool company.
That we would use our private traffic to help our customers to digitalize and to provide these customized solutions for them. Being a platform is not our major direction. Of course, we can also consider the GMV and the other service. Also, as you have mentioned, the 618, and we have also demonstrate with our customers how to do the live streaming. The main reason is to help them how to share with them the private traffic, not to guide them into the GMV. I think that the platform market in China is already a Red Sea. It is already very saturated. There's not so large room for the platform in e-commerce. We can never say never. Maybe we can provide some added value for them.
The second one is, I think there's some misunderstanding, because for 2B, you can never make, or it is not possible to make 100% of online trade. It doesn't exist. Even for a KA, we think that it is much better to do the omni-channel to increase the efficiency. Also the KA, if it is a very big KA online, it still has the great model shops in the offline market. Therefore, we think that we can expand the KA and then we can think about this economy. Even we are expanding the online KA, it still accounts for the economy of scale. Also we think that the offline will not have a big influence. Because at the end of the day, those business would all come back to those all brick-and-mortar shops are all offline.
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Thank you. Due to time constraint, we now conclude today's call. On behalf of the Weimob management team, I would like to thank you for your participation in today's conference call. If you have further questions about Weimob, please feel free to contact us. Thank you and goodbye.