Earnings Call: Q2 2021

Aug 23, 2021

Earnings release

Hello, and thank you for standing by for Energy Monster's 2021 Second Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference call, Director of Investor Relations, Hansen Hsu. Please go ahead. Thank you. Welcome to our 2021 Q2 earnings conference call. Joining me on the call today are Mark Tsai, Energy Monster's Chairman and CEO and Maria Xin, Chief Financial Officer. For today's agenda, management team will discuss business updates, operation highlights and financial performance for the Q2 of 2021. Before we continue, I would refer you to our Safe Harbor statement in the earnings press release, which applies to this call as we will be making forward looking statements. Also, this call includes discussion of certain non GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this call are in RMB. I would now like to turn the call over to our Chairman and CEO, Mark Cai, for the business and operation highlights. Thank you, Hanson. Good day, everyone. Welcome to our 2021 Q2 earnings call. We are so pleased to announce the solid second quarter results with revenue growing to 52.9 percent year over year, which is above the upper end of our previous guidance range. During the Q2, the outperformance of certain regions such as Eastern China and the rapid expansion of our PEOI coverage positively contributed to our growth, while the impact of COVID weighed down our growth for other regions. Despite facing these external factors, we are committed to remaining focused on our long term strategies of providing best in class services and value proposition to our users, location partners and network partners. The scale of our mobile device charging service network also expanded quickly during the quarter with POIs growing 55,000 to reach 771,000 and number of power banks in circulation growing by 390,000 to reach 6,000,000 by the end of the second quarter. As a result of continued DOI and Power Bank expansion, we were able to reinforce our leadership and grow our market share to 35.2% within the mobile device charging service industry during the first half of twenty twenty one. We continue to see multiple drivers propelling forward the fast growing mobile device charging service industry. 1st, industry penetration rate of potential POIs remains low. Opportunities in terms of increasing penetration across different types of POIs for both existing higher and lower tier cities continue to be core driver. 2nd, there continues to be large number of countries that are unpenetrated for mobile device charging service. During the quarter, we newly add up 29 new countries, extending our coverage to over 1600 counties or county level cities as of the end of quarter out of the 2,846 total in China. This means there continues to be significant opportunities in expanding to uncovered regions across China. Lastly, our service bring convenience to our users across China by relieving their low battery anxiety. Compared to other services, mobile device charging service has high purchase frequency and user thickness. During the Q2, we acquired more than 19,000,000 newly registered users, reaching to approximately 255,000,000 cumulative registered users of the end of Q2, reflecting that there continues to be increasing demand for the service and that there are still large number of users who are in need, but have yet to try out service. In the future, as the size of our network continues to grow through increased penetration, we as number one player in the industry is poised to better capture the benefits of network effect in attracting more users. Now, despite our growth, we continue to experience headwinds from outbreaks of COVID. In the Q2, outbreaks in Southern China and especially within the Guangdong province resulted in a significant revenue drop upwards to a 70% to 80% decline in the impacted regions due to restrictions that require the closing of certain stores and resulted in decreased food traffic. We estimate that total impact of outbreak in Southern China resulted in a RMB20 1,000,000 to RMB30 1,000,000 decline in revenue during the Q2. The Guangdong COVID outbreak was eventually controlled and our revenue have made a strong recovery starting late July. We continue to experience headwinds from COVID outbreaks, but based on the historical numbers, we expect the impact to be short term in nature. To reduce the impact of the COVID outbreaks on our operations, we implemented measures to increase our recovery speed from external events such as COVID by focusing on reallocating our cabinets from less utilized POIs to mid to higher tier POIs or chain stores in good quality. In the future, we will continue leveraging our operational expertise to reduce the impact of external events on our operations and execute measures that will help us increase our market share during these events. Now, let me walk you through our core strategies in strengthening our competitive advantages, expanding coverage and exploring new initiatives for the quarter. Efficiency has always been the hallmark of Energy Monster that differentiated us from our peers within the industry. Last year, the competitive landscape changed significantly due to the initial impact of COVID. The fast growing mobile device charging service industry also attracted the interest of major companies. We meanwhile, continue to focus on our core operating principles of efficient growth and more aggressively competing for mid to higher tier POIs. Our ability to more accurately access the revenue potential of POIs, offering correct revenue sharing policies that results in positive economics for the company, managing our vast on the ground business development team and making sure that we abide to the company's operating principles, affecting the correct economic incentives for these business development personnel that correctly align their interests with the company are some of our core competitive advantages. This is why we were able to achieve industry unique economic profile after COVID last year, while our competitors were primarily all loss making. This difference in unit economics profile has allowed us to more quickly and aggressively develop our network effect. We continue to dynamically balance growth and operational efficiency. We remain committed to our principle of individually accessing each PUI based on their economic profiles. Despite the shift in the competitive landscape in the recent years, we believe our competitive advantage in network effect and also operational efficiency are being strengthened as our market share continue to grow during the first half of twenty twenty one. Our best in class service for our users in the form of high quality hardware and easy to use and return service and a clear value proposition to our location partners in terms of shift responding to the business development team and customized cabinet and power banks are key differentiating advantages of Energy Monster. Going forward, we will leverage these advantages to more efficiently expand into POIs, acquire new users and to further differentiate ourselves from peers within the industry. Now I would love to talk about our expanding coverage. The industry continued to be fast growing. The PEOI coverage of the industry still remain low with continued opportunities across the board in higher and lower tier cities and POI types as well. For Dialectin, we expanded our business development team by 400 people during the quarter in anticipation of the market potential. Our business development team has actively expanded to obtain more mid to higher tier PLIs. On the KA front, we had great success in signing up new accounts during the quarter like ajisan ramen, week 7 and UME. Our ability to offer a comprehensive package and our ability to deliver high quality service to KA has allowed us to sign these accounts despite not offering the highest revenue sharing policy. For our network partner model, although we are also leading within the industry through this model, we continue to identify and recruit high quality network partners. We are able to continue attracting these partners during our market leading position as well as due to the full suite of support and training that we offer them when they work with us. The network campaign that we launched in the Q1 of 2021 that is tailored to help us acquire additional high potential network partners to our network. This campaign gives us network partners more room to quickly reach scale and to see results earlier, which further aligns interest between our network partners and us. Our sustained investment and commitment to expanding our network partner model will allow us to better capture the growth of the industry by strengthening the coverage of lower tier cities and solidifying our network partner model. As a result of our efforts in both the direct and network partner models, we were able to quickly expand our PY and power bank counts during the quarter. This has helped us attract more customers to Energy Monster. We were able to acquire 19,000,000 newly registered users during the quarter, reaching 255,000,000 registered users in all. In the future, we believe the increase in our business development team and network partners in conjunction with our industry leading efficiency will allow us to accelerate the benefits of our network effect advantage and to further differentiate Energy Monster within the mobile device charging service industry. Lastly, I would like to touch up on our new initiatives. We continue to be in the testing phase for our 1st consumer product brand lineup and expect a full launch by end of this year, the peak season of Fizhou. While leveraging Energy Monster's massive online and offline networks, consisting of over 250,000,000 unique registered users and 771,000 POIs across all province of China, we can more quickly scale consumer products than traditional brands. On the other hand, we continue to explore other IoT and service industry that we leverage and extend our existing networks. Going forward, we believe that our current setup of network will give us a unique set of advantages in incubating new initiatives from Energy Monster. So in conclusion, our core mobile device charging service continue to grow quickly on the back of our expanding network effect and growth of industry. Even though the competitive landscape has shifted during the last 2 years, we remain committed to doing the right thing and that is to dynamically balance growth and operational efficiency based on market conditions. This difference in philosophy has differentiated us from our peers in the past and we'll continue to do so in the future as we form stronger competitive advantage around our core business. Eventually, controls and our revenue has made a strong recovery. So let's see this is a strong recovery after the outbreak of Guangdong province of COVID. We look into the Q1, we still continue to see headwinds that were impact that traditionally has been the peak quarter of the year. The recent COVID outbreak in Jiangsu province as well as in a number of cities across the country and weather induced province have all negatively impacted our Q3 performance. Since the outbreak, we have seen a gradual recovery and but have not yet returned to normalized activity levels. We also continue to see the recovery, the setback by continual regional outbreaks across the country. Going forward, we may continue to face impacts from small scale regional resurgence of COVID in the future. But we believe these are short term impacts and will not impact our long term competitive advantage in network effect and operational efficiency. Thank you. I will now turn the call over to Maria Xin, our CFO, for the financial highlights. Thank you, Mark. Now let me walk you through the financial results in greater detail. For the Q2 of 2021, revenues were RMB 970 $2,400,000 representing 52.9 percent year over year increase. Revenues from mobile device charging business were up 51.6 percent year over year to $931,600,000 and accounted for 95.8 percent of our total revenues for the quarter. The increase was primarily attributable to the increase in the number of POIs and available for use part banks. Revenues for power bank sales were up 83.2% year over year to $31,600,000 and accounted for 3.2 percent of our total revenues for the quarter. The increase was primarily due to the increase in number of POIs available for used power banks and the customers that select to purchase the power banks. Other revenues were up 111.1 percent year over year to $9,200,000 and accounted for 0.9% of our total revenues. The increase was primarily attributable to the increase in users and advertisement efficiency. Cost of revenues were up 44.8 percent year over year to 138,700,000 dollars for the Q2 of 2021. The increase of cost of revenues was primarily due to the increase in the operational scale, resulting in increase in maintenance costs, disposal costs and the logistic expenses. Gross profit were up 54.3% year over year to $833,700,000 for the Q2 of 2021. The increase was primarily due to the increase in revenues from mobile device charging business. Gross margin for the Q2 of 2021 reached 85.7%. Operating expense for the Q2 of 2021 were $814,800,000 up 62.6 percent year over year. Excluding share based compensation, non GAAP operating expenses were $805,900,000 representing a year over year increase of 63.1 percentage. Research and development expenses for the Q2 of 2021 was $20,500,000 up 25.3 year over year. The increase was primarily due to the increase in personnel related expenses. Sales and marketing expenses for the Q2 of 2021 were $771,000,000 up 64.6% year over year. The increase was primarily due to the increase in incentive fees paid to the location partners and the network partners from the increase in mobile device charging business revenues and the increase in personnel related expenses. Journal and administrative expenses were $28,700,000 in the Q2 of 2021, up 49.3 percentage year over year. The increase was primarily due to the increase in personnel related expenses. Income from operations was $18,800,000 down 51.9 percent year over year. Operating margin for the Q2 of 2021 was 1.9% compared to 6.2% in the same period last year. Net income was $8,200,000 in the Q2 of 2021, down 72.6% year over year. Net margin for the Q2 of 2021 was 0.8%. Non GAAP net income, which excludes share based compensation expenses, was $17,200,000 in the Q2 of 2021, compared to a non GAAP net income of $38,800,000 in the same period last year. As of June 30, 2021, the company had cash and cash equivalents, restricted cash and short term investments of $3,100,000,000 Cash flow generated from operations for the Q2 of 2021 was $74,800,000 Capital expenditure for the Q2 of this year was ninety $7,300,000 Energy Master currently expect to generate 900,000,000 dollars to $930,000,000 of revenues for the Q3 of 2021. Please note that this forecast reflects Energy Monster's current and a preliminary view on the industry and its operations, which is subject to change, particularly as the potential impact of COVID-nineteen on the economy in China. Thank you for listening. We are now ready for your questions. Operator? The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, Your first question comes from the line of Vicky Wei from Citi. Your question. Good evening and management. Thanks for taking my questions. So would management share more insight on the guidance for the Q3 of 2021? Thank you. Thanks for your questions. So let us give you a bit more insight on guidance. Despite the impact of Guangdong COVID, our revenue were making a strong recovery during July. On a year to year basis, we see in early July, the revenue growth was on track for more than 20% year on year. So, however, since the Jiangsu COVID broke out, so Nanjing, Zhengzhou and Yangzhou in that kind of cities, overall revenue dropped more than 70% from the normalized level. So flat upgrade to the other cities such as Beijing, Shanghai, Chengdu, Shenzhen have all resulted in the significant drops in revenue. For example, Shanghai Beijing dropped more than 30% in the early August compared with the early July. However, we are confident that the impact from the COVID will be short term impact in nature and that our company's fundamentals are fully intact. So and the user continues to have strong demand for our services that we saw we acquire a lot of new users during the past quarter. So going forward, we will continue to be long term oriented to deliver value for our shareholders. So in this quarter, Sogou's guidance is a bit lower than which impact by the COVID. Thank you. Your next question comes from the line of Lucy Li of Goldman Sachs. Please ask your question. Thank you, management. So my question is related to the first one. Can management share with us more details on the impact of COVID-nineteen during the Q2 and a possible impact going forward into Q3? And how do you think of like more frequent, I wouldn't say lockdowns, but local restrictions going forward? Thank you. Mark speaking. To be honest, actually even by end of May, I'm expecting that in this call, I'm so proud to announce a first RMB1 1,000,000,000 revenue quarter. But in June, actually, you can see that the COVID outbreak in Guangdong, which we just see in the field. So during the Q2, the outbreak of COVID in Southern China, mostly Guangdong, was significant. At its peak, impacted region experienced a 70% to 80% of week over week decline. Overall, the impact of the outbreak in Southern China resulted in approximately RMB 20,000,000 to RMB 30,000,000 in revenue drop. So for the Q3 of 2021, the COVID outbreak in combination with weather induced problems will negatively impact what has traditionally has been the peak quarter of the year, as I mentioned. We follow following the initial outbreak in Jiangsu, minor breaks across all places like Shanghai, even Shenzhen are disrupting our recovery process towards normalized activity levels. Despite facing these external factors, we are committed to remaining focused on our long term strategies of providing the best in class services and value proposition to our customers, location partners, users and network partners. That's why we are able to increase our market share in the first half of twenty twenty one. So I'm also pleased that even with the impact of COVID, we still hit the expectation of the top line of last quarter. So thank Your next question comes from the line of Charlie Chan of China Renaissance. Please ask your question. Thanks management for taking my question. I've got one question regarding competitive landscape. So can you give us more color on the current competitive situation? Are we seeing an increase in revenue sharing percentage or a fixed entry fee amount? And how has another major competitor's exit, which we heard from the news, which is Meituan, from the direct model impacted the market? Thank you. Thank you for the question. Sure. We see that our peers shift away from the direct model and move towards the network partner model. Actually, it is a positive move for the market in the long run and will be healthy for the total industry. This will reduce the amount of aggressive business expansion with high revenue sharing policies that some players actually is doing. And because there continue to be large amount of potential within the industry and that we have industry leading operational efficiency. We have increased the number of business development personnel in the quarter by over 400 people to better capture the market opportunity. Similarly, we have also rapidly increased our signings of KAs during the quarter by leveraging our large on the ground team and also our ability to provide comprehensive service to the KAs. Lastly, for our network partners, we launched a campaign that in the Q1 of 2021 to attract high quality network partners with proven track record with us to more quickly increase their coverage in the lower tier cities. So as a conclusion, on one side, we continue to do our best in terms of growth and efficiency for our direct sales model. On the other side, we keep doing better in terms of policy, also facilitate our network partners to become stronger players in the market to gain market share in lower tier cities. So I would say that in long run, in midterm, the market will turn to be a more sustainable development because some of the players are shifting their business models, which will lead to a less competitive environment for the industry. Thank you. In terms of the revenue sharing percentage, the level of increase a bit on a quarter on quarter basis, so due to the large impact of COVID on the Q2. So in the Q2, COVID impact around RMB20 1,000,000 to RMB30 1,000,000 in both the top line and the bottom line. So for the Nightclub partners, as Mark mentioned, so the campaign the new campaign continues to help us to attract new network partners. During the past quarter, we acquired around 13 new network partners and delivered about 15,000 cabinets to our new network partners. Revenue sharing under this new campaign with network partners had a higher revenue selling percentage and have contributed to the increase in sales and marketing expenses. At the same time, we're also increasing our investment in the new initiatives. So our path on the consumer products and the launch of the Energy Master's new online channel for the Power Bank have also contributed to the increase in the sales and marketing expenses both. Thank you. Thank you for your questions. Your next question comes from the line of Lucy Li of Goldman Sachs. Please ask your question. Hi, thanks. I have a follow-up question. So we've seen a lot of regulations coming out recently on various industries, including, for example, Internet companies, but also logistic transportation companies, including some of the pricing guidelines and the thesis on the mutual prosperity of Gontong Fuyu. So do we from our perspective, do we see any potential of regulators trying to limit our pricing level? And if so, how would that impact our business or our revenue sharing scheme with the partner with our either the POIs or the network partners? Thank you very much for the question. We have been keep a very close eye on the regulation part, actually, since the very beginning of creating the company. So at this time, we are not under direct regulation by a specific government entity outside of the standard ones. So we are actively tracking all updates in regulation, and we're fully compliant to the regulations and requirements implemented by the government. And so far, we don't see any potential that our operation will be influenced by certain potential regulation. So but still, every day actually, we are having this monitoring. And also, we have quite a good relationship with the government in the district level because we are one of their important start ups. So we are confident to have good management over this. We are now approaching the end of the conference call. I will now turn the call over to Energy Monster's CFO, Morbius Shen, for closing remarks. Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your support and we look forward to speaking with you in the coming months. Thank you.