Earnings Call: Q1 2019

Jun 10, 2019

Earnings release

Ladies and gentlemen, thank you for standing by and welcome to Uxin's First Quarter 2019 Earnings Conference Call. 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 Uxin. Please go ahead. Thank you, operator. Hello, everyone. Welcome to Uxin's Q4 2018 conference call. Today, D. K, our Founder and CEO and Zhen Zeng, our CFO, will discuss our financial results for the Q4. Following the prepared remarks, ZK and Zhen 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 made 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 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 the company's filings with SEC. With that, I will now turn the call over to our CEO, D. K. Please. K. Choi:] Thank you, Nancy. Hello, everyone. Thank you for joining our Q1 2019 earnings conference call. We are pleased to start the year with another strong quarter of growth as well as a significant improvement on the bottom line. Total revenue in the quarter increased by 55% year over year and exceeded RMB1 1,000,000,000, once again beating the high end of our guidance. Thanks to great economics of scale and more effective cost control. Gross margin improved to 70% from 66% in the same period 1 year ago. We also continued to gain operating leverage during the quarter, which enabled us to cut adjusted net loss by over 50% year over year to RMB231 1,000,000 and significantly reduced adjusted net loss as a percentage of total revenue to 23% from 74% in the same period last year. Before we dive into operations, I'd like to highlight that Starting from the Q1 this year, we will only disclose the transaction volume and the corresponding operational metrics for the transaction with generated revenues. With this change, transaction volume growth will serve as better indicator of our revenue growth. By excluding free of charge transactions, investors can get a clear picture of the take rate that we can actually charge from 1 used car. And it will better demonstrate our ability to enhance monetization and the development of our cross region and intra region business. In addition, this will reflect how we are more focused on the transaction, which have generated monetization potential and a better margin profile. The new method of disclosure has been applied to all the metrics of this earnings call. Now, I will provide some further color on our operating starting with our 2C business, which continued to be the primary growth driver for Uxin. We facilitated transactions for over 78,000 used car on our 2C platform, up 40% from the same period a year ago. Revenues from transaction facilitation services increased by 2 24% year over year to RMB308 1,000,000. Far outpacing of the growth of our 2C business and contributed 35% of total 2C revenues, which we are expanding our loan facilitation services. We are also continuously improving our risk management process. We managed to keep the M3 plus delinquency rate relatively stable at 1.45% as of Q1 of 2019, a similar lever to the 1.41% as of the previously quarter. The cross region business continued to play an increasingly integral role in driving the growth of our 2C business. We maintained the growth momentum for the peak season in the Q4 and facilitated over 2000 over 20,000 cross region transactions in the Q4, up almost 50 times year over year. The cross region business contributed 26% of total 2C transaction volume and 32% of total 2C revenues, up from only 1% of transaction volume and revenues in the same period last year. As we control 100% of the entire shopping process and provide unique value to customer through our nationwide selection of used car and a better price, we are naturally able to generate a higher take rate in our cross region business. In the Q1, we generate a total take rate of 12.6% for cross region business transaction, of which 6.2% was for the transaction facilitation fee and 6.4% was for the loan facilitation services. During the quarter, we also made significant progress expanding our business in lower tier cities. As we previously noted that we are now adopting a franchising model to expand our service network and complement it complement the service centers that we operate directly. With the expansion of our cross region business, our franchise model has gained significant traction from local merchants across the country. As of end of the quarter, we had over 1300 service center across China, of which over 600 was operated by ourselves and over 700 by franchisors. The majority of the franchised services center were operated gradually throughout the quarter. On average, this franchised service center were fully up and running for 1.3 months during the quarter. And collectively, they contribute a low teens percent of total cross region transactions. Our service network covered over 400 per factor level city or 900 cities and region at all level of China administrative deviations, include the prefecture level city, country level city and the district. In order to enhance user experience, we have been promoting on-site services across country. Upon request, our sales consultant can visit the customer at their workplace or home, help them when we first engage with them. However, if the customer insists on seeing the car in person, but doesn't require financing, We will no longer accompany him to visit an offline dealership or assist him with the purchase process on flat. In the quarter, we generated a total take rate of 8.4% for interregime used car transaction, of which 2.5% was for the transaction facilitation services and 5.9% was for the loan facilitation services. Moving on to our 2B business, transaction volume decreased by 43% to 36,500 used cars during the quarter. The decline was primarily due to our change of the approach in serving customer with car selling needs as well as dealers growing preference to sell used cars on our 2C platform, which was further bolstered by the growth of our 2C cross region business. B2B transactions facilitation take rate was 3.8%, down from 4.3% in the previous quarter. Strategically, the 2P business will continue to serve as a complementary pilot of our business that strengthens our relationship with dealer and expands the inventory available for our 2C customers. Given that, we may continue to provide favorable terms to our dealers on the 2B platform, so as to maintain stickiness as well as encourage dealers to expand the collaboration in the 2C business, especially cross region transactions. Now, I'd like to briefly discuss our new strategic partnership with 58.com. 58.com's used car business in complementary with Uxin Business Model. And we believe our partnership will lead to many synergies. 58 Used Car is a well established classified category on 58.com's platform with a huge volume of targeted used car traffic and a large user business. By combining their traffic with our deep expertise in fulfilled used car transactions throughout the entire value chain. We are confident that we will improve monetization and generate significant value for both company. More importantly, in recent year, 58 dotcom has been penetrating into lower tier city as well. This is aligned with our strategy focused on cross region transactions and the expansion of our service network into lower tier city across China. Through our strategic cooperation, we are confident that After several years, we have continuously involved Uxin's business model to better meet customer demand and we have experienced rapidly growth of both transaction volume and revenue. As we continue to expand our business, we will increase our focus on achieving more sustainable growth by implementing the following three initiatives. First, we will continue shifting our resource to the cross region business, where we see a huge market opportunity. In addition to targeting this significant growth potential, our strategic focus on cross region transaction will enable us to generate greater revenue and take us one step closer to profitability. 2nd, we will continue to improve our operation efficiency by taking a more strict approach to cost control and expense management. 3rd, we will adopt more stringent risk control procedure and concentrated our resource on used car assets with better risk profiles. We have already been reviewing our loan facilitation business and are taking a more prudent approach within facilitating a loan. This will ensure that we build an even strong foundation and improve cash flow. Together, this initiative will help us build a more sustainable business over the long term and take us one step closer to profitability. With that, I would like to turn the call over to our CFO, Zeng Zeng, to talk through our financials. Zeng, please. Okay. Thanks, D. K. Hello, everyone. Thanks for joining us today. Now let me walk you through our financial details on the first quarter of 2019. Please note that all numbers are in RMB, unless otherwise stated. Also, please note that some numbers I refer to are non GAAP. You can find a reconciliation of these numbers in our earnings release. In the Q1, total revenue increased by 55 percent to RMB104 1,000,000 from RMB649 1,000,000 in the prior year period. The increase was primarily due to the increases in the 2C transaction volume, transaction facilitation take rate and amount of loans facilitated. Drilling down to our business pillars, in terms of our 2C business, total 2C revenue was RMB883 1,000,000, representing an increase of 94% year over year from RMB454 1,000,000 in the prior year period. Moving on to more details, revenue of 2C cross regional business was RMB 284,000,000, representing a significant increase of 54 times from only RMB5 1,000,000 in the prior year period. Cross regional transaction volume increased substantially by 48 times to 20,647 units from only 420 units in the prior year period. And the corresponding GMV increased to RMB 2,268 1,000,000 from RMB67 1,000,000 in the prior year period. Cross regional transaction facilitation revenue increased substantially by 47 times to RMB140 1,000,000 from only RMB3 1,000,000 in the prior year period, primarily due to the increase in the transaction volume, GMV and the transaction facilitation take rate of used cars sold through our cross regional business. Take rate for the cross regional transaction facilitation increased to 6.2% from 4.4% in the prior year period, primarily driven by our enhanced service, user experience and higher pricing power. Cross regional loan facilitation revenue significantly increased by 64 times to RMB144 1,000,000 from only RMB2 1,000,000 in the prior year period, primarily due to the increases in the financing transaction volume and the amount of loan facilitated as well as the increase in loan facilitation take rate of the used car facilitated through our cross regional services. Take rate for cross regional loan facilitation increased to 6.4% from 3.3% in the prior year period. Revenue of 2C intra regional business was RMB599 1,000,000, representing an increase of 33 percent of RMB449 1,000,000 in the prior year period. Intra regional transaction volume increased by 4% year over year to 57,630 units and its corresponding GMV increased by 22% year over year to RMB6624 1,000,000. Intra regional transaction facilitation revenue increased by 83 percent to RMB168 1,000,000 from RMB92 1,000,000 in the prior year period, primarily due to the increases in the transaction facilitation take rate and GMV of the used cars sold through our intra regional services. Take rate for intra regional transaction facilitation increased 2.5% from 1.7% in the prior year period. Intra regional loan facilitation revenue increased by 21% to RMB432 1,000,000 from RMB357 1,000,000 in the prior year period, primarily due to the increases in the financing transaction volume and amount of loans facilitated for the used cars sold through our intra regional services. Take rate for intra regional loan facilitation remained at 5.9% compared to the prior year period. In terms of our 2B business, our 2B transaction facilitation revenue was RMB70 1,000,000, representing a decrease of 36% year over year, primarily due to the decline of transaction volume, which reflects our ongoing strategy shift to the 2C business. The decrease of 2B transaction volume was mainly because of a change of approach in serving customers with car selling needs, as well as the dealers' growing preference for retail transactions through our 2C platform. Our take rate for 2B transaction facilitation increased to 3.8 percent from 3.5% in the prior year period. Cost of revenues increased by 33% year over year to RMB296 1,000,000 compared to RMB222 1,000,000 in the prior year period. The increase was primarily due to the increase in cost of fulfillment, title transfer and the registration, which were correspondingly driven by the increase in the transaction volume as well as the increase in the salary and the benefit of employees engaged in the car inspection, quality control, customer service and after sales services. Gross profit increased by 66% to RMB7 8,000,000 from RMB427 1,000,000 in the prior year period. Gross margin increased to 70% in the quarter compared to 66% in the prior year period. Total operating expenses was RMB969 1,000,000. Non GAAP operating expenses, excluding share based compensation, was RMB915 1,000,000. For sales and marketing expenses, slightly increased by 8% year over year to RMB681 1,000,000 compared to RMB633 1,000,000 in the prior year period. The minimal increase reflects our continuous efforts to enhance operating efficiency and improve conversion rate. Sales and marketing expenses as a percentage of total revenue decreased to 68% during the quarter, decreasing from 97% in the prior year period. For G and A expenses, increased by 17% to RMB188 1,000,000 from RMB161 1,000,000 in the prior year period. The increase was primarily attributable to the increase in the share based compensation expenses. G and A expenses, excluding share based compensation expenses, was RMB135 1,000,000, representing 13% of total revenue in the quarter, decreased from 24% in the prior year period. RMB expenses increased by 17% to RMB80 1,000,000 from RMB68 1,000,000 in the prior year period. The increase was primarily due to the increase in accelerating and benefit expenses. RMB expenses excluding share based compensation expenses was RMB79 1,000,000, representing 8% of total revenue in the quarter, decreasing from 10% in the prior year period. We are confident that we our increasing operating leverage and the prudent approach to expenses management will continue to improve our profitability over time. Loss from guarantee liability was RMB20 1,000,000, compared to a loss of RMB18 1,000,000 in the prior year period. The loss was primarily due to the fluctuation in delinquency rates from the Q4 of 2018. Loss from operations was RMB261 1,000,000, a decrease from RMB453 1,000,000 in the prior year period. Non GAAP loss from operations, which exclude share based compensation expenses, was RMB208 1,000,000, a decrease from RMB451 1,000,000 in the prior year period. Non GAAP loss from operations as a percentage of total revenue was 21%, a significant decrease from 69% in the prior year period. Fair value change of derivative liabilities was nil in the quarter compared to a loss of RMB359 1,000,000 in the prior year period. We no longer see any impact of derivative liability as the preferred share were covered into ordinary share at the time of IPO. Net loss was RMB285 1,000,000, a decrease from a net loss from RMB839 1,000,000 in the prior year period. The narrowed net loss was primarily due to greater operating leverage and a decrease in loss from fair value change of derivative liabilities. Non GAAP net loss, which excludes the share based compensation expenses, was RMB231 1,000,000 in the quarter, a decrease from RMB478 1,000,000 in the prior year period. Non GAAP net loss as a percentage of total revenue was 23%, decreasing significantly from 74% in the prior year period. Turning to our cash position. As of March 31, 2019, we have the cash and cash equivalents of RMB455 1,000,000 compared to RMB801 1,000,000 as of December 31, 2018. We have a short term deposit and other investment product of RMB597 1,000,000, compared to RMB596 1,000,000 as of December 31, 2018. We had a restricted cash of RMB2025 1,000,000 compared to RMB2013 1,000,000 as of December 31, 2018. Before we move on to the guidance, I'd like to highlight our determination to implement of initiatives that DK Online, which will help drive the substantial growth of our business. Our strategy focusing on building the cross regional business will fuel our growth and our initiatives to improve cost control and the strict management risk will enhance our operating efficiency and move us steadily towards profitability. Factoring the measure that we are taking, we expect the total revenue for the Q2 of 2019 to be in the range of RMB900 1,000,000 to RMB950 1,000,000. This forecast recently completes current and primary view on the marketing and operational conditions, which are subject to change. That concludes our prepared remarks. Thank you, Mr. Zeng. Operator, we'd like to open the call for questions now. Ladies and gentlemen, we will now begin the question and answer 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 that you have been talking about to implement 3 new initiatives, including the shift more resources to cross region transactions, improved operating efficiency as well as focus on the used car assets with better risk profile. So can you give us more color on how such initiatives will be reflected on the operation as well as the financial metrics in terms of the transaction volume growth, proportion of the cross region transaction, loan attach rates and advertisement spending in the next few quarters? This is the first question. And second question is, actually, I would like to have your view on the competitive landscape of the used car e commerce industry. On the one hand, we actually noted that the demand of both new car and used car is relatively weak here today in China. But on the other hand, we have also noticed some of our competitors are claiming to increase their investment in the used car business. So our new initiatives seem to me that is to focus more balance between the sustainable growth with profitability. So does it mean that you think the used car e commerce industry has gone to a stage that profitability is becoming the most one of the most important target of all the used car e commerce companies? Thank you. Okay, Eddie. Here is Michael here. So I'll address your first question. So overall speaking, after a year of the rapid development, we think now is the right time for us to shift our focusing on high quality and more sustainable growth. And we have been continuously optimizing our business model and operations and we have identified great market opportunity in the 2C, especially for the cross regional business. More importantly, we have built the core capability to carry out the business and have the 1st mover advantage. In order to capture this market opportunity, I think we will shift the key resource to our cross regional transaction and become more focusing on the expanding this core business. Using our new disclosure method, we are looking at around 40% of the transaction volume coming from the cross regional transaction this year. Concentrating on the within the cross regional business will not only give us more sustainable growth, but also take us 1 step closer to the profitability. And to ensure this high quality growth starting from the Q2, we have been conducting an overall for the whole company in-depth review of our business operations, operational efficiency and the cash flow. And for some of the low margin and or the low efficient business, such as new car loan facilitation business, we decide to stop the business. For the loan productively, the headcount or geographic regions, we streamlined related headcount and operations. And at the same time, we have decided to take more conversation approach to our loan facilitation business. And going forward, we will commit our resource to use car asset with better risk profiles. We will also adopt strict risk control process and be more prudent when facilitating the loan. Regarding some of the intra regional loans with less satisfactory risk profile or low cash flow performance, we were also cutting back this portion of volume. But we are confident that it will lead a more sustainable business and improve the cash flow, since we no longer provide onset transaction facilitation service to the local transaction without financing package and not disclose the free of charge transaction financing, the tax rate will seem higher. And for the I think the intra regional business, our loan tax rate will 100% and for the cross regional is around 80% to 85%. And we will also take strict measure to manage cost and expenses to ensure that we are maximizing the impact of average dollar we spend and continue to optimize the operational efficiency. Compared to the last year, our branding expenses will be greatly reduced in this year. And I think with this initiative, through our top line of this year will be lower than the previous expected. Our bottom line will be further improved. So we believe we can build an even stronger foundation for our long term growth. Hello, Eddie. This is D. K. I'm addressing your second question. I use Chinese to answer the question and then Nancy help me to translate. Okay. Right. Okay. Yes. So I think the key difference from previous years is the different models between different players are very clear now. So some of the players are choosing asset heavy model and some of the competitors is choosing the traffic direction model. And for us, for Uxin, we are a firm believer of the B2C model and our key value is in the for the whole supply chain. Yes. So we have been prepared for cross regional services for quite many years. So starting from 2011 when we established, we've been fully prepared for all the capabilities. So we have been doing a lot of things throughout the value chain. So from the how we secure the car inventory to car inspection to standardization and to the digitization as well as the offline fulfillment such as logistics and the title transfer. So all of the these are the whole new used car purchasing experience to Chinese consumers. So we believe the market or the barrier we've been set is quite high. So it's not something other competitors can catch up with within very short time of period. Yes. So our focus on the sustainability and the high quality of the growth doesn't mean that we will slow down our pace. Instead, we will more concentrate our resources on the core business, which is our cross regional business. So our goal is not only to maintain our market leadership for the moment, more importantly, we will extend our market leadership in the future. Thank you. Thank you. The next question comes from the line of Ronald Keung from Goldman Sachs. Please ask your question. Thank you, D. K, Michael and Nancy. So thank you, D. K, Michael and Nancy. I think I have two questions. Firstly is on given the focus on cross regional that we've talked about and I've heard D. K. Talked about the strategies and the uniqueness of our business model there. I just want to hear, have you done sort of how do you see the market size could be ultimately? How many cities do you plan to cover in the lower tier cities through your cell phone and franchise models? And sort of how do you see the total volumes could reach in terms of lower tier consumption power for these used cars? And I'm thinking one of the potential challenges is always that we as a buyer, we haven't seen the car, we haven't test driven it. So to make a decision on the spot without touching and seeing the car, what else besides the video or the sales agent talking about the inspection report, what else can we offer to increase the confidence of a buyer using our platform in buying these assets from other cities? And the second about the disclosure change, can you just outline what exactly have changed there, particularly as you mentioned about volumes that are not generating commission revenues are no longer counted. So could you give us some apples to apples GMV and volume numbers possibly for fiscal last year, full year 2018 under this new definition that could help us compare more apples to apples from this year onwards? Thank you. Okay. Thank you, Ronald. I will address your first question and I use Chinese to answer and then Nancy will help me to translate. Okay. Yes. So the online positioning of used car transactions is a future trend for the China's used car market as well as it's also true for the U. S. Or European market. So for our cross regional transactions, we provided 2 key unique values to the consumers. 1 is the wide selection of used cars nationwide selections. So whether especially for the consumers in the lower tier cities, whether they can find this car is very important. So for lower tier cities, we can enlarge the used car connections as high as thousands of fold. And for high tier cities, we can provide as high as 20 times of more used car selections. This is our first value we provide. And for the second value is to increase the overall efficiency of the used car industry and we can cut the unnecessary procedures in between. So we can lower close the price gap between different markets, so we can provide better prices to the consumers. So we think we can guide our consumers to change their shopping behavior, especially by the capabilities we provide the digitalization. So the first thing is how we can better display the used cars online. So first, we provide on top of the text plus picture inspection report, we also provide video inspection report as well as the VR functions. So consumers will have a better idea of how this car performs even without seeing the car in person. So we will increase their comfort level to purchase the car online. So secondly, we provide a well rounded warranty services to the consumers. So we provide a 30 day quality issue return policy or we provide a 1 year or 20,000 kilometers warranty programs to the consumers. Also for the super value cars, we also provide a 3 day no reason ask return policy. So all of these will lower the increase the people's trust to purchase ROI. Yes. So in longer term, if we look at in 10 years horizon, online transaction of the used car, the advantages is quite clear. So we believe there will be as high as 50% of consumers will choose to purchase the car online. So especially for the cars with car price above RMB80,000. So people will be more price sensitive and they will be more prudent when choosing the car. So online connection will give them more comfort level. And also with our cross regional transactions, we provide a whole new purchasing experience to the consumers. The consumers who are purchasing through our cross regional services, they feel very happy about it. We believe this will be the trend going forward. Starting from Q4 2017 or early 2018, we started to launch this cross regional transactions. We've seen consecutive quarters of volume growth very rapidly. So this is also the evidence that our property transactions is gaining traction among consumers. Thank you. Okay, Ronald. It's Michael here. So I'll address your second question. Because we changed the discovery method, So on the apple to apple base, for the full year of 2018, the total to fee transaction is 255,000 used cars and the GMV is 27,000,000,000. And for the intra regional, the transaction volume is 220,000 used cars and the GMV is 23,000,000,000. And the 40 across regional is the transaction volume is 38,000 and the GMV is 4,000,000,000. Okay. Thanks, Ronald. Sure. Thank you. Thank you. The next question comes from the line of Nick Lai from JPMorgan. Please ask your question. My simple question is number 1, our partnership with Huaba, what does that mean to our revenue and profit, if we could quantify that for now? And secondly, management talked about marketing expense saving and cutting. What does it mean to the transition to our volume and traffic in the rest of the year? Thanks. Yes. So 58.com has a massive targeted used car traffic and large user base. So they've been also penetrated into larger cities in recent years. So this is highly in line with our strategy in the cross regional transactions. So by leveraging their traffic and their resources in the lower tier cities, we believe we can further expand our cross regional transactions. In return, we will help f58.com to further monetize their traffic as well. So we believe the synergy is quite great. Yes. So after 3 years of branding investment, Uxin's brand is highly recognized by the consumers, especially with the consumers with purchase minded consumers. So we believe it is the right time to control the branding budget and also it is practical. So we won't we don't see any or material impact on our volume and we believe it won't impact, I mean, in the near future as well. Yes. So car purchasing is a heavy decision making process. So it will take quite long time before they can finally make the purchase. So people normally will choose from platform to platform and compare the used cars. So we believe the invest more in branding will have a limited impact. So, yes. Thank you very much. Thank you. We have the last question from the line of Monica Chen from Credit Suisse. Please ask your question. So I will quickly translate my questions. My question is about the market outlook for this year. So the year to date used car transaction volume looks quite weak comparing to the growth rate in last year. And given the micro uncertainties for this year, how do your management think about the second half market outlook? And what is our expectation on the transaction volume growth for this year? And to achieve this target, what do management think about the biggest opportunity and the challenges for this? Thank you. Yes. So the car market in China has been quite challenging for quite a few times. So the new car market has been declining year over year. And for the used car market, the growth is still slowing down. And with I think this trend will continue in the next few months. If you look at our last year's Q3 and Q4 as well as this year's Q4 growth, we maintain very high growth both in transaction volume and revenue growth. This is especially thanks to our professional transactions. I think this high growth is mainly because our cross regional connections or our total connections are still relatively low compared to the whole market. So we are still benefiting from the people's online condition of their purchasing behavior. So this is also why we are less impacted than the whole market. And for the I mean, looking into the remainder of 2019, we are still looking at very decent or high quality growth. So as we previously mentioned, we are focused more on the sustainability of our growth, even though our top line growth or volume growth will be lower than previously expected. Yes. With all the initiatives in place, we believe our profitability of this year will be highly improved. Thank you. Thank you. I will now hand over to Nancy for closing remarks.