Earnings Call: Q3 2019

Nov 27, 2019

Earnings release

Ladies and gentlemen, thank you for standing by and welcome to Uxin's Third Quarter 2019 Earnings Conference Call. At this time, all participants are in listen only mode. After management prepared remarks, there will be a Q and A 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 Uxin. Please go ahead. Thank you, operator. Hello, everyone. Welcome to Uxin's Q3 2019 earnings conference call. Today, DK, our Founder and CEO and Jen Zeng, our CFO, will discuss our financial results for the Q3. Following the prepared remarks, D. K. And Zheng will be available to answer your questions. Before we start, I would like to remind you that our statements today will contain forward looking statements that we make under the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act of 1995. These statements are based on management's current knowledge and assumptions about future events that involve risks and uncertainties, which could cause actual results to differ materially from our expectations. Uxin does not undertake any obligations to update any forward looking statements, except as required under applicable law. For more information about the potential risks and uncertainties, please refer to the company's filings with the SEC. With that, I will now turn the call over to our CEO, D. K, please. Thank you, Nancy. Hello, everyone. Thank you for joining our Q3 2019 earnings conference call. We are pleased to report a solid guide of results for this quarter. Our total revenue increased by 33% year over year to RMB461 1,000,000, exceeding the high end of our previous guidance. In particular, 2C revenue recorded another robust year over year growth of 2 47 percent. And even more encouragingly, our adjusted net loss narrowed notable by 40% year over year and 19% quarterly over quarter to RMB268 1,000,000. Demonstrating the results from our strong commitment to control costs, enhance operating efficiency and improve margin profile. Looking at our 2C business in further detail, we completed over 23,500 online used car transactions during the quarter, reflecting strong year over year growth of 107% As some cities and regions have adopted the new emission standards China VI starting from July and don't allow car with lower emission standards to register locally. We did experience a certain impact from this policy change, which resulted in relatively flat quarter over quarter transaction volume. Despite the impact, we are very pleased that our unique value proposition and strong monetization ability help to further increase our 2C take rate to 11.6% from 11.2% in the 2nd quarter and 7% a year ago. This translated into per unit revenue of around RMB14000 for the 3rd quarter, up from about RMB13000 in the 2nd quarter. Looking ahead, the used car market is typically quite resilient. As more used car inventory meeting the new emission standard becomes available on the market, the sector will gradually take us to the impact from policy change. We are also confident that we will be able to deliver strong sequential and year over year growth for online transaction volume in the coming year end peak season. Underpinned by our key customer value, we believe our monetization ability will also get strong along the way. On the franchisee model front, we continued to penetrate into lower tier city by expanding the franchisee network to over 1200 stores. Our franchisee contributed over 35% of total 2C transaction volume for this quarter. Moving on to our 2B business, we recorded a transaction volume of over 30,000 used car from our B2B auction platform. Although the volume declined year over year as a result of the continuing shift of our strategic focus toward our 2C business, We slightly increased our 2B take rate to 4.7% in this quarter from 4.5% in the prior year period. We are known as one of the most efficient channels for dealer to source their inventory. Our B2B auction platform will continue to serve as part of our important product and service offering to our dealer customers. Before Deng provides a deeper overview of our Q3 financial details, I'd also like to highlight the key area we have been and we'll continue to focus on in order to achieve sustainable growth over the long term. First, we are fully concentrated on executing our strategy of focusing on online used car transaction to drive our already leading position as an online used car dealer. We are focused to maximize our key value proposition for customer, which are a national wide selection of used car, better price, a one stop online purchasing experience and a high quality professional sales consultant services. We believe this value differentiates us in the market and will enable us to stay ahead of the competition, which in turn will further enhance our ability to monetize online used car transactions. 2nd, we are committed to continuing to enhance operating efficiency. We have been and will continue to streamline our business operators operations across the board. To highlight a few of our ongoing initiative in these areas. In terms of inspection, we continue to improve the inspection to sales conversion, which is to sell more used car while keeping the number of car inspected stable or even reduced to some extent. We have been continuously optimizing the inventory mix inspected and listed on our platform by selecting the inventory which meets our customers' preference and has desirable cost of preference. For example, we focus more on inspect the car which meet our target price range and cater to our customers' demographic. We also prioritize the inspection on those, which meet a certain price to performance criteria or freeze inspection on those, which we already have quite enough SKU available for the moment. This makes our real time inventory essentially get more exposure and become more marketable, which in turn saves our inspection results and effectively increase productivity. In terms of fulfillment, we are able to continuously enhance logistic planning as our transaction volume in growing on much larger scale than previously. With more used cars sold and delivered through our network, we have not only gained a stronger bargaining power to get better terms when negotiating with a car shipping company, but also become better positioned to optimize the road plan to make sure each delivered trucks can be loaded as full as possible for car transportation. This has effectively lowered our per unit to deliver cost. In terms of traffic optimization, we continue to optimize our traffic optimization channel mix by allocating more resource to this generating high quality and more cost effective sales leads. With our enhanced sales productivity and expanded sales forces team in both our direct and franchising model, we are confident that we will gradually increase the leads to sales conversion going forward as we drive higher the transaction volume without having to invest more in traffic acquisition than our current level. All those efforts in cost control and efficiency measures contributed to the improved gross margin and narrow loss in the Q3. With respect to the near term, as we continue to execute on these top priorities, we are confident that we will be able to drive top line growth, improve margin and a narrow loss as this year concluded. And with respect to the long term, we are committed to building the best destination for customer to buying used car online in China. We believe the growing traction from our target customers coupled with our effort to effectively managing our business will translate into our long term sustainable growth and profitability in the coming years, which in turn will create long term value to our shareholders. With that, I would like to turn the call over to our CFO to go over the financials. Ron, please. Okay. Thanks, D. K. Hello, everyone. Thanks for joining us today. As D. K. Highlighted, we are very pleased to report a solid Q3 during which our gross margins further improved and operating and net losses significantly narrowed. In addition to the cost control and the efficiency efforts D. K. Mentioned, we have also streamlined our headquarter related operations, such as the administrative management and R and D processes by optimizing internal online business management system. Moving forward, prudent cost control and operating efficiency will be an ongoing focus area for us. We are confident that coupled with our superior monetization ability will help to further narrow our losses towards the end of this year. At the same time, we are confident that our business is well supported by our current cash position. 1st, divesting the loan facilitation related business will significantly lower our cash requirement. 2nd, we believe our losses will continue to narrow as a result of our ongoing efforts in cost control and enhancing operating efficiency. 3rd, pursuing to the definitive agreements we enter into with Golden Pacer, the working capital associated with the divest the loan facilitation business that we advance to certain financing partners on behalf of Golden Pacer during the Q3 will be returned back to us in due course when the transaction is closed. 4th, we expect to receive an aggregate cash consideration of US100 $1,000,000 after the closing of the transaction. All of this will contribute to our cash position and coupled with our continuous efforts to enhance our monetization ability and operating efficiency. We believe we can build a more sustainable and profitable business over the long run. Now, let me walk you through our financial details for the Q3. Please note that the financial impact of the proposed divestiture has already been reflected in our Q3 results and all I discussed 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 a reconciliation of these numbers in our earnings release. In the Q3, total revenues increased by 33 percent to RMB461 1,000,000 from RMB346 1,000,000 in the prior year period. The increase was primarily due to the increases in the 2C transaction volume, GMV, commission rate and the value added take rate. Drilling down to our business pillars, in terms of our 2C business, total 2C revenue was RMB328 1,000,000, representing an increase of 2 47% year over year from RMB94 1,000,000 in the prior year period. Online used car transaction volume increased by 107% year over year to 23,556 units and its corresponding GMV increased by 110% year over year to RMB RMB2828 1,000,000. Moving on to more details. Commission revenue was RMB176 1,000,000, representing an increase of 193% from RMB60 1,000,000 in the same period last year, primarily due to the increases in the transaction volume, GMV and commission rate. Benefiting from our stronger value proposition to consumers improved the user experience and higher pricing power. The commission rate increased to 6.2% from 4.5% in the same period last year. Value added service revenue was RMB151 1,000,000, representing an increase of 3 42 percent from RMB34 1,000,000 in the same period last year, primarily due to the increases in the transaction volume, GMV and VAS take rate. The VAS take rate increased to 5.4 percent from 2.5% in the same period last year due to our higher pricing power brought by our optimized N and D diversified services. In terms of our 2B business, 2B transaction facilitation revenue was RMB73 1,000,000, representing a decrease of 63% year over year. Our take rate for 2B transaction facilitation slightly increased to 4.7% from 4.5% in the prior year period. Cost of revenues increased by 10% year over year to RMB207 1,000,000. The increase was primarily due to the increases in the salaries and benefits of employees engaged in car inspection, quality control, customer service and after sales service, as well as the increase in the fulfillment cost, which was corresponding driven by the increase in the transaction volume. Gross profit increased by 61% to RMB255 1,000,000 from RMB158 1,000,000 in the prior year period. Gross margin increased to 55% in this quarter compared to 46% in the prior year period, driven by better economy of scale and optimized cost structure. Total operating expenses was RMB510 1,000,000. Non GAAP operating expenses, excluding the impact of share based compensation, were RMB511 1,000,000. Sales and marketing expenses decreased by 26% year over year to RMB330 1,000,000. This decline reflects our continuous efforts to enhance operating efficiency. Sales and marketing expenses, excluding the share based compensation expenses of NIO, as a percentage of total revenue decreased to 72% during the quarter from 130% in the prior year period. G and A expenses decreased by 24% to RMB126 1,000,000. The decrease was primarily attributable to the decrease in the share based compensation expenses. G and A expenses excluding share based compensation expenses was RMB126 1,000,000, representing 27% of total revenues in the quarter, relatively flat compared to the prior year period. R and D expenses increased by 58% to RMB54 1,000,000. The increase was primarily due to the increase in the salaries and the employee standing expenses. R and D expenses, excluding the impact of the share based compensation expenses, was RMB55 1,000,000, representing 12% of total revenues in the quarter compared to 10% in the prior year period. Loss from continuing operations was RMB253 1,000,000, a decrease from RMB490 1,000,000 in the prior year period. Non GAAP loss from continuing operations, which exclude the impact of share based compensation, was RMB254 1,000,000, a decrease from RMB418 1,000,000 in the prior year period. Non GAAP loss from continuing operations as a percentage of total revenues was 55%, a significant decrease from 121% in the prior year period. Net loss from continuing operations was RMB267 1,000,000, a decrease from RMB517 1,000,000 in the prior year period. The narrowed net loss was primarily due to the better economy of scale and the greater operating leverage generated from our continuous efforts to streamline business operations and enhance operating efficiency. Non GAAP net loss from continuing operations, which exclude the impact of share based compensation, was RMB268 1,000,000 in the quarter, a decrease from RMB445 1,000,000 in the prior year period. Non GAAP net loss from continuing operations as a percentage of the total revenue was 58%, decreasing significantly from 129% in the prior year period. Turning to our cash position, as of September 30, 2019, we had cash and cash equivalents of 627 1,000,000. Moving on to the guidance, factoring the divestiture of our loan facilitation related business to Golden Paper, we expect the total revenue for the Q4 of 2019 to be in the range of RMB540 1,000,000 to RMB560 1,000,000. As we focused on the cost control and efficiency measures to build a more sustainable and profitable business in the long run, we will also provide guidance on near term operating profit expectations going forward. We expect the non GAAP adjusted loss from continuing operations to be in the range of RMB150 1,000,000 to RMB170 1,000,000 for the Q4 of 2019. This forecast reflects the company's current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks. Thank you, Mr. Zeng. Operator, we'd like to open the call for questions now. Thank you. The first question comes from the line of Eddie Huang from Morgan Stanley. Please ask your question. I have two questions. The first is about ASP. We have witnessed that the ASP of the 2C business actually has been increased in the past 3 quarters. So in the Q3, I think the ASP has almost reached around RMB 120,000, which is almost the same level as the average ASP of a new car in China. What do you think of the trend of this ASP in the next few years? And how do you balance the ASP versus the transaction volume? And what do you think the implied revenue per unit level in the near term and in the long term? The second question is about the competition. Since we have achieved the narrow loss in this quarter and our guidance also implies that a further narrow loss in the next quarter. So I think the overall the cross regional transaction business model has been proven. So that's why I think some of the major competitors actually also launched this cross region transaction business. Have you fueled any direct competition from these competitors the similar business? Or do you think it's just in the it's still have a lot of room for us to gain share even if there's the competition from the video competitors? Thank you. Yes. So our platform will actually provide a very full price range for our cars from RMB30,000 to up to RMB1 1,000,000. So our current AIC is, like you said, is around RMB120000. So I think mainly comes from 2 reasons. The first one is regarding to the relatively higher car price range, it's more with younger car age. So this used cars more cater to the clientele who care more about the services or the after sales guarantees or wider selection of used cars. Yes. So if we look at the mature market in the U. S. Like CarMax or Havana, for CarMax, their average selling price is about US22000 dollars For Carvana, it's about US21000 dollars But if we look at the overall market in the U. S, the average selling price is about only US10 $1,000 So this is quite similar to China's market conditions. So for us, we feel very encouraged is that we are very encouraged by our current ASP because we can sell like RMB5000 used car or a RMB 120,000 used car, But the cost incurred is quite similar regarding the inspection cost or delivery cost. But different car price equals to different per unit revenue we can earn if we look at our if we charge the same take rate. Yes. So in terms of the volume and car price, I think it's not the one way or the other. So our current focus is more to maximize our revenue scale and healthy and sustainable profitability that comes along with this high profitability revenue. Yes. So our revenue per unit revenue increase is actually an evidence of consumers' recognition of our values brought by our online used car transactions product offerings. So we won't drive the volume by compromising per unit profitability. Instead, we will drive the volume growth as we continue to enhance our online used car transaction services and more consumers naturally will be attracted to buy cars online from us. So we believe this will help us to reach a sustainable profitability in the longer term. Yes. We do observe some peers in the market are copying our online used car transaction model at pixel level. So this is actually a strong proof that we did the right thing 2 years ago to choose such business model. So we believe online used car transactions is definitely the future trend. So we believe online this market is still a blue ocean market. So it's large enough to have a second player. So the compensation in the online used car transaction area is actually multi dimensional. So it has that very high bar for companies' ability to organize, operate and manage the business in a highly efficient manner. So and the ability to provide high quality customer services as well as to operate a highly efficient and stable supply chain. As the first mover in the market, we have accumulated massive know how and expertise and build strong competitive advantages here. So we are very confident to win this competition for sure. Thank you. Thank you. The next question comes from the line of Ronald Keung from Goldman Sachs. Please ask your question. Thank you. Hi, D. K, Michael and Nancy. So I have two questions and then I'll translate it to Chinese. Firstly, it's on the industry. As you mentioned, the GuoWu portfolio that has impacted sort of industry growth this year, not only new cars, but also used car. Do we see any signs of this blossoming or do we will this impact kind of drag on for a few more quarters before we see any potential uptick? And within the growth in this quarter, can you share just how the lower tier city growth has been versus higher tier city? Just want to see how growth has been trending for these markets, particularly you mentioned about the strong volumes from the franchisees? My second question would be given that the Golden Pacer restructuring is mostly behind us, initiate just how the current management team, D. K. And rest of the team, how are you spending your latest focus and time into with the finance business now, no longer with the group? What are we focusing on particularly in the cost side and in user experience? Just want to hear how the management team is doing in the latest restructured entity. Yes. So we did see the new car market is declining and it's worsening now. So the used car market also took some hit. For the used car market specifically, it's slow the growth rate is slowing mainly because of 2 reasons why it's like you said, it's a new emission standard adopted in a few regions like Zhejiang province or Hebei or Guangdong provinces. So for us, it affected about 25% of our Q3 volumes. We won't expect the policy will be further adopted by other cities because back in 2016, the state government have already issued the regulation to lift the restriction on the car transported into across regionally. So Yes. We will see the market will be digesting the policy changes and in the next 2 or 3 quarters, the market will be picking up. So mostly because there will be more used car inventories meeting the new emission standard will be available on the market. So the other factor is actually from the new car price decline side. So from mid this Q2, we did see the new automakers have been cutting their new car prices to boost sales. So this will put some short term pressure on the used car market because it affects the price to performance of the used cars. So we think the new car price cost has already reached to bottom to some percent. So the impact from new car market will be minimizing over time over into into next year. So the transaction volume on our platform from the lower tier cities in Q3 was basically similar to our Q2 level, about 40% of our total volume. And the growth rate between high tier cities and the lower tier cities, our platform are also pretty similar. So the first action we take is we leverage big data analytics to improve our inventory mix available on our platform. So to target the most useful inventory, we can actually downsize the number of cars inspected. So you can see this year, we actually inspected less cars than last year, but the transaction volume is actually quite higher than last year's level. So this will help us to reduce the per unit inspection cost and we can also help consumers to better identify the better price to performance cars on our platform as well. Yes. So the second action we take is we enhance the customer satisfaction in terms of the fulfillment such as the timeliness of delivery and the consistency of the cost condition between consumers see the video inspection report online and the actual car they see when they receive the car. So the increased satisfaction actually help us lower our car return rate effectively. Yes. So buying cars online is pretty very new way. So our sales consultants need to be fully prepared to convert the consumers to buy cards online. So we also upgraded our CRM system by leveraging the AI technology, So we can better recommend the cards to our consumers. And we also build up this very highly effective sales consultant sales assistant system to enhance the professionalism of our sales reps. So this will also enhance our customer satisfaction and the conveyor rate as well. Yes. So the 4th area is on logistics. So we optimized our logistics planning by upgrading the former 2 part logistics to 3 part logistics. We increased the portion of the main route versus the brown route. So currently the main route accounts for about 60% of our total logistic assistance. So it will effectively lower the per unit delivery cost and also increase the full load rate as well and also make sure the car can be delivered to the consumer stores as soon as possible in a timely manner. Thank you. The next question comes from the line of Ashley Xie from Credit Suisse. Please ask the question. Thanks, management, for taking my questions. I have two questions. One is about users' acceptance on online car purchase without seeing the cars offline. Is there any user metrics that could be shared? And second question is on the cash position. How much receivables would we have from Golden PASI in 4Q given we have made some deposits on behalf of them? And also, what's our plan on the use of the cash together with the USD100 1,000,000 proceeds from the transaction? Thank you. Yes. So it's true that still there are many consumers go offline to check the car and buy the car. But buying cars online is a totally new experience for consumers. So it will take some time for consumers to shift their shopping habits. But what we do see is there are increasing number of consumers buying cars online from Uxin. So this year, we are looking at 100,000 used online car transactions from our platform. So we posted the same number of consumers actually accepted this way of buying cars online. So buying cards online is definitely the future trend. So buying cards online also have the non comparable advantages over going offline. So we can provide a much wider selection of used cards from nationwide. And also because we don't have fixed cost of the offline stores, we can offer better prices to consumers. So we are able to also provide a one stop solution online to consumers, which cannot be provided by the offline stores. So the convenience we can deliver to the consumer also help us. Paul? Okay. Thanks, Ashley. I'll address your second question. So I'm more likely to give you the overall cash position of our current status. So I think our business is well supported by our current cash position. 1st of all, divesting the loan facilitation business has significantly lower our cash requirements. We no longer need to put cash deposits as it restricts cash with the financing partner or buyback the default loans. So both will lift to the pressure on our working capital. So secondly, without the loan facilitation business under the list call, our bottom line will be a reasonable indicator of our cash flow performance. As we continue to take cost control measures and enhance efficiency, we believe we can keep narrowing the losses and minimizing the cash outflow in this sense. And address your question per the definitive agreement we enter into with Golden Pacer, this quarter we still advanced some working capital associated with the divestiture. After the transaction is closed, the portion of the cash will be returned back to us in due course. Last, we also expect to receive an aggregate cash consideration of US100 $1,000,000 associated with the divestiture after the closing. So, collectively, all of this will contribute to our cash position. Again, with our focus on enhancing monetization ability and operating efficiency, we believe all will contribute to our long term sustainable growth. Thank you, Ashley. Thank you. We have reached the end of question and answer session. I would now like to hand the conference back to Nancy for closing remarks. Thank you everyone for joining today's call and for your continued support for Uxin. We look forward to speaking to you again in the near future. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.