Earnings Call: H1 2020

Aug 17, 2020

Good evening, ladies and gentlemen. Welcome to WeMob Incorporation's twenty twenty Interim Results Call. A copy of their interim results announcement can be found and downloaded from the company's Investor Relations website at http:wimarb.comen/pages/relation. Joining us today on the call are Mr. Sun Tao Yong, Chairman of the Board and Chief Executive Officer and Mr. Tao 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. So please do take a minute to read the Risk Factors and non GAAP measures discussion in Remark's 2020 interim results earnings release. I'll now turn the call over to Mr. Tao. Thank you. Good evening and good morning. Great to see you here online and hope everyone is 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 Weimar 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 nineteen 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 speed up the commercialization of their ecosystem to accommodate more merchants business. In light of the opportunities, Waymo 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-nineteen to the sales side, we have achieved a 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 SARS sabotage events, adjusted revenue has exceeded 1,000,000,000 in the 2020, representing nearly 60% increase. Adjusted EBITDA increased by 38% to RMB114.8 million. In the 2020, SaaS revenue increased 39% to $3.00 5,000,000 and target marketing gross billing increased to 156% to 4,600,000,000.0. We have continued sustainable growth in a number of SaaS paying merchants and have over 88,000 merchants by the June. Smart retail and smart dining are our two strategic segments. We have doubled our size in smart retail with total 2,260 merchants. And within that four fifty seven brand merchants with average contract value exceeding RMB 2 and 27,000. The total revenue for smart retail segment is about million with seven times increase year over year. In Smart Dining segment, revenue from the 2020 reached million with 69% year over year growth. By the June, we have total EUR 6,500 merchants with average contract value around EUR 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, we announced a deal to acquire over 60% equity interest in Yazoo, a well known SaaS company in catering After acquisition, we are integrating with Yaatsuo in creating a one stop solution for large catering merchants that connect the online restaurant, CRM, POS and ERP solutions. In April, we invested in a smart delivery SaaS company named Shangyou to increase our footprint in smart food delivery business. Recent years have also seen short video becoming a popular trend in marketing business. And in April, we also invested in a startup company, Clipworks, to tap on the growth in short video making business. Since our listing, Waymo 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 150,000,000 US dollar convertible bonds issuance. In July, we have been selected as part of the Hansen Technology Index. We also worked closely with our strategic partner in the 2020. We became a member of Tencent's first SaaS Technology Alliance. After investment in Yazuo and Shangyou, we leverage 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. And so far, the fund has participated in the investment in three start up companies. So next, I will talk more about the financial performance of the company in the first half. So in spite of the disturbance from COVID-nineteen and the weak general economy, we recorded a strong revenue growth in the first half twenty twenty with 60% year over year growth. Revenue from both segments increased significantly and both contributed to the total year 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. And 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 JPY 52,000,000, 77% increase versus last year. A strong balance sheet is also important to our sustainable growth in future. By the June 2020, we have RMB 4,800,000,000.0 total assets and RMB 2,100,000,000.0 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 grew 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 3,400 on a half year basis. As one of our key strategies to move up market 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 Waymo and small retail has been partially offset by a lower ARPU from small restaurant and other products, partly due to the COVID-nineteen impact and our onetime free period granted to merchants for small retail and small restaurant during the pandemic and also partly due to the effect of consolidating Yahsoo's revenue for just three months. Next, let's move to the Targeted Marketing segment. Despite the changing environment and the weak economy, Weimar's Targeted Marketing business maintained a strong growth in the first half. Gross billing increased to JPY 157 percent to 4,600,000,000.0 and revenue grew by 70% to JPY $745,000,000 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 to 34% from 19,000 to 26,000 and average spend increased to 92% from 92,000 to RMB 177,000, reflecting not only a continued advertising spend from merchants, but also a changing merchant profile with more KA merchants. Among the total JPY 4,600,000,000.0 gross billing, $545,000,000 gross billing were booked revenue using the growth method and the revenue booked is JPY $495,000,000. The remaining JPY 4,100,000,000.0 is booked revenue using net method and the revenue booked is $250,000,000. The proportion of target marketing revenue under gross method increased from 64% in the first half twenty nineteen to 66% in first half twenty twenty, which impact the gross margin a little bit. Next, we will take a look at the gross profit and gross margin. The overall gross margin decreased from 55% in the first half twenty nineteen to 49% in the first half twenty twenty. 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 and D investment in SaaS products in recent years and therefore increased the cost of revenue in the current period. Target marketing gross billings dropped five points to 38% in the 2020, mainly due to the slightly increased proportion of target marketing revenue on gross basis, which traditionally have relatively low gross margin. 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 the 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 50,000,000. General and admin staff increased CNY 31,000,000. And related property rental and property expenses, which increased by 12,000,000 and promotion expenses, increased by JPY 7,000,000, all in line with the business expansion. So as a result of the revenue growth and the improved operating efficiency, we continue to be profitable in the 2020. The net loss from the financial statement for first half twenty twenty is $546,000,000. However, the loss is mainly driven by a fair value change of convertible bonds of RMB $496,000,000, compensation accrual due to the SARS sabotage event of JPY 87,000,000 and other non GAAP items. After excluding these items, we have an adjusted net profit of JPY 52,000,000 in the first half twenty twenty, 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. So we will continue to adjust this item so that investor can see a better picture of our own business results. The compensation due to SaaS sabotage event will be a onetime 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 87,000,000. So this basically concludes my part of the introduction of the first half results. Next, let's invite our CEO, Mr. Sun, to talk more on the business and the strategy. Good evening. Welcome you all to this interim results performance meeting. 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. Our main business mission is to help transform and upgrade the traditional companies and business and mainly including those e commerce like Taobao and Tmall and also the catering about like the Meituan and the tourism and hotel like Ctrip. And those all lead to several problems, like they cannot control the overall traffic and the data, and they cannot directly connect our users. And also, it has increased in increasing CAC and also the high commission fee. And our solution is to have a multichannel acquisition of the data and also to have a to operate this private traffic from the platforms such as WeChat, Yin Kuaishou and Baidu. Therefore, that we can help our merchants to have a mastering of their data and traffic and can decrease their CAC and also can have reduced commission. Right now, we have two business. One is SaaS product and the other one is the targeted marketing. And there are three clouds in SaaS products. These are the commerce cloud, marketing cloud and sales cloud. And in the marketing targeted marketing, we have we just target those advertisers from the Tencent platform like WeChat. And focus on SaaS products may include the e commerce, retail, hotel catering, local lifestyle and marketing. And there are many like the landmark or benchmark merchants that are using our products in each category. In the first half of this year, our paying merchants number has increased by 26.4%, while the ops increased by 10.2%. Though our attrition rate has increased a little due to the pandemic influence on the SMEs, but we think that the risk is still controllable. And we will focus on the smart retailing, which is our main product or main focus during the 2019. And this half of year of 2020, the retailing revenue has surpassed the whole of the 2019. Because our target is our target is mostly the chain merchants. Therefore, their ACV this half a year have reached 220,000. And the number of our retailing merchants has increased from two seventeen last year to four fifty seven this year this half year. And our merchants, from in terms of the ACV or attrition rates or the quality, they are all better than the SME previously. And all our merchants and our customers are all the landmark, and there are many in the head part of our business. For example, in the home textile, we have a lot of representative customers like the Mandal, Fana, Beyond and Mercury. And we also have many typical and the head customers in the apparel segment, like in the female apparel, we have Jay Z, Dazzle, Argos and Alisae. And in the male part, we have GXG, Kabin and the Markofel Well, K Boxing, and also have a Balabala and Annelle in the children's department. And of course, for another example is about the beauty and the makeup. We have Jiahua, Forest Canyon, and also the Maruby. And we think that we have in terms of those luggage and also the apparel and the shoes, we think we have our target is 2,000 customers. Right now, we have 500. And besides that, we also have a shopping mall and the supermarket, for example, Walmart. And also our newly signed contract is with Starbucks. It is more than tens of millions of volume. We're seeing that our share of the smart retailing will be increasing strength by with strength and almost half of that. And another core part is the retailing smart catering. And through the acquisition of Yasuo, we have integrated the cashier, the ordering payments, marketing and the supply chain. Up to now, we have five parts in our smart dining or smart catering. They are the restaurants, the members the Yazuo membership and the cashier and the cost of stewards and also the delivery. And we have provided the three stops integration solutions for our customers and integrating the eat in, the delivery and also the e commerce scenario. Therefore, our customers always prefer our integration solutions for them rather than the separate and the independent data that cannot be interchangeable. In the first half of this year, our Smart Signing has increased by 69, accounting for 7% of our SaaS total. And also, our structure has more moved to room for the bigger and the medium companies. And our ASPA has reached 10,000. And the number of our dining customers has reached more than 6,500. And due to the pandemic effect, it has a huge blow to the catering industry. So they have quite a reservation for the budget, but I think that it will be much brighter in the second half of the year. And the next part is the targeted marketing. It is very prominent. And from the financial report, we can see that the number of advertisers has increased by 33.5% in the first half of this year, and the SPA has increased by 92.1%. And also, gross revenue or gross billing increased by more than 1.5x. And also, repurchase rates increased by 67.2%. And the reason that why we still can achieve such a great momentum in the first half year is because of we have provided the effect oriented marketing. And also, we have this original license that can give us more room to perform. For example, like in Beijing and Guangzhou, there's two very major markets. And also, we have used to make use of the mini program. For example, our typical client customer is Wonderland. They are using quite a few way more mini program and advertisements and has increased their sales a lot. And we predicted that it will maintain the rapid momentum in the second half of this year in terms of this sales volume on the advertisers, and it would last through next year. And due to the increase of those gross billings, and we are quite positive about this, the revenue rate since we don't increase our operating fee. And next part is the outlook. And I will not go in detail about the core strategy since you have all in our report. Maybe we will focus on the core strategy during the next three to five years. And the first is we are going to move upmarket. We will move gradually move to the bigger and the medium companies. Just like we have done in the restructuring of our retailing and also the catering. And also, we will move in this direction in terms of the product strategy and investment. And we have seen that in compared with the others, the upper market customers will have much more SPA and their retention rate is much bigger and as well as their participants and the participant increase. So we think that in the future, those upper market customers would have much more share of the value. And the next trend is the globalization. And right now, we have already had have the suppliers and the service providers in the other markets like the Australia, Canada, Japan, South Korea and Hong Kong, China. And in the future, we'll do more localization in, for example, the language. And according to their habit and the local location, and we would increase more the globalization efforts. And also, we can make use of M and A to expand. And the third one is to make it an ecosystem. We would use the investment and M and A to cooperate with our strategy partnership to make to build up this ecology. And we have found that there are many diversified demands and also synergies so that we could have more barrier as a service to meet And currently, we have done a lot of outlay and arrangement in the ecosystem of building up, like the CRM, in the catering and also delivery. And last not the least, let's look at this ECO roadmap. And we have using used the Tencent and the other platform like the WeChat QQ mini program or Inkuaishou to have the connections with the with the merchants. And also, we provide SaaS and cloud service. In SaaS, we will provide four clouds, commerce commerce, marketing, sales and the service. And right now, we have smart marketing in the marketing cloud, and we have Xiaoke in the sales cloud. The service cloud is now coming to form. And in the platform, we will build up the service market, the distribution market and the live streaming And also, we will provide the added value service like the an advertisement, finance, operating and customer. And those are the overview and those outlook of our business. Now we'll come to the Q and A session. Thank you for the presentation. So now we'll start the Q and A session. If you would like to raise a question, please press 01. If you want to cancel question, please press 02. Please feel free to raise any questions. So our first question is from Chris Pham, And he was asking, good evening, mister Sun. Do you think that WeChat new function influence the market share for WeMob SaaS products? I think that the influence is not so much since those customers that's using the service of WeChat and Xiao Shandian is very rudimentary. They are both basically those long tail customers with low threshold, but they are not our targeted customer. We are more into the medium and larger customers. And those are small customers, they don't have much capabilities to pay. So they are still the entry level. And, however, we have the connected API with we've seen I mean, the WeChat. So it is open source. If they can upgrade those small and medium customers, we believe we can always using our WeMob and SaaS products. Therefore, it is a one key connection. And I think this Xiaoxian production is a actually, it's a positive for us. And we don't think that's that much of influence. And also, it has been confirmed by WeChat and they have the same they they they we are on the same page. Our next question is from Charlie Tim at the CICC. Your line is open. Please go ahead. So I have two questions. The first first question is related to our channel partners because the company are saying they are going to moving to focus more on k a, then how is our channel partners development right now and what's our plan to for for the coming years? And my second question is related to the integration of our investment in Yazuo. So how's the feedback from our client? And how much the company the management think will the smart restaurant business how much is the basis for us to grow? Okay. Let me translate. And about this channel building, yes, previously, we are more dependent. Our customers, those small and medium customers are more rely on our channel. But 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. So this channel building is not so well rounded. And more is about the direct sales. And our direct sales order have increased 100%, more than 100%, but the channel hasn't increased a lot. Therefore, that we think that about those KA or the KA accounts, we mostly focus on the direct sales and also reflect on the retailing and the catering. And we can build up those ecosystem, including those upper and the downstream customers like the CRM and also the ERP, those vendors. And also, it includes those traditional consultancies to make it more diversified and varied. And about this Ka, yes, as I have said that we were using the used the core of the direct sales and to have increased their number and to engage more into their operating. So about to and overall, that the channels will be made use of the expansion in the smaller cities and the lower cities. And in these SMEs that we think the our portion will be six percent to 4%, 60% is the direct sales. And for our Ka, I think the direct sales was accounting for 88%, 8% to two distribution. And about this investment and the M and A, yes, we have finished the acquisition of Yazuo. And now we have integrated more functions like the cashier, the payment, and the stewards, and the membership, and the supply chain so that our customers can have the one stop solution in yeah. On Yaap through a platform, and they can decrease this connection cost and also can integrate their data, and it will become empowering. And we have seen that it has been it's a very encouraging phenomenon for our customers, and especially those three sub integration, the eat in, the delivery and the retailing. And in the July and August, we have launched several activities in Hangzhou, Shanghai and Chengdu and other cities, and it has been well welcomed by our customers there. And we know that during the pandemic situation, the budget is limited. So probably, it's not so quick investment into our into this business. And but however, the products so we're mainly doing the integration of our products. And but we think that we are quite positive about the second half year of the performance and the and the data. Our next question is from at Morgan Stanley. Please go ahead. I would do the translation briefly. The first question is regarding to the smart retail brand customer churn rate in the 2020? The second question is about the SaaS billing monthly growth dynamic. And the third question is the the cash flow for targets and marketing, especially the given the AI account receivable and prepaid prepaid expense is growing not as fast as the gross billing. So we'd like to have an update in terms of pay cash payments policies on the major platform partners. Thank you. I'd like to answer your questions one by one. The first one is about the retailing. In the first half of the year, our retention or the renew rate has reached 100%. And even some of them have increased their purchase. So we think that we have we could maintain the attrition rates at the single digit. And the second question about the SaaS monthly billing. In the February, we know that there are very bad flow for the pandemic phenomenon. So in the February, it is almost ignorable. And in the from the March to May, it is has a explosive increase. However, in the June and the July, it has a a downturn and back to normal. And, we think that in the Q4, in the the fourth quarter, we think there will be a busy season, and it would increase a lot. So in the whole year, we think that the SaaS billing we could maintain averagely is about 40% to 50% of increase. And about the third question about the targeted marketing. Yes, and we know that Tencent have a few changes in their policies. For example, with hotel and Tencent, they are more they have more policies or strategies for those intangible points. And also, they have more and also their return rates is a little bit conservative. So we think that the billing and also the billing is increasing and also the Ka Ka share is increasing. So we think that our marketing has marketing value has reached more than CNY 20,000,000. And since that the Ka's acquisition cost and also the cost is not as big as the other smaller customers. So we think that our net profit very positive. And we think because we will the operating cost will not increase a lot. And also, we can reduce the cost. Therefore, we think that to maintain a 35% to 40% of increase is not a problem. And actually, we think that we can do better than that during the whole year. And also, we think that the market has undervalued our value, only about 20% to 30%. We think that it is not it hasn't reflect our real value. We think that our ratio is about 50 to 60%. Our next question is from Liao Yan at Citi. Please go ahead. Darwin, your line is open. Please go ahead with your questions. Thanks, management, for taking my question. My question is about, our SaaS business. How do we view the impact on of The US WeChat ban on our business since America American's companies such as Walmart and Starbucks are also are paying merchants on WeChat? Thank you. Thank you for your question. And have four aspects to answer you. The first one is that the the international market right now doesn't account for too much share in our in our overall distribution. And the second is that if we want to expand it to the international markets, we probably would not use WeChat. We would more prefer FB and Instagram and WhatsApp and the other international apps for the platforms. And 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. And the fourth that we think that the ban on WeChat is maybe more influence has more influence effect on the trade aspect, not the the normal business ones. So overall, we don't think that there will be a much bigger bigger effect on us. Our next question is from Steven at Credit Suisse. Please go ahead. 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 even for the SaaS business. Any key indicators that we should monitor to predict when that timing will come? Thank you very much. Yes. About the marketing share of those 3,000,000,000 RMB, I like to do a clarification. We said that we have 5,000 of customers of those 3,000,000,000. And and the we have the customers in the apparel and the the luggage or the bags segment. We have 2,000 of them, and they share the market of it's about 50%. But we have other customers, like in the supermarkets, 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%. So that these we see that the number hasn't changed. It's about 30% to 40%. And 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. And right now, we have about 5,000 of customers, and they are their SAP is about 300 to 400,000. And also, they have much more willingness. And we so we think that the market is about 1.5 to 2,000,000,000. Oh. And put pay. And right now, we are still in a about a breakeven. We're still in the input stage. And we think that the in order to have a very proper and healthy increase and to increase this R and D and the marketing input. And 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, then we can predict what is the cash flow and also what is the breakeven point. And right now, we think that and also 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. And at the same time, we have to maintain a rapid development. And so and also to maintain a proper loss. And also, we have to increase the input in the R and D and also the expansion and increase of Ka. So we don't think that there will be a big problem of cash flow. However, in in view of this unpredictable situation, it is hard to say. Last question for today is from Yang Lin Lin at Bofa Securities. Please go ahead. The first question is how do you think how do you consider the current models of commercial SaaS? We can see that we focus more on helping merchants realize digitalization, and companies like Shopify focus more on the to help merchants do business. Both of these two models performed well. Will we adjust our strategy to both have in future? And another question is about the smart hotel and smart restaurants, both focused on offline client acquisition and service. How do you how do we realize the economies of scale? And about your first question, it's about our business model. And we we all know the business model of Shopify, and it is including those they monetized the payments, the logistics and also the commission commission. And however, we know that the in The U. S, the e commerce and the mobile payment is not as advanced as in China. And also, the logistics is not as solid as in China. So the gross billing is actually not so high and the commission is not so high. And we think that and and now we think think we could increase. However, we are starting from an increase of those traffic, and maybe we can also take some commission from that. And also we will do we will add value for them and as well, for example, in the distribution and in the live streaming. So we think that in the long term, we would use we are still the tool company that we would use our traffic private traffic to help our customers to digitalize and to provide this customized solutions for them. Being a platform is not our major direction. And, of course, we can also consider the GMOA and the other service. And also, as you have mentioned, sixth the June 16, and we have also demonstrate with our customers how to do the live streaming. And the the main reason is to help them how to share with them the the private the the private traffic, not to guide them into the GMV. And I think that the platform market in China is already a Red Sea. It is already very saturated, and there's not so large room for the platform in e commerce. And but it's also but we can never say never. So maybe we can provide some added value for them. And the second one is, I think that there's some misunderstanding because for two b, you can you can never make or it is not possible to make a online 100% of online trade. It it doesn't exist. Even for a Ka, we think that it is much better to do a the omnichannel to increase the the efficiency. And also, the Ka, if it is a very big Ka online, it still has the the great model shop in in the offline market. Therefore, we're seeing that we can expand the Ka and then we can think about this even if we are expanding the online Ka, it is still for the economy of scale. And also, we think that the offline will not have a big influence influence. And because and at the end of the day, those businesses would all come back to the those brick and mortar shops are all offline. Thank you. Due to time constraint, we'll now conclude today's call. On behalf of the WeMob management team, I would like to thank you for your participation in today's conference call. If you have further questions about WeMob, please feel free to contact us. Thank you, and goodbye.