Ladies and gentlemen, thank you for standing by. Welcome to the Niu Technologies first quarter 2019 earnings release conference call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. At which time if you wish to ask a question, please press star one on your telephone. I must advise this conference is being recorded today, the 13th of May 2019. I would now like to hand the conference over to your speaker for today, Mr. Jason Yang. Please go ahead, sir.
Hello, everyone. Thank you for joining us on today's conference call to discuss the company's financial results for the first quarter of 2019. We released the results earlier today. The press release is available on the company's website, as well as from Newswire services. On the call with me today are Dr. Yan Li, Chief Executive Officer, and Mr. Hardy Zhang, Chief Financial Officer. Before we continue, 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 inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding this and other risks and uncertainties is included in the company's public filings with the SEC.
The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures, and is available on our website. Please note that unless otherwise stated, all figures mentioned during the conference call are in Chinese renminbi. With that, now let me turn the call over to our CEO, Dr. Yan Li. Yan?
Thanks, Jason. Thanks, everyone, for joining us on the call today. First of all, we are very excited to report a great start in 2019, with a strong growth and a positive net profit. We grew scooter unit volume by 76%, and the revenue more than doubled. We also improved gross margin to over 21%, and operated profitably with a net margin of 3.4%. Gross margin and net margin are 8.6 and 39.2 percentage points higher than this time last year. Niu is at the forefront of the revolution in urban mobility, and our results this quarter demonstrate our leadership position. We made advances in technology leadership and also leveraged our brand awareness into new adjacent categories. Our brand and the product strength really show in our financial results. Growth was outstanding despite winter being our seasonally slow period.
Let me first cover our most exciting development, the two all-new scooters models for the U Series, the UQi+ and the UQi S, that we launched on April 12th. Our UQi+ and the UQi S models inherit the attractive design style of our new U Series. The U Series just achieved the so-called Grand Slam, winning all seven major international design awards. Over the past 20 years, the U Series is the only second product to achieve this Grand Slam in the mobility industry. Many of you already know, the first product was our own M-Series. We're extremely proud of our design leadership, and this Grand Slam demonstrates our expertise. Our unique and attractive style is an important part of the premium value proposition of our brand. In addition to a great style, the new U model covers more consumer segments.
The UQi+ is bigger and offers more driving range, up to 160 km per charge, which is more appealing to our frequent users with longer daily commutes. The UQi S is smaller and lighter, thus more appealing to users that prefer agility. All U models are compliant with the new regulation on the Safety technical specification for electric bicycles in China, which went into effect on April 15th. The UQi+ and UQi S models deliver outstanding value. The price range for the UQi+ is between RMB 4,400-RMB 6,000. For the UQi S, that's between RMB 3,500-RMB 4,600. Both products were well received by consumers, and the first deliveries were made in late April. Niu is unique in that we can deliver a stylish scooter that has great range, yet is compliant with the 55 kg weight regulation. This is due to our leading battery system technology.
At the launch event, we introduced our upgraded smart battery system, which is called NIU Energy. NIU Energy encompasses the battery management system and the pack technology. Our engineering team designs industry-leading power systems by leveraging the 2.4 billion km of riding data we have collected from our users. That usage data gives us an incredible insight into the performance of the batteries under all sort of conditions. Under the NIU Energy, our battery pack is able to achieve 8% longer driving distance, 40% longer battery life cycles, and a 6% power improvements. Our brand is also incredibly strong in urban mobility, and we are now extending the brand into adjacent categories. The new brand is technology, style, and freedom. We deliver the brand promise for weekend commuting via the electric scooter category. Now, we're delivering our brand promise for the weekend pleasure via our new high-performance bicycles.
At the April launch event, we launched our new sports performance bike family, NIU AERO. The NIU AERO family features five product lines encompassing eight models of high-performance mountain and road bicycles. Those bikes have aerodynamic design for speed and style, and a smart meter connectivity for performance tracking. Those bicycles are super light, with the lightest weight at 7.6 kg. The price range is from RMB 2,500-RMB 62,000. We performed extensive market research before entering this category. We conducted a customer survey and learned that 30% of our customers love bicycles, and 40% expressed interest in our potential bicycle offering. Furthermore, we note that the sales of premium performance bikes are growing at 10% a year in China, even as the whole bike industry is shrinking. This data supported our thesis that Niu can effectively penetrate the performance bike category. Early results are encouraging.
Our first sales campaign on JD.com was sold out in two minutes. The April product launch not only successfully rolled out two electric scooters and a family of performance bicycles, but was also a big success in terms of building brand awareness. We counted over 400 media mentions and had an audience of more than 400,000 people watching the product launch through live streaming. To support a new product post-launch, we are now running offline ads as well. In addition to the launch event and the offline ads, we continue to leverage social media to build brand awareness. Our last two social media campaign in Q1, Not Only a Scooter and A Niu Way Forward, generated over 4 million views on TikTok and 1 million views and retweets on Weibo. Let me also mention another interesting program we initiated in social media.
In addition to the premium riding experience, Niu is also known as a socially responsible choice for transportation. This is due to the cleanness of the electric power, as well as the reduction of traffic congestion and emissions due to the small factor. To further reinforce our image as a socially responsible brand, in March, we launched a NIU Forest campaign. We asked our riders to post their mileage and their Niu stories on social media, such as Weibo and TikTok. Selected users will get to claim one pine tree planted in Inner Mongolia, sponsored by Niu. On social media, the NIU Forest topic has received over 500,000 views. With our brand strength and product leadership, our only real barrier to growth is the distribution. Naturally, growing our distribution network is a top priority.
Again, in Q1, we expanded our reach around China and around the world. In China, we opened 121 stores, giving a total of 881 retail outlets by end of this quarter. Our store network is managed now by 223 city partners across 180 cities. We're also expanding internationally, entering yet another new country, now selling in 28 countries through 23 international distributors. The next major countries which we're expanding into are Korea and the U.S. On March 28th, we attended the Seoul Motor Show and saw potential for robust demand in that country. We are now working hard to build our distribution channel in Korea. Meanwhile, in the U.S., we have obtained the federal government approval for selling our scooters nationwide. We're not looking back. We already received our first order for 1,000 units from the U.S. scooter sharing operator. Planned deployment is in New York City.
We ship to the U.S. in April. Our customer anticipates that they will be put into services in June. Lastly, let me touch upon the new regulations, specifically the so-called Safety technical specification for electric bicycles in China. It went into effect on April 15th. This regulation prompts the industry to operate from traditional, heavier, lead-acid battery-based scooters to lighter and more portable lithium-ion battery-based scooters. It does this by putting a weight restriction of 55 kilos on the scooter. This policy will accelerate adoption of lithium-ion battery-based scooters in China electric scooter market, while simultaneously improving the road safety of electric scooters. We believe this regulation will encourage more people to adopt electric scooters for their daily commute. The policy is enforced at three levels. First, the manufacturers are required to obtain certification at the China Quality Certification Center for all electric scooter models sold as electric bicycles.
Finally, consumers can only get a license plate for compliant electric scooters. The entire industry, including us, experienced a noticeable spike in the demand in March before this regulation went into effect. Clearly, some of the Q2 demand was pulled into Q1. Many consumers rushed to purchase existing models before April 15th. After April 15th, we have observed a sharp drop in retail sales for a couple weeks, confirming our thesis about this demand pulling in. We expect this demand shift to be a short-term, only affecting the first half of the year. We still foresee a very strong demand growth in the second half of the year. 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. As I review our financial performance, keep in mind that we are referring to the first quarter figures, unless otherwise noted. All monetary figures are RMB, unless otherwise noted. As Yan mentioned, 2019 is off to a great start. We again delivered a strong growth. We operated profitably. Revenue more than doubled. Gross margin increased significantly to 21%. Net margin was positive at 3.4%. Revenue rose 106% to RMB 355 million, driven by increased scooter unit volume and higher revenue per scooter. Volume grew by 76%, driven primarily by two factors. First, our expanded sales network in both China and internationally. Second, incremental demand for certain N and M models in front of the new national standards deadline, which was April 15th.
We accommodated the actual demand for these models because they will no longer be licensed and registered as electric bicycles after the deadline. This was the main reason for the surge in revenue, which was significantly above the guidance we provided earlier. Revenue per scooter was RMB 5,359, up 17% year-over-year. That growth was driven both by scooter pricing and the sales of accessories, spare parts, and services. The average scooter sales price grew 14%. This was due mainly to the higher retail price for the U-Series, as well as favorable change in product mix. Specifically, we started delivering NGT models in China, where the NGT retail price of RMB 20,000 is more than double other models. Sales of NGT contributed 2.3% of the total unit volume. In addition, sales of M+, which is the upgraded version of the M1, generated around 30% of total unit volume.
The higher average sales price of scooters was also helped by a higher proportion of sales from our premium versions of each model, specifically within the M-Series and N-Series. We have multiple versions of scooters within each model series. These are the Pro, Sport, City, and Lite. Pro and the Sport versions have higher retail sales price than the City and the Lite. For instance, the Pro is usually 35% higher than the Sport, which in turn is 15% higher than the City. We also have strong sales of accessories, spare parts, and services. On average, for each scooter sold, we also sold RMB 670 of accessories, spare parts, and services. That ancillary revenue per scooter is up 47% from RMB 457 last year. The increase was mainly driven by the spare parts sales from international markets.
Gross margin was 21.3%, 8.6 percentage points better than this time last year, and 7.8 points better sequentially. Over the longer term, we expect our gross margin to be in the range of 20%-25%. We are very happy to be moving into that targeted long-term model. Margin expansion was helped by sales of accessories, spare parts, and services, which are high margin. A higher proportion of international scooter sales also impacted gross margin positively. Ancillary revenue and international sales were 12.5% and 18.8% of revenue, respectively. Altogether, these two factors contributed two to three percentage points of the high growth, gross margin. I want to caution you that we do not expect this gross margin lift to be sustained as we move through the year. These two factors are usually seasonally high in Q1, then normalize during the rest of the year.
Cost of goods also declined as planned, as we secured cost savings of 3%-5% for various , raw materials, and components. We were able to negotiate lower procurement costs as our larger scale leads to better bargaining power. We believe these cost reductions are sustainable and will continue to benefit our growth margin for the foreseeable future. Operating expenses increased in line with the growth of our business. Excluding share-based compensation, G&A increased by 153%, representing 5.4% of revenue, versus 4.4% last year. The increase in G&A expense was due to audit and legal fees for the annual audit and producing the 20F filing. Obviously, those are the new costs now since we are publicly traded. R&D expense grew as we invested in new product development and design. Sales and marketing expense grew in line with our expanded sales network in both China and the international market.
Despite higher expenses, we are still seeing meaningful operating leverage. As a percentage of revenue, operating expense, excluding share-based compensation, was 17.4%, below the 19.2% we saw last year. Our GAAP net income was CNY 12 million, with net margin of 3.4%. 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 CNY 694 million in cash and equivalent. Operating cash flow was positive, CNY 16 million. Capital expenditure was CNY 29 million, primarily driven by building out the new manufacturing facility in Changzhou and by the new stores opened in China. Now let's turn to guidance. We expect second quarter revenue to be in the range of CNY 580 million-CNY 660 million. This represents year-over-year growth of 51%-72%. We expect to operate profitably.
The revenue range is relatively wide due to the regulatory demand pulling we discussed earlier. Although the new regulation shifted some demand between quarters, the underlying trend in our industry is still quite strong, as you can tell by the growth we still expect. In fact, to get a better picture of underlying demand without the quarterly fluctuation, we are comparing the first half of 2019 to the first half of 2018. Combined revenue for quarter one and quarter two is expected to be in the range of CNY 935 million-CNY 1 billion, representing year-over-year growth of 68%-82%. 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 followed by the number 1 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, that's star and the number 1 on your telephone keypad, and wait for your name to be announced. We have the first question from the line of Brad Erickson. Please ask your question.
Thanks. I just had a few. First, you mentioned the falloff in demand you saw for a couple of weeks, I believe you said, due to the regulatory deadline. Is the takeaway to be made there that you've seen things sort of stabilize? Maybe just a bit of color about how run rates have been trending now over the past month as you've gotten past that sort of pull forward and fall in demand. Thanks.
Yeah, I think that's a good question. Given we're only four weeks since they just implement the regulation. The first couple of weeks, there was really a sharp drop in terms of retail sales, basically what we call the sell-out. We start seeing that the retail sales start to recover. Obviously, the entire industry hasn't really recovered back to the normal sales levels yet. Keeping in mind, this is only four weeks after they implement the new regulation.
Yep, got it. Okay. Then just within gross margin, Hardy, I think you mentioned you got benefits from the ancillary channels as well as international revenues. If we looked at it based on a product mix, how much benefit did you get from the pull forward in demand? Any color there would be great.
I think from the gross margin point of view, we don't think there's any benefit on the gross margin from the pull over demand. I think the higher gross margin is mainly because we have much higher ancillary revenues, especially the spare parts we sold in the international market. Those spare parts normally have around 40% to 50% gross margin. That part really help us with that. I think second, what helped us is the price increase on the U-Series we did in August last year. U-Series has a quite significant growth in the first quarter. Therefore, we do see the contribution from that on our gross margin.
I think very lastly, I think the most significant contribution to the gross margin is from the COGS. We did manage to get a lot of cost reduction on different types of raw materials and components, and that has translated to part of the improvement in the first quarter gross margin. In the quarters ahead, we believe there's still room for us to improve.
Perfect. Thanks. Maybe one last one, if I could. I guess one of the important levers it would seem like for demand here going forward is how tightly the new national standard will be policed in some of the smaller outer-lying cities. What are you seeing there thus far from a regulatory standpoint? Maybe just a bit of color in terms of what's baked into your guidance around your expectations for how shrewdly the new national standard will be policed. Thanks.
I think, first of all, we have a view that, actually from the fact also, that this new national standard will be very strictly enforced. Having said that, it basically trickles down. It takes time to actually get to what you call tier 4, tier 5, tier 6 cities. If you look at top-tier cities, like tier 1, tier 2, basically Beijing, Shanghai, Guangzhou, Shenzhen, and also the provincial capitals, almost on day one, April 15th, on day one, that is already in place. Now, as I mentioned in the call, it's basically enforced on a manufacturer level, basically from our level. Any scooters we ship out has to be what they call a 3C, basically get a 3C certificate from the China CQC Center.
There are people checking, the local enforcement are checking on the retailers on a weekly basis to make sure the retailers doesn't sell anything that is non-compliant. Lastly, I just want to make an example, like City of Beijing. What you see is actually, there are policemen on the street, checking people who don't have a license plate for their scooters. You don't have a license plate for scooters, at this point, it's only a CNY 20 fine, but I think there's also announcement within a few months or so that that fine will actually get to about CNY 1,000. We do see, it is as we expected, that this regulation is being strictly enforced.
I think to add a little more color on that. There are also some administrative burdens on some of the cities. On the country level, we have this new national standard, which all the manufacturer needs to get this CQC certificate. However, some of the cities also have their own requirement to put the product into the product catalog. Only after the manufacturer register their scooters in their city catalog, they can be sold in the retail network. This administrative has also added additional burden to some of the distributors. We believe this is temporary, and once we get everything registered, then the retail will recover.
Got it. Thanks.
We have the next question from the line of Bin Wang. Please ask your question.
Thank you. I actually have three I want to ask. The first one is, I noticed in April this year, it seems that you raised the price for some of your products by around 2%-5% because of the new regulation. Can you see guidance because of the pricing hike? Do you see any margin improvements, or how much margin? As mentioned, 2%-5% price increase, maybe some cost increase. What will be the margin increase because of this? That's number one. Number two is that recently, the China-U.S. trade have some dispute. Do you think this impact your penetration to the U.S. market? Also, would this impact your first batch order, which was mentioned in the call, to the U.S. client in New York City? That's the second question.
The last one, I actually want to ask about the margin, because the margin is really a surprise. Can you, removing one-off factors, for example, the NGT sales, for example, some of the potential issues, only removing everything off, what will be the normalized margin in the first quarter? Especially, can you quantify on the raw material pricing decline, because you were saying raw material, you didn't break down, say, how much motor, how much battery, and how much steel, how much tire. Can you give me more detail? Thank you.
Let me answer your first question about the price increase in April. Indeed, in April, we increased the retail sales price for certain models and the N-Series, M-Series, and U-Series. For the price increase for N-Series and M-Series, it's mainly to cover our cost. There is no impact on the gross margin. We just want to maintain our gross margin. That's why we increased price for N-Series and M-Series models. For the U-Series, we increased the price, that will help us with the margin going forward. There's another reason we increased the sales price for the U1 models, because we launched the two new models, UQi+ and UQi S, we need to make sure the different type of products are in the different category of price range. That answers your first question. Second, I will let Yan to answer.
Bin, just also let me add a little bit on the first question. The price increase sometimes because, for example, on the U-Series, with the new regulation, what's required is actually we had to include pedal on the scooters. Obviously, our price increases is at a higher percentage than cost increase to help the margin a bit. On the second, on the U.S. dispute, because our product category is already at a 25% tariff. The current dispute, makes no difference, unless the current dispute results that they reduce the tariff from 25%-10%, it will help us. Right now, we're actually doing competitive business in the U.S., assuming we just let the 25% tariff. Also let me pass to Hardy to talk about the-
Yeah
gross margin part.
Yeah. For the gross margin, we have 21% in the first quarter. I think I can break down this 21% improvements to three different segments. The first segment is the way so-called one-off. This one-off is not linked to NGT. We did deliver a lot of NGT in the first quarter, but this NGT is a pre-order from last year. Last year, we give a lot of promotion events to the consumers, therefore the NGT margin was not as good as the normal models because of this actual promotion. There is one one-off event, that's the change of product mix, especially in the N-Series and M-Series. As I mentioned earlier, in each model, we have different specs. We have Pro, Sport, City, and Lite. In the first quarter, our sales in the top models, premium models, Pro and Sport, has take a larger proportion.
Normally, these top two models account for 40% of the total series. However, in the first quarter, these two models contributes to around 60%, and this impact contributes to around 1%. This is, I call it one-off. I don't think this will repeat in next quarter. This 1% is one-off. Second category, as you see, is more seasonal impact. It's mainly from the international sales and also the accessory sales. International sales account for around 19%, and the accessory sales account for around 13%. This is much higher than the normal average we have for the whole year. These two parts contributes to around 2%-3%. For the full year basis, we don't think this 2%-3% will be fully translated into the full year margin. The very last point is the contribution from cost reductions. That give us around 3%-5%.
That part is going to be sustainable. If we make the normalized adjustment, we believe if we take out these one-off items, also we normalize for seasonal impact, our gross margin for the first quarter will be around 18%.
Thank you. Great.
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. 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. 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. As there are no questions, I'd like to hand the call back to you speakers.
Thank you, operator. Thank you all for participating on today's call and for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress. Operator?
Thank you. Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.