Earnings Call: Q1 2021

Sep 8, 2020

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to Uxin's Earnings Conference Call for the Quarter Ended June 30, 2020. And at this time, all participants are in listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Nancy Song, Investor Relations Director of Yuxin. Please go ahead. Thank you, operator. Hello, everyone. Welcome to Uxin's earnings conference call for the quarter ended June 30, 2020. On the call today are D. K, our Founder and CEO and James Zeng, our CFO. D. K. Will review business operations and the company highlights followed by Jin, who will discuss financials and guidance. They both will be available to answer your questions during the Q and A session that follows. Before we start, I would like to remind you that this call may contain forward looking statements made under the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events that involve lower or unknown risks and uncertainties, which could cause actual results to differ materially from those in the forward looking statements. Uxin does not undertake any obligation to update any forward looking statements except as required under applicable law. For more information about the potential risks and uncertainties, please refer to our filings with the SEC. With that, I will now turn the call over to our CEO, D. K. Please go ahead. K. Wei:] Thank you, Nancy. Hello, everyone. Thank you for joining our earnings conference call today. In the most recent two quarters, the impact of coronavirus pandemic continued to create the challenges for overall economic. Given the current macro environment, we are glad that we successfully completed the divestiture of our loan facilitation business and relieved ourselves of the historical guarantee liability. With this business change in place, the financial impact of diversity in the loan facilitation business, settling its financial guarantees and diversifying the B2B business and will continue to be reflected in our financial statements for the quarter ended June September 30, 2020. Along with this business divestiture, we have shifted our business strategy from multi business streams to a core focus and shifted our growth strategy from being finance financing driving to 1 that is used car quality and service oriented. Under the previous financing driving approach, where we experienced the rapid transaction volume growth. We were also weighted down by a significant underlying credit risk and conscientious on cash flow because we had to take all the guaranteed liabilities and buyback the default loan when these delinquency assets meet certain criteria. Now with this drag behind us, we enter into a new phase of development as a transaction oriented online used car dealer, where our focus is clearly on all in high quality value for money used cars and the premium purchasing services. We believe that continuously enhanced used car quality and the purchasing services is the best way to maximize customer value and gain more customer trust and award our most referrals. Although it takes time to build a reputation and grow at scale with this used car and service oriented approach, we believe that this is a key to maintaining our long term competitive advantages and achieving sustainable growth. In order to create the best value and experience across the entire value chain for our customers, we upgrade our used car transaction process and migrated every sales step online. In transforming our business, we have upgraded the key points throughout our service process. We build a group of inventory collectors to curate value for money used car from across the country, ensure that the highest standards of car quality are met by careful inspection, simplify our pricing structure to facilitate the customers' purchasing decisions, offer professional consultants and purchasing services in a timely fashion from our online sales consultants. Work with more financing partners to offer diversified used car finance product and improve overall loan approach approval rate for our customer. Provide a well rounded quarantine program and after sale services and make the entire purchasing process more convenient and efficient for our customers. All these efforts have translated into better customer satisfaction and greater trust in our Yuxin brand, evidenced by our increased net promoter score among our customers. To further enhance the customer experience, we will reinforce our role as China's leading online used car dealer and begin to build our own inventory of used car this month. This will help us better control our supply chain for used car and deliver higher transaction certainty to our customers. As we move up the supply chain and assess used car at more favorable acquisition price, we will have a greater flexibility in offering more competitive pricing to our customers. Further building Yuxin as a chart data and go to online division for buying used car. In contrast to the local offline dealers' traditional way of acquiring inventory based only on individual experience and user case. Our inventory advantage comes from our strong data and analytic capability. We will take a more scientific and systematic approach to procure used car by analyzing the extensive used car user behavior, used car and transactional data aggregated on our platform over the years. We will selectively build our inventory based on our proprietary assessment of customer preference, of course, value for money performance as well as real time market dynamics and the trends. In addition, we will offer refurbishment as a new service by reconditioning our car to a like new condition before handling it over to our customers. This will be another key step in ensuring the best overall pricing experience as the reconditioning can further enhance our cars value for money performance. We believe that our data driving and quality focused inventory strategy will further enhance customer satisfaction, will enabling our to achieve a faster inventory turnover. This will be another significant milestone for us in solidify our position as China's leading nationwide online dealer and offering high quality value for money used car and the premium services. With that, I'd like to turn the call over to our CFO to walk you through the financial results. Zheng, please. Okay. Thanks, D. K. Hello, everyone. Thanks for joining us today. As D. K. Mentioned, in completing the online transformation of our transaction process, we have also restructured our costs and expenses to adapt to the new business and the service model. We now have a streamlined inventory sourcing and a car inspection team, online sales consultant team and the back office support team. In addition, higher customer satisfaction and more word-of-mouth referrals also translates into more organic traffic and lower the need for external traffic acquisition. All these factors will enhance our long term operational efficiency as we achieve greater scale over time. Thanks to the tax cut that was implemented in China since May this year, used car dealers now only need to pay 0.5% off of the used car sales. This means we now have a more active physical environment in which to operate as actual dealer. We will work with the financial institutions in the form of inventory financing to selectively building our own inventory. So that it will allow us to adequately manage our cash flow. Assessing used cars at more attractive acquisition costs by moving up, the supply chain will not only reinforce our control over inventory, but also help us to potentially drive market expansion over the long run. We believe this revamped inventory strategy will better position us to generate long term value for our shareholders, while maximizing the customer value and experience. Now let me walk you through our financial details for the quarter ending in June. Please note that the results I will discuss related to continuing operations only. All numbers are in RMB, unless otherwise stated. Also, please note that some numbers I refer to are non GAAP numbers. You can find the reconciliation of these numbers at the bottom of our earnings release. In the 3 months end June 30, 2020, total revenue were RMB62 1,000,000 compared with the RMB389 1,000,000 in the same period last year. The decrease was primarily due to the decrease in the 2C transaction volume and GMV as a result of economic downturn caused by the COVID-nineteen pandemic as well as the lead time that we need to fully ramp up this upgraded transaction process. Our total 2C revenue was RMB52 1,000,000 compared with the RMB341 1,000,000 in the same period last year. Online used car transaction volume is 3887 units for the 3 months ended June 30, 2020 and its corresponding GMV was RMB426 1,000,000. Moving at the Q revenue stream of our 2C business, commission revenue was RMB29 1,000,000 compared with the RMB179 1,000,000 in the same period last year, primarily due to the decreases in the transaction volume and GMV. Our commission rate expanded slightly to 6.7% from 6.2% in the same period last year as a result of our continuous effort to offer a nationwide selection of best value for money used cars as well as the quality transaction services to the customer. Value added service revenue was RMB23 1,000,000 compared with the RMB162 1,000,000 in the same period last year, primarily due to the decreases in the transaction volume and Q3. VVAS decreased slightly to 5.4% from 5.7% in the same period last year as a result of pricing adjustment during the COVID-nineteen period. Looking at other business, other revenue was RMB11 1,000,000 for the 3 months in June 30, 2020 compared with RMB48 1,000,000 in the same period last year. The decrease was mainly due to the divestiture of the company's salvage car related business in January 2020. Cost of the revenues decreased by 53% year over year to RMB80 1,000,000. The decrease was primarily due to the decrease in salary and benefits from employees engaging in car inspection, quality control, customer service and after sales services, as well as the decrease in the fulfillment cost due to a decrease in the transaction volume. Gross margin was negative 28.4% for the 3 months ended June 30, 2020, compared with the gross margin of 55.9% in the same period last year. Total operating expenses was RMB151 1,000,000. Non GAAP operating expenses, which excludes the impact of share based compensation, was RMB156 1,000,000. Sales and marketing expenses decreased by 61 percent year over year to RMB116 1,000,000. The decrease was mainly due to a decrease in salaries and benefits expenses as a result of the adoption of the flexible workload based staffing program and some termination of the employee contracts resulting from our business model upgrade as well as the decrease in the traffic acquisition costs. Sales and marketing expenses excluding the impact of our share based compensation were RMB111 1,000,000. G and A expenses decreased by 29% to RMB87 1,000,000. The decrease was mainly due to a decrease in salaries and benefits as a result of adoption of a flexible workload based staffing program and some termination of employee contracts results from our business model upgrade as well as the decrease in the share based compensation expenses and partially offset by the surveillance caused as a result of some termination of employee contracts and a goodwill impairment of RMB9.5 million reported in the reported quarter. G and A expenses, excluding the impact of share based compensation was RMB98 98 1,000,000. RMB expenses decreased by 29% to RMB23 1,000,000. The decrease was primarily due to a decrease in acceleration and benefits expenses as a result of adoption of the flexible workload based staffing program and some termination of the employee contract resulting from our business model upgrades. R and D expenses, excluding the impact of our share based compensation, was RMB24 1,000,000. Gain from the guarantee liabilities was nil for the 3 months end June 30, 2020. We incurred the guarantee liabilities associated with the remaining guarantee obligations from its historical facilitated loan and that were now transferred to Golden PASER. We adopted accounting standard update 2016-thirteen financial instruments credit losses, measurements of the credit loss on financial instruments on January 1, 2020. Under modified, we talked back to this method Before the adoption of ASC 326, gain or loss related to guarantee liabilities accounted for the under the operator of the amount determined on 450 and the amount determined under ASC 450 was reported as the gain or loss from guaranty liabilities. After the adoption of ASC 326, we expect to the credit losses from a contingent guarantee liabilities shall be accounted for in addition to and separately from the standard ready guarantee liabilities accounted for under ASC 460 and the provision for the contingencies guarantee liabilities is currently recorded within provision for credit losses and the release from the bank ready guarantee liabilities accounted for under ASC 4 60 is currently recorded within other operating income. Provision of credit losses, net was RMB74 1,000,000 for the 3 months ended June 30, 2020. The reversal of the probation for credit losses were primarily due to the release of a guarantee liability of RMB86 1,000,000 as a result of the supplemental agreement reached between us and one of our major financing partners in April 2020 with regards to our historical facility loans. Pursuant to this supplemental agreement, this financing partner agreed to set a cap on the amount of cash we would use to fulfill its guarantee liability with this financing partner from 2020 to 2022. Loss from continuing operations was RMB 128 1,000,000 compared with RMB223 1,000,000 in the same period last year. Non GAAP adjusted loss from continuing operations, which excludes the impact of share based compensation, was RMB133 1,000,000 compared with RMB196 1,000,000 in the same period last year. Net loss from continuing operations were RMB152 1,000,000 compared with RMB241 1,000,000 in the same period last year. Non GAAP adjusted net loss from continuing operations, which excludes the impact of share based compensation were RMB157 1,000,000 in the quarter compared with RMB214 1,000,000 in the same period last year. Turning to our cash position, as of June 30, 2020, we have cash and cash equivalents of RMB241 1,000,000. That sums our results for the 3 months ended June 30, 2020. Moving on to our guidance, starting this month, September 2020, we will build our own used car inventory. We have started to select the value for money used cars in the market, procure these cars and arrange for the reconditioning and refurbishment to operate them to a like new condition before selling them to our customers. We are currently assessing relevant revenue recognition in accordance with ASC 606 for selling our own inventory For these 3 months in September 30, 2020, taking into account the continuous impact of the COVID-nineteen pandemic, operating progress of our business model and the complete business divestiture, excluding the revenue to be recognized under selling our own inventory starting from September 2020, we expect our total revenue from continuing operations to be in the range of RMB33 1,000,000 to RMB35 1,000,000, which includes the commission revenue, value added service revenue and other revenue. If taking into consideration part of the revenue to be recognized under selling our own inventory, for which a portion of the revenue generated in the September 2020 may be recognized on a growth pace, we expect our total revenue from continuing operations for the 3 months ended September 30, 2020 to raise to a range of RMB65 1,000,000 to RMB70 1,000,000. This forecast reflects our current and preliminary view on the market and operational conditions and is based upon the current situation and uncertainties associated with the COVID-nineteen pandemic, which are subject to change. This forecast is also based on our preliminary accounting assessment of such inventory owning business model, which may be subject to refinement and the revision. That concludes our prepared remarks. Thank you, Mr. Song. Operator, we'd like to open the call for questions now. Sure. Thank you. We have our first question from the line of Eddie Huang of Morgan Stanley. Please go ahead. Hi, D. K, Michael and Nancy. Let me translate myself. So my question is about the long term outlook of the used car industry in China, especially for the next few years. So under that background, I think what's the advantage of the inventory taking business model we will adopt? Yes, just want to hear your thoughts on that. Thank you. In the past 1 or 2 years, operating product quality and services is a keynote in every consumer facing industry and sector. And the high quality product and the manufacturing services are the foundation of gaining more customers and building reputation. Under this environment, where individuals are highly connected with each other and the information exchange is highly effective, building reputation and gaining word-of-mouth referrals is key to a company's long term sustainable growth. And this is also very true in the used car industry. After over a decade of development where they lacked industry standards and honesty, The used car industry unfortunately had a less than satisfactory reputation. We believe being honest and sincere when servicing customers offering them high quality used cars and premium services is the best way to transform the entire industry and achieve a healthy and long term growth for the overall sector. Yes. So in the past 1 or 2 years, more and more consumers are turning away from new cars and choose to buy used car. This is not simply because they cannot afford buying a new car, but more about they have now have a more rational consumption philosophy. They want to spend less on a used car, but get a lack new condition, which is almost as good as a new car. With this trend, more and more used car dealers will come up willing to offer high quality used cars and premium services. And in turn, with this benefit, more and more consumers will also choose by used cars as well. And affected by the soft macro economy, overall used car industry will see a very slow growth this year, but looking at next 1 year or 2, we are expecting it will gradually recover to a double digit growth. We decided to build our own inventory of used cars now is actually encouraged and driven by our quality focus and the customer referral strategy. We believe offering high quality value for money used cars and the premium purchasing services will win us higher customer satisfaction and reputation as well. More customer cost and word-of-mouth referrals will not only increase our car sales, but also improve our ability to drive long term margin expansion as a result of the quality premium our customers are willing to pay us. We started to build our inventory now because we think we have 3 full advantages. The first one is about the digitalization and intelligent data analytics. Both our historical transactions and the current transactions actually exist in digital all in digital form. So do our customer behaviors and their preferences aggregated on our platform. So this enabled us to well manage the supply and demand as well as the selling prices with totally different decision making capabilities from the traditional used car dealers. And our current digital capabilities allow us to accurately predict the monthly sales of certain car makes and model even to predict the turnover of this specific model. And this perfectly guides us to selecting cars and build our own inventory. And the second is about our capability to realize purely online used car transaction and services. Currently in China's used car market, we are actually the only one who is able to sell cars completely from online. Our customers can easily make the purchase decision after reading our used car digital profile online. In addition, our customers are able to make these decisions without the need to be assisted by offline sales staff throughout the entire process. And also our fulfillment capability covers over 300 cities and counties combined across China. Our customers can receive their cars that meet or even beyond their expectations within days after they make the purchase online. Our pure online way of selling used cars significantly strengthened our ability of matching cards with consumers on a nationwide level, which also ensures a higher chance of faster turnover. The third one is about our advantages in the cost structure. And our cost structure is actually fundamentally different from that of traditional offline dealers. So unlike them, we don't need have the expensive offline physical showrooms and we don't need a large offline sales team either. Such advantages actually enable us to grow into a national online used car dealer with strong operational efficiency and the potential to grow at scale. So look at the macro environment, now is actually a good timing for us to take this approach given the current used car taxation creates a more favorable environment for us to build the inventory. And since May of this year, the used car tax cut in China allows dealer only need to pay 0.5% of used car sales as tax compared with 2% previously. And with tax rate, our overall tax expenses was increased much as compared with before. And in addition, for the cars that we procure upfront, the card titles are actually with us. So we are able to work with financial institutions on inventory financing. So when everything ramps up, the macro environment is actually also support our decision. Thank you, Eddie. Thank you. I'd now like to hand the conference back to Ms. Nancy Song for closing remarks. Thank you again for joining our call today and for your continued support in Uxin. We look forward to speaking with you again soon in the future. Thank you.