Ladies and gentlemen. Good day, ladies and gentlemen. Thank you for standing by, and welcome to the NIU Technologies second quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now I will turn the call over to Mr. Jason Yang, Investor Relations Manager of NIU Technologies. Mr. Yang, please go ahead.
Thank you, operator. Hello, everyone. Thank you for joining us on today's conference call to discuss the company's financial results for the second quarter 2019. We released the results earlier today. The press release is available on company's IR website as well as from news wire services. Please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks, uncertainties, assumptions, and other factors. The company's actual results may be materially different from those expressed today. Further information regarding the risk factors is included in the company's public filing with the Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required by law. Our earnings press release today, this call includes discussions of certain non-GAAP financial measures.
The press release contains a definition of the non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results. Please note that unless otherwise stated, all figures mentioned during the conference call are in Chinese Renminbi. On the call with me today are Dr. Yan Li, Chief Executive Officer, and Mr. Hardy Zhang, Chief Financial Officer. Let me turn the call over to our CEO, Dr. Yan Li. Yan?
All right. Thanks, Jason, and thanks, everyone, for joining us on the call today. We have been navigating a dynamic market in the second quarter that has been challenged by regulatory changes. Despite the fact that overall China market for electric scooters slowed in Q2, we managed to deliver healthy growth. Our scooter sales volume grew by 14%. Revenue grew by 38%. We also improved gross margin to 23.7% and net profit margin to 9.6%. Both are significantly higher than Q2 last year and further improved from Q1 this year. We're pleased to continue operating profitably in this quarter. NIU is at the forefront of the revolution in urban mobility, and our results this quarter demonstrated our leadership position. We made advances in technology leadership and leveraged our brand awareness into a new adjacent category. Our brand and product strength really showed in our financial results.
First, as we discussed in last earnings call, we launched our two new product lines complying with the new China regulation effective April of this year, namely the U+ and the Us. Both products were delivered to the market in late April. Both have received very popular feedback from our customers. The U+ and the Us volume represented more than 1/3 of our sales volume in Q2 and widely considered a popular product in the market against our competitors. The Us retail price starts at RMB 3,499, or approximately $ 500, is considered an affordable entry-level product for new customers to experience NIU for the first time. The U+ retail price ranges from RMB 4,399-RMB 5,999 and is positioned as a top-end electric bicycle model, great for daily commuters and for long-distance urban riding.
Both the U+ and Us models are powered by our new energy technology, which has helped to improve the average driving range by 8%, a 40% increase in battery life cycle, and a 6% improvement of power generation. Our growth in the second quarter has been supported by those two product models. We're in the process of launching a new product line under the second brand name, Gova. By leveraging our design capability and the cost efficiencies, we position Gova as a value-for-money product targeting at a mid-end segment. We intended to sell this product line in both China and the international market. Second, we continue to build a global NIU brand as a lifestyle urban mobility brand through innovative yet cost-efficient marketing and branding activities.
On June 1st, we celebrated our fourth birthday in China. We launched a social media campaign called "Don't Call Me Electric Scooter" to separate our brand image from traditional low-quality e-bike market. We have engaged many social media influencers across TikTok, Weibo, and Bilibili, receiving more than 20 million views. The Chinese Valentine's Day, which is celebrated in July, we started a new love story event and collected more than 2,000 stories from couples who fall in love because of NIU, and with more than 70,000 page views. We have made a documentary film based on those love stories. We will host a movie viewing party among our highly engaged users. Starting from July, we launched a TV ad campaign with one of the most popular Chinese internet drama, called ["The Longest Day in Chang'an"].
This campaign was a combination of TV ads, social media viral marketing, and user interaction activities on WeChat and offline stores. We have achieved a 1.2 billion views on the internet TV, 50 million views on Weibo, and more than 50,000 users participation in the WeChat and offline activities. We continue to increase our fan base on all social media from WeChat, Weibo, and TikTok. Our monthly views on those social medias have reached to over millions. We also start a offline ad campaign called Always NIU Forward, with bus ads, subway ads, and billboard, covering 12 cities and with more than a billion views. Several Chinese and international celebrities were spotted riding a NIU scooter by the paparazzi, which show the popularity of our products. Those news instantly spread across social and traditional media channels.
Those viral activities allowed us to capture more than 1 billion views online of our product, which is just another testimonial to our growth as a lifestyle brand. Now globally, we have also signed 22 social media influencers across six countries, creating new content under the theme, "Unlock Your City," and has generated more than 500,000 views. To further build our customer loyalty, we rolled out our NIU Points Program in July. Users can receive NIU Points via various activities and can redeem those points for NIU lifestyle accessories. Within one month of the rollout, we already have 39,000 users participating in the NIU Points Program. All of those event-based marketing activities have helped us to continue to improve our brand awareness as a leading lifestyle brand in urban mobility. Lastly, we continue to expand our footprint in China and globally.
In Q2, we opened another 124 stores in China, reaching 1,005 stores in total, which covers 182 cities in China. Internationally, we further expanded our international footprint and entered six new countries. Now we sell in 34 countries through 26 international distributors. In June, we opened flagship stores at Seoul in South Korea and Ho Chi Minh City in Vietnam. Now our solution for sharing operation has also been growing very quickly. So far, we have supported a total of 13 operators globally in 11 countries. We provide not only the scooters for their sharing fleets, but also the out-of-box IoT connectivities and the backend fleet software to allow them to quickly launch their sharing operation. This is a key differentiator for NIU in the sharing space, as we are able to provide a full stack solution, where our competition is just providing a dumb scooter.
The sharing operations we support in the U.S., as mentioned last time, has been very successful and have received positive reviews from The New York Times, Vogue, The Wall Street Journal, The Verge, and The Washington Post. The continued success of sharing operation in U.S. and around the world played a key role in building our global brand awareness, while simultaneously educating a whole new customer base for NIU. All you have to do now is to head over to Brooklyn and see how popular the NIU scooter in the Revel sharing program in the U.S. is, and how we are building a culture for scooters even in America. Lastly, let me touch upon the China market dynamics four months after the implementation of new regulation. As mentioned earlier, the overall regional market has been uncharacteristically soft since the implementation of new regulation.
In some markets, we have observed a market contraction by up to 80% since the April, when the regulation was put in place. This was partly due to the rush purchase before the regulation came into effect, and partly because the consumers still need time to adjust to the changes, especially adapting to mandatory smaller form factor scooters and longer process of getting license plates. Additionally, we see a portion of customers are choosing to postpone their purchase as a way to see how the regulatory environment shakes out. We have seen signs of recovery in July and August, the total market sales volume is still below last year at the same time. Due to the slow sales of the entire market, many of our competitors have had to close their retail shops, we see this as an exciting time to grow our sales channels.
Despite the sluggish market conditions, we have been taking advantage of our competition's reduction in retail outlets and their lack of product to meet the new regulation, by rapidly expanding our retail footprint as more retail spaces become available. This strategy now will position NIU for future growth in 2020. Now I will turn the call over to Hardy to discuss our financial results. Hardy?
Thank you, Yan, and hello everyone. Our press release contains all the figures and comparisons you need. We have also uploaded the figures in Excel format to our IR website for your easy reference. As I review our financial performance, keep in mind that we are referring to the second quarter figures, unless I say otherwise, and that all monetary figures are RMB, unless otherwise noted. As Yan mentioned, the second quarter is a challenging quarter due to the difficult macroeconomic environment and the implementation of the new national standards in China. We managed to deliver a high-quality growth, thanks to the strong sales in international markets and the solid sales in accessory and spare parts. Our profitability further improved as a result of favorable changes in revenue mix and our continued efforts to optimize costs.
Total revenues rose 38% to RMB 531 million, below the guidance we provided earlier due to lower-than-expected sales in China. Despite the challenging market, our scooter sales volume still grew 14% compared with the second quarter last year. China sales was affected by the implementation of the new national standards. The subjective interpretation and poor implementation in different cities caused a lengthy product certification and the registration process, which affected the entire China e-scooter market, including us. The new regulation also sets the top speed limit at 25 km per hour. Customers are not used to this and will take time to adapt to the new speed limit. The impact from the implementation of the new regulation will continue to affect our China sales in the third quarter, and possibly for the rest of the year.
We have seen a positive trend in the recent months that the market began to recover from Q2 and retail sales gradually picked up. The slower sales in China was partially offset by strong sales from international markets, especially the newly entered markets such as the U.S. and South Korea. We shipped out 1,500 units to the U.S. market and 2,000 units to the South Korea market during the second quarter. We have expanded our international sales network to cover 34 countries, compared with 23 countries the same period last year. We made a further entry into Southeast Asia market. We opened a dedicated store in Vietnam, and we are in the process of setting up our own company in Indonesia so as to further expand our business in the promising Southeast Asia market.
We are very pleased to see that our products are welcomed in these newly entered markets. Our international sales has both 2B and 2C business. Both have enjoyed a very healthy growth in the quarter. The 2B business, i.e., the scooters and accessories sold to sharing operators or fleet management companies, is becoming sizable and contributed significantly to our revenue growth in the second quarter. Revenue per scooter was RMB 5,339, up 21% year-over-year. That growth was driven by both higher proportion of international sales and the strong sales of accessories, spare parts, and the services. The average scooter sales price grew 11%, driven by two key factors. First, and more important, the higher proportion of scooter sales from international markets, where our sales price are much higher than the China sales price.
In the second quarter, our international scooter sales accounted for 27% of the total scooter revenue, compared with 10.2% in the second quarter last year. In April this year, we increased the China retail sales price by 1% to 5% for selective models. The retail sales price increase and higher proportion of international sales both helped our average scooter sales price increase in this quarter. The other positive development in the quarter is the stronger sales of accessories, spare parts, and services. On average, for each scooter sold, we also sold RMB 796 of accessories, spare parts, and services, increased significantly from the RMB 296 per scooter last year. The increase was mainly driven by accessory and spare parts sales from international markets, especially those to the sharing operator, who tends to purchase additional accessory and spare parts together with the scooter.
Gross margin was 23.7%, 8.6 percentage points better than this time last year, and 2.4 percentage points better sequentially. Over the longer term, we expect our gross margin to be in the range of 20%-25%. We are happy to be moving close to our long-term goal. Margin expansion was helped by favorable revenue mix. Ancillary revenue from sales of accessories, spare parts, and services was 14.9% of total revenue, compared with 6.7% last year. International scooter sales was 27% of total scooter revenue, compared with 10.2% last year. Both the ancillary revenue and the international scooter sales have a higher margin. Hence, help our margin expansion.
Out of the total 8.6% margin improvement in the second quarter, we estimate roughly 4% came from the favorable revenue mix. I want to caution you that we do not expect this favorable revenue mix to sustain for the coming quarters when the Chinese scooter sales begin to recover from the slow season in the second quarter. The margin expansion is also helped by our continued efforts to optimize costs. The cost of revenue on comparable basis further declined. We secured cost savings on raw materials of 5%-7% versus last year, and 2%-3% versus last quarter. We were able to negotiate lower procurement costs because of our larger scale and in-depth knowledge of the supply chain. We believe these cost reductions are sustainable and will continue to benefit our gross margin for the coming quarters.
Operating expense on comparable basis increased in line with the growth of our business. Our total operating expense, excluding share-based compensation, was RMB 18 million, decreased by 14% year-over-year, and was 15% of revenue, below the 24% we saw last year. G&A expenses, excluding share-based compensation, decreased by 47%, representing 3.3% of revenue versus 8.6% last year. In April 2018, there was a fire incident which caused a damage loss of RMB 22 million. After excluding this amount, our G&A expenses increased by 60%, mainly due to higher staff costs and related office and travel expenses. R&D expense, excluding share-based compensation, grew by 79% as we continued to invest in new product development and design. Sales and marketing expense, excluding share-based compensation, decreased by 9%, mainly because of the timing of marketing expenditure.
In 2018, we had higher marketing expenditure in the second quarter because of a product launch event at Paris in June 2018. This year, considering the impact from the new national standards in the second quarter, we limited our marketing spending and deferred sales and marketing activities to the third quarter. Our GAAP net income was RMB 51 million with a net margin of 9.6%.
We are pleased to operate profitably even as we invest heavily in growth, which demonstrates the strength of our business model. Turning to our balance sheet, we ended the quarter with RMB 667 million in cash and equivalents. Operating cash flow was positive RMB 23 million. Cash expenditures were RMB 54 million, mainly for building the new manufacturing facility in Changzhou and for expanding our retail sales network. Let's turn to guidance. We expect third quarter revenue to be in the range of RMB 600 million-RMB 700 million.
This represents year-over-year growth of 22% to 42%. We expect to continue to operate profitably in the third quarter. Please keep in mind that this forecast reflects our current expectations and could change. With that, let's now open the call for any questions that you may have for us. Operator, please go ahead.
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or the hash key. Once again, it's star one on your telephone keypad and wait for your name to be announced. We have the first question from the line of Vincent Yu. Please ask your question.
Hi. This is Roger in for Vincent. Thank you, management, for taking my question, and congrats on a great quarter. My first question is, can the management help us to break down the unit sales in terms of China versus international? How should we think about the gross margin trend going forward for the second half of the year?
Sorry, the quality of the line is not very good. We didn't hear your question. Do you mind to repeat your question and repeat slower?
Yes, sir. Can you hear me all right now?
Excuse me, operator.
Yes, sir.
Our signal here is not good. Can we redial later? Redial again?
Sure, sir. I will dial you back in. One moment, please. Ladies and gentlemen, the speaker is facing technical difficulties. We will be dialing them back and connect them to the conference. Your line will be on music hold until then. Ladies and gentlemen, we have Mr. Yang joining back the conference. Thank you. Once again, ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. We have a question from the line of Bin Wang. Please ask your question.
Thank you, everyone. My first question came from the M-Series. I understand maybe in a short period of time, only one product called U can be sold in the dealerships. Can I know what the revised version of M can be eligible to sell as a scooter? Which month can you specify the timing? That's number one. Number two is about the new brand, Gova. Can you elaborate roughly the pricing range and the potential margin, because NIU was in the high market, how you think about the lower market profitability? Do you see this will be a long-term issue for margin? That's the second one. The third one, actually, I want to understand, you think about the raw material has been declined by 5%-7% year-over-year in the second quarter. Do you know which is the key components?
Is it the battery or other issues? Thank you.
Hi, Bin. This is Yan Li. Let me address the first few questions, I'll have Hardy answer on the raw material question. Yes, for the first half of this year, even until now, the product we have actually meeting the new regulations are basically the U+, the U, the Us, essentially the product family of the U-Series. Actually, we are working hard to actually get one of the M-Series to meeting the new regulation requirement. To be honest, there has been a delay a bit on that product because there has been a, what do you call, the interpretation of the new regulation, which is announced in March 25th. Which actually tightened the new regulation a bit more in terms of the extra spacing in the battery compartments, in terms of the back seat rest, the requirement on the back seat rest.
That actually caused us to literally scratch the original design of the new M and then restart it over. We're looking at the new M probably will come out in the first half of next year. That was with the M product. Secondly, while having said that, we also have the M+ as also as NGT passing the light motorcycle certifications. By having M+ and NGT passing the light motorcycle certifications, we were able to sell N and M+ as light motorcycles in areas where they don't have the restriction on light motorcycles. That has been generating quite a bit in terms of sales boost. The second question on Gova. The Gova, right now we have in terms of Gova, we have essentially three product lines on Gova which is the G1, G3, and G5.
G3 and G5 are not ready for production probably until later this year, Q4 this year. The G1, we're planning to roll that out in early September. The price range on G1 is anywhere between RMB 2,999, basically just a little bit below RMB 3,000 to RMB 3,999 . Basically anywhere in the price range of RMB 3,000 to RMB 4,000 . The reason we launched this as a second brand and actually launched this product here is, first of all, G1 is new regulation compliant. Second, we look at our product offerings. The cheapest of our product is actually Us, which actually at a RMB 3,500 . We're a little bit short in terms of the product in below RMB 3,000 and in a range between RMB 3,000 and RMB 3,500 .
Those are basically what you call the price gap area that we did not cover using the NIU product. In order to get us, the Gova, to get to that price range while maintaining a healthy margin, we had to deliberately separate some of the functionalities between Gova and the NIU. For example, NIU is viewed as a smart electric scooter, it's connected. The Gova, we do have to strip down the connectivity part. This is what I position saying the Gova is a product which can be used to serve the mid-end segment. Having said that, we do offer accessory, what we call a sky eye option, which allow users to add a little box on Gova to enable that connectivity. That's the option that users can buy as accessory.
I think those answer the question on Gova, and then I'll hand over to Hardy to talk about the bottom part.
Yeah. The reduction of cost related to the procurement of raw materials, we achieved 5%-7% cost down compared with the Q4 last year. This cost down is across different parts of the scooter. In the average, the body part, including frame, lights, tire, et cetera, we reduce the cost by around 4%. For the battery pack, including the battery cell, the pack, and BMS, in total, we reduce the cost by around 9%. In average, it give us a 5%-7% cost reduction. I hope this answers your question.
Thank you.
We have the next-
Yes, sir. We have the next question from the line of Vincent Yu. Please ask your question.
Hi, management. This is Roger again. Sorry about that. My line was disconnected. My question was, can the management team help us to break down unit sales in terms of China versus international? How should we think about the gross margin going forward for the next, for the second half of the year? Thanks.
I think in the revenue, we do have the split between China sales and international sales. International sales accounts for 27% of the revenue. China sales accounts for 73% of the revenue. By multiply total revenue with this percentage, that give you the total China sales. If you compare the second quarter China sales revenue with the same period last year, that has a growth around 2%. We still have some growth in China, but at a slower rate. For the gross margin, Q2, we achieved 23.7%. Q1, we have 21.3%. Out of the, as I mentioned, out of the 8.6% margin improvement, around 4% coming from this revenue mix. Revenue mix, we do not expect it will sustain for the next quarter. For the cost reduction, we believe it will continue to benefit us in the next quarter.
We estimate the gross margin for next quarter will be likely in the range between 18%-20%.
Okay. That's great. Okay.
Hope this answers your question.
Yes, that does. Okay. My second question is, do we have any visibility on how much e-scooter purchase will be made by the sharing platforms in the second half of the year?
We have some visibility. First of those, the sharing operator, they are not the main contribution of our international sales. Vast majority of our international sales, they still sell to the end consumers. The sales to sharing operators normally account between 10%-30% of the sales across different months, depends on the sales order. For the second half, we believe it will be in a similar percentage.
Okay. Great. Okay. My last question is, can you maybe talk a little bit about some of the feedback you guys heard from the distributors or customers on how they think about the new regulation? Also, when will we see the demand become more normalized from your standpoint?
Yeah, I think that's a great question. The CNE, as we've been on the field talking to the distributors and the retailers as well as the customers, I think it still need a bit time for the consumers to get adapt to the new regulations. The new regulation, key things on new regulation, one is actually on the size of the scooter, second on the weight of the scooter. There's what they call a more stringent check on the speed. All those actually is very different with before, with the previous case, before the regulation are in place. What we have observed that is, one, as I mentioned on the call, some people actually did a rush purchase in Q1 before the regulation in place.
Some consumers decide to postpone because a major part of this market is a replacement market, where every year people replace their old scooters and purchase new scooters. We do see, actually observe that some people decide to postpone that replacement by keeping their old scooter for another six months or for another year before switching to the new regulation scooters. Having said that, the market has been slowly, I have to say, slowly recovering, where in the cities where the new regulations started to being heavily enforced, I think the entire market at the month of April or May, really, some of the cities actually dropped, the entire retail dropped by, like, 80%. Now, not saying they're back to the last year level, but month by month, the sales has been improving.
Okay. Great. Thank you.
This is on the consumer side.
Oh, sorry. Yeah. Mm-hmm.
I think that's it on the consumer. The last thing I want to add is actually, a lot of retail shops, to be honest, in the last few months, have been suffering because the volume has been dropped, and then you will actually look around, the major portion of scooter being sold in those market are very cheap scooters, basically anywhere ranging from RMB 1,400 to RMB 2,000 . There's little margin to be made on those cheap scooters. Many retail shops from our competitor brands really has shut down the shops. That actually, we did manage to take advantage of that and actually able to acquire some of the hot retail spaces, which we wouldn't be able to previous year.
Okay, great. Thank you so much.
Once again, ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. We have the next question from the line of Joyce Lin Wang. Please ask your question.
Hi, management team. You explained that the sales and marketing expense may be larger in the coming quarter. Could you give please guidance about how large it could be? Thank you.
I think for the sales and marketing is just on a comparable basis, it will be slightly larger than the second quarter. We don't believe there will be a significant increase in the market spending. There won't be any amount significant.
Okay, thank you.
Once again, ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. Thank you. Seeing no more questions in the queue, let me turn the call back to Mr. Li for closing remarks. Once again, seeing there are no further questions in the queue, let me turn the call back to Mr. Li for any closing remarks.
Thank you, operator, and thank you all for participating in today's call and for your support. Appreciate your interest and look forward to reporting to you again next quarter on our progress. Thank you.
Thank you.