Good afternoon, ladies and gentlemen. Welcome to momo.com's conference call. Our chairperson today is Terrisa. Please begin your conference. Thank you.
Good afternoon, everybody, and welcome to Momo's third quarter earnings conference call. This is Terrisa, Momo's Head of Investor Relations. Momo is hosting our earnings conference call via live audio webcast through our company website at www.momo.com.tw, where you can download the latest company presentations and earnings call, earnings report. We encourage you to have this meeting material from our third quarter operation, followed by outlook for fourth quarter. Afterwards, I will go through our financials in detail. As usual, I would like to remind everybody that our comments and response to your questions reflect management's view as of today only, and will include forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our presentation. Now, I would like to turn the call over to Jeff.
Hello, everyone. Thank you all for being here today with us. Firstly, let's talk about the industry landscape and the market dynamics. Physical stores such as department store, hyper supermarkets, and the convenience store together, their revenue increased 8.7% year-over-year in third quarter, higher than e-commerce, modest growth of 3.7% year-over-year. It was mainly impacted by ongoing reopening effect, overall weak consumer sentiment, and macro uncertainties. However, the growth rate gap between online and offline has been further narrowed from Q2's 13.6% to Q3's 5%, and then we expect that gap to further reduce in fourth quarter. In the meantime, we have seen continuous efforts of offline players to expand their online sales, and the new entrants ramped up its marketing campaigns. All these activities are going to accelerate Taiwan e-commerce market growth and expand the market penetration.
Although the competition is heating up, we think the stronger ones will get even stronger and again, benefit from our large market share in the long run. One thing we firmly believe is that Taiwan EC market penetration rate will continue to grow to measure those well-developed markets such as Korea, China, and the U.S., et cetera. As for momo, our leading market position and the demonstrated execution track record will continue to allow us to benefit from this growing larger market. And so far, we have outgrow the industry average for the past three quarters of this year. Let's move on to these third quarter operation highlights. Our third quarter company revenue increased 6.4% year-on-year, stronger than 4.3% in the second quarter, in line with our expectations.
Third quarter company operating margin came in at 3.6%, with the first three quarters operating margin at 3.9%. Third quarter operating margin was impacted mainly by the lower tax rate and higher marketing expenses. About our e-commerce business, despite macro uncertainties, our EC business reported a 3.7 year-on-year growth in third quarter, continuing to grow much faster than the e-commerce industry average of 3.7%. Meanwhile, e-commerce operating margin improved to 3.6% versus 3.5% a year ago, driven by efficiency gain in operations. The major five product categories continued their growth runway, but at a more moderate pace, with beauty and healthcare, sports and leisure, fashion and luxury delivering stronger momentum.
On the other hand, 3C and home appliance and household products reported tepid growth rates, largely due to COVID high base and the consumer spending more on travel and leisure activities. Home appliances still suffered from high base in previous year, and the consumer electronic sales was helped by the new iPhone launch in September. Despite the low growth rate of overall 3C's category, we are still gaining the market share. We are also pleased to see the e-commerce active user and their order frequency continued their upward trend in third quarter. The total Fubon and the momo co-branded credit card payments has increased 30% year-on-year, contributing to 34% of total e-commerce revenue versus 29% a year earlier. Demonstrates growing customer loyalty and stickiness. About our TV shopping and the live streaming.
TV shopping continues its downward trend and it resulted in lower revenue and lower profit. However, we have also seen a good growth momentum on live streaming in terms of the user base and the time spent as well. On the logistics side, southern distribution center will be in operation in first quarter of next year. With that, we will be able to offer even better services to the customer in southern Taiwan and improve our logistic efficiencies. As for central distribution center, we held our groundbreaking ceremony yesterday. The construction work will begin soon and is set for 2027 in operation. The total CapEx for construction and automation for central distribution center is around NT$ 7.6 billion, with actual payment being spread through various phases of construction until completion.
On the ESG front, we launched a new Green Life membership program on September one, by calling customers with intent to participate in our various environment-friendly activities, such as using recycled packages, combining multiple shipment into one, environmental-related community services, et cetera. In just two months, we have accumulated more than under 40,000 customers. Finally, looking ahead to the fourth quarter. Fourth quarter is the most important season for us. We are well prepared with strong marketing programs and a competitive product lineup. We expect a positive revenue growth, but the growth rate will be lower than last year. As far as the operating margin is concerned, we think it will be slightly lower than last year as well. So this concludes our, my third quarter operation highlights and the key messages. Now, let me turn the microphone over to Terrisa.
Thanks, Jeff. Before financial update, please turn to our presentation page 5. You will find the full note regarding accounting adjustment for mo coin, our cash reward to customer. Starting in third quarter, instead of booking mo coin as marketing expenses, mo coin will be directly deducted from our company revenue, leading to lower net sales but also lower OpEx, thus no material impact to operating profit. By using the same accounting treatment as last quarter, third quarter company revenue growth would be higher at 6.8% year-over-year, instead of 6.4% as reported. While OpEx year-over-year will be also higher at 11.7%, instead of 4.2% as reported. We expect the adjustment will be fully reflected till third quarter 2024. Back to key ratios.
OP margin came in at 3.6% from 3.7% a year earlier, impacted by TV structure decline and unfavorable EC TV mix change, offsetting logistic efficiency gains. You can see from the P&L, operating costs declined 1.4% year-over-year, as we further improve operational efficiency across our island-wide logistics network. For example, improved digitalization of demand forecasting and inventory allocation, also optimize order fulfillment and minimize mid-mile transportation costs. Net income to parents declined 0.9% year-over-year, and the basic EPS came in at 3.12 NT$, which can also be attributed to company operating profit increased 4% year-over-year, together with non-op gain, declined 63% to 22.9 million NT$.
Moving to page 14, the major five product categories continue their share gain story in spite of overall slow product consumption. 3C and home appliance continue to grow and increase 6% year-over-year, contributing 39% of our EC revenue. Even though it is the most mature category, its growth runway is still long, given the online penetration rate for consumer electronics is only 25%-30% in Taiwan, versus over 50% for other developed countries. Household products, including grocery items, kitchenware, home improvement, furniture, bedding, and pet supply, contributed 28% of e-commerce revenue and increased 5% year-over-year due to high base. Beauty and healthcare increased 50% year-over-year to account for 18%, maintaining robust growth, driven by our superior supply chain capability. Our efforts in deepening relationship with brand and maintaining stock availability and assortment have been paid off in recent years.
Last, fashion and luxury increased 9% to account for 10%, and the sports and leisures increased 11% YOY to account for 5%. As for live streaming, we are encouraged to see the total numbers of participating suppliers and the product increase robustly in third quarter, and the total numbers of viewers reach a record high. We believe engagement on live streaming help drive higher level of traffic, new customer acquisition, and the retention on our user base. Moving on to the balance sheet on page 10. We ended third quarter with net cash positions of NT$4.57 billion.
Regarding cash flow and the CapEx on page 11, during the third quarter, we generated about NT$ 1,157 million in cash from operations, spent NT$ 802 million in CapEx, including around NT$ 600 million for southern distribution center construction expenditure. Finally, let me touch on CapEx. Every year, our CapEx is spent in anticipation of the growth that will follow in future years. Given the near-term macro uncertainties and the tougher competitive environment, we continue to manage our business prudently and continue our reinvestments to cement our industry leadership and future growth. In the meantime, work diligently on our internal efficiency improvement. We continue to optimistic about the long-term growth potential of the opportunity and the market we are addressing. This conclude my update, and thank you for your attention. Now, we are ready to open the line to questions. As usual, Jeff will lead this part. Operator?
Thank you, ladies and gentlemen. If you wish to ask a question, please press star one. Thank you.
Okay, I got a first question from Angela, from Citi. The first question is regarding competition. With Coupang's aggressive competition in 1P this year, what are the things that we have done and or are we going to do to what are we going to do to increase our competitiveness? For things you have done, can you please share the initial results? And the second question is: How do we balance share gains and the margin contraction? Is share gains still our priority, and are we willing to sacrifice the margin pressures for that?
Okay, thank you for the question. For the first one, regarding Coupang, certainly, I think everyone have noticed that they have increased a lot of their investment in this market, both in term of the marketing activity and price competitions. We have seen they have get a lot of attention through the heavy advertisement, so I think that will lead them to enjoy some gain in terms of the traffic. And however, the way we see this is, I think the e-commerce business is, we treat it as a marathon. So I don't think we will do quite differently because someone is sprinting at the moment. We will maintain our long-term competitiveness and with no intention to engaging in price war with them just because they would like to use the price to acquire more customers.
In terms of long-term impact, I think after the dust comes down, everyone needs to go back to their normal business. I think the true test will be at that time. We believe, if we continue to increase our product selections and do a better service, I think this business will, at the end, come down to those basic principles, and I think we are okay in the long run. But it doesn't mean we ignore their existence. We still watch back carefully about all the development they have done, and including they just announced they are going to build the certain warehouses. However, as you probably find, every large distribution we announce we need to take a 3-4 years to build.
So, whatever you can find on the market is readily available; they are all those small ones, and how to make those small scattered warehouses to run competitively, I think that's another challenge we present today. Regarding the second question about the how do we balance the growth and the profitability? We have always tell investors that growth is very important to us. I think so far still it is, although we have experienced some headwind so far this year, because after the COVID, we still believe the e-commerce market penetration going to reach to those to the standard of those developed countries. So we need to make sure when that happen, we are there to grab that growth opportunity. So growth is still important. However, we will not sacrifice with all the way just for the growth.
I think profitability, maintaining a certain profit level is also very important to us. I think so far we have been successfully doing that. So although for this year, the past two quarters, our revenue growth has slowing down, and we still maintain the profit still a positive growth. So we are carefully managing this balance for the coming period to come. Okay?
Okay, operator.
Thank you. Next question comes from Daniel with UBS. Thank you.
Hi, Jeff and Terrisa. Thank you for taking my questions. Could you hear me?
Yeah.
Yeah.
Okay. Thank you. My first question is that, as reopen effect gradually goes away and everything go back to normal, what revenue growth rate would you expect in the mid to long term for the company? Thank you.
I think the long term. Mid to long term, it's hard to say at the moment. We also feel that reopening effect has gradually goes away. But how soon the consumer going to go back to their normal standing allocation online or offline? I think we don't have an answer for you yet. We still observe some key indicators. But I think the only answer I can give to you is that we still believe our e-commerce penetration rate, we're going to reach to that level. How soon? I just can't comment yet.
Okay, thank you. And second question is that, could you give us an update on the development of the new business, which is the 3PM advertisement? What's the timeline and the potential revenue contribution in 2024 and 2025? Thank you.
I think we will probably give you more information when we have, once we complete our 2024 budget and, all the, preparations. Next year is going to be, probably, the, one of the early years of these two, initiative. I think the, it won't be significant year to our overall business. However, the next year, we're going to be focused on the grocery, and I think probably, our next conference call, we can give you more colors on that.
Yeah, sure. Sounds good. Thank you. And the last question from my side is that I noticed there's some delay for the operation of central distribution center. I recall previously we target like, 2026, but now it's 2027. Any reason behind this delay?
Mainly is the complexity of the construction work. After we finish the design, it's going to be a underground two-story and above ground, eight stories building. And the overall storage space is going to be 39,000 pings. It is going to be one of our largest distribution center. So once that design get finished, and then we have the... And we have that work contract out, and so we have the more accurate construction work need to be done. So that work out is going to be ready in 2027. We would like it to be ready sooner, but however, that's just the way it is.
Okay. Thank you. That's very clear. That's all my questions. Thank you.
Thank you. Next, we have Andy. Thank you. Hi, Andy, please begin your questions. Thank you.
Hi, Andy, we cannot hear you. Andy Huang from Morgan Stanley. Okay. Maybe operator, we can move to the next question.
Next question comes from Jason Chan with Allianz Global Investors . Thank you.
Hello, can you hear me?
Yes.
Okay. Hi, Justin Chan. I have two questions. The first one is regarding your B2C take rate. It's, you know, 12.7 in third quarter, it's down about 40-50 both QoQ and YoY. But when I look at your product mix, they are quite similar, also both QoQ and YoY. So I'm just wondering, what's the driver here for lower type of B2C take rate, both QoQ and YoY? That's my first question.
Sorry, you are breaking out, so I really can't hear you clearly.
Okay. Sorry about that. Try again. So my question is, your B2C takeaway was down 40-50 basis points, both QoQ and YoY. But the product mix are quite similar, so I'm just curious, what's the reasons here?
Right. Regarding the take rate, basically, company-wise, there are many impacted by the percentage shift between the TV and the e-commerce. Within the e-commerce, I think the take rate mainly impacted by the product category. As you can, you have noticed on our presentation, page 14, on third quarter, our 3C and home appliance accounted for 39%, and which is 1%-2% lower than we used to be. And that category is a low margin category, so certainly it's going to help. However, you can also see, there are our the household they only have 5% year-on-year. So all this adds up, it-
So, but the mix, the region mix is actually lower QoQ and YoY, right? It's 39 in the third quarter. It was, you know, both 40 in second quarter this year and third quarter last year. So it should be a tailwind rather than a headwind for your B2C takeaway. So I'm just curious if, I'm not sure if, you know, there are any more other reasons, like maybe pricing. Have you taken more aggressive pricing to defend some market shares?
That's certainly one, also one of the reason, yes. And because you have that weaker consumer sentiment, of course, you sometimes will resort to the lower price to really incentivize people to buy more now. Yes, it's also one of the reason, but the main, main reason is still the product mix.
Very clear, thanks. And my second question is, well, it's also partially related to my first question. So, looking at your active buyers, right? Those buyers, whether the numbers or their spending are still growing quite well, versus the overall MAU, right? The broader client base. So my question is, do you think you've reached the limit of converting MAU into active users? And if so, will you consider, you know, just cut marketing expenses, right? Because now, the major spending, the growth of spending mainly comes from your loyal customers, and I guess they are not that sensitive to your marketing campaign. So, will consider to cut the expenses here? That's my second question.
Right. Yes, the loyal customer become more loyal, as you can see from the average purchase by per active customer. Yes. And also, you are right, the conversion rate is lower, and, as I said, it's hard to convince people to spend because of the weak consumer sentiment and their preference to spending on the travel and dining out. So all that, the and for those things, more expensive or they tend to shop around, so they are all result of in a lower conversion rate. However, it doesn't mean we have reached to the peak of the travel. It just go because of those macro conditions, most consumer become more cautious on the spending.
I think that going to gradually improve with the more clear on the economic outlook and also the reopening effect reduce and people go back to normal life in terms of how they spend the money.
Got it. So, basically you think the Momo conversion is just temporary?
Yes.
Okay. And then my final question is regarding the subscription program or membership program. And, you know, we know, I think Coupang has sort of the membership program. I'm not sure it's here in Taiwan, but definitely in the country. And also, I think Shopee recently also launched a subscription for free shipping. I'm just curious, you know, given your dominance and the leadership in Taiwan B2C and in terms of market share and also in terms of product category you've offered, you've added, you know, many new categories like books or insurance, and now you have more cooperation with Taiwan Mobile.
You know, the product portfolio look to me becoming more, you know, bigger and more diversified and, you know, it's also different kind of value to customers. So I'm just curious, are you considering, you know, besides your new business, right, those 3P and Ads , are you considering also launch sort of a membership program, and when will be that? And if not, what's the consideration here? Thank you.
We have been contemplating to have a membership program. However, in order to have membership program that has that kind of a stickiness, is difficult to come up. Because the fierce competition landscape in Taiwan already made most of the shipping costs to zero. So as all those cases, you mentioned, the membership program also surrounded the shipping cost. So you join the membership, then you will have the discount or free of the shipping. So that has gone, so we need to come up with something else. And we have tried several different activities with our associates companies, say for example, Taiwan Mobile. They have their telephone mobile phone plan combined with mo coins.
So if you use Taiwan Mobile subscription and, they will reward you with mo coins, so that will take that customer to Momo. We have limited success. It's not a mainstream mobile product yet. However, it does attract some of the customers, so it benefit both of us. And, we're continuing to explore other ways, but so far, we haven't really come up with a program can be, can reach to the effect that you mentioned and, or you referred to what happened in the overseas years.
Okay. And just to clarify, so it sounds like if you are going to have more, you know, activity, that that would be, you know, that'd be centered around mo coins rather than a membership program charging, let's say, $100 per month. It probably won't be that soon. You will do more activities to, you know, to promote the mo coin ecosystem. Is that understanding correct?
mo coin is a vehicle to link our product together. So it's not a mo coin is a membership program, but it's a very good vehicle to make the customer feel they get a benefit, and make all our product linked together. And we would like also to expand that mo coin into a ecosystem. If we can do that, and what you so call the membership will become more beneficial to the consumer, and it will become a more effective membership program. But we're still working on that.
Okay, thank you. That's all my questions. Thank you.
Okay, thank you. This conclude our QA session, and thank you for joining us today, and we hope you will join us again next quarter. Thank you.