Earnings Call: Q3 2018

Nov 20, 2018

Earnings release

Ladies and gentlemen, thank you for standing by and welcome to Uxin's Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a 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'll now 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 2018 conference call. Today, ZK, our Founder and CEO and Zhen Zeng, our CFO, will discuss our financial results for the Q3. Following the prepared remarks, Henry Cai, our Head of Corporate Finance, will join ZK and Zhen to address any 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 laws. 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. We are pleased to report another strong performance for the Q3 of 2018. Our focus on providing a broader selection of used car, digital transparency and a one stop solution continues to translate into an outstanding user experience and a growing demand from both consumer and dealers. We again delivered a robust top line growth with revenue up 60% year over year, which exceeded the high end of our guidance. This reflect an increase in the transaction volume number of loan facilitated and take rate during the quarter. Our 2C business remind the premium growth driver from the for the business. The revenue for our 2C business, including both transaction facilitation and loan facilitation, increased by 109% year over year. Transaction volume for our 2C business reached 129,000 used cars, up 53% year over year. This is equivalent to GMV of RMB10.2 billion. Our transaction facilitation take rate was 1.4% compared to 0.7% in Q3 last year. The increase reflects the strength of our brand and the pricing power as well as the increasing friction of our service among user. As a result, our transaction facilitation revenue increased by 165% year over year during the quarter. Loan facilitation continued to be important for consumer and increase together with growth in volume and transactions. The average service fee rate for loan facilitation increased to 6.9%, up from 6.1% a year ago, with loan facilitation revenue growth by 96% year over year. The increase in service fee rate was mainly due to the ongoing diversification of our loan products. We also enhanced our risk management through analyze of large volume of transaction and user behavior data collected by our platform as well as enhancement in our pre and post financing management capability. This leads to an improvement in our M3 plus delinquency rate to 1.43% as of the end of Q3 2018 from 1.53% as of the end of Q2 this year. Now let me share some updates on key area of our operation before Deng give the greater detail on our financial performance shortly. 1st, in reaching selection of used car, Uxin is dedicated to providing consumer with a broader selection of used car from different region across China. At the end of Q3, we had 290,000 cars available to be purchased real time via our network. 2nd, digital transparency. We are also committed to setting the industry benchmark for transparency by standardized and digitalizing used car inspection and increasing the accuracy of used car evaluation. Through our standardized and proprietary inspection process and recently launched VR enabled online car building experience. We differentiated our service by bringing a more professional and interactive experience to our user. In addition, our Manhattan pricing system analyzed data from over 5,800,000 car inspection and 1,800,000 transactions to accurately estimate used car value. This enable us to reduce information gap between sellers and buyers and bring much greater price transparency. Last but not the least, we continue to focus on making Uxin a one stop service platform. On top of offering a broad cross regional selection of used cars, we are also able to provide car financing options, arrange title transfer and used car delivery with the support of our service and fulfillment network. This 4th suite of offering enables us to deliver a seamless and comprehensive used car purchasing experience on one platform. With our determination to enhance value proposition for our users, we are confident that we can extend our market leadership in China, underserved used car market and build a sustainable business over the long term. Now I would like to turn the call over to our CFO, Zhen Zhen, to talk through our financials. Thank you. Well, thanks, D. K. Hello, everyone. Thanks for joining us. Now let me walk you through our financial performance in the Q3 of 2018. 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 Q3, total revenues increased by 60% to RMB864 1,000,000 from RMB541 1,000,000 in the Q3 of 2017. The increase was primarily due to the increase in the transaction volume, amount of loan facilitated and the take rate, particularly from our 2C business. Drilling down to our 2C and the 2B business units, 2C transaction facilitation revenue was RMB139 1,000,000, an increase of 155 percent from RMB52 1,000,000 in the Q3 of 2017, primarily due to a 53% increase in the transaction volume and a 35% increase in GMV of used cars sold through our 2C business. Our 2C transaction facilitation take rate was 1.4% in the Q3 of 2018, up from 0.7% in the Q3 of 2017. 2C loan facilitation revenue increased by 96% to RMB474 1,000,000, primarily driven by the increase in the volume and amount of loan facilitated. Our service fee rate was 6.9% during the quarter, up from 6.1% in the Q3 of 2017. The increase in service fee rate was primarily driven by the ongoing diversification of our loan products with more tenure and the down payment options. The attach rates of a loan facilitation service remained relatively stable at around 46% in the quarter. In terms of our 2B business, our 2B transaction facilitation revenue reached RMB191 1,000,000, representing an increase of 21% year over year, primarily due to the increase in take rate. Our take rate for 2B transaction facilitation was 4.5% in the Q3 of 2018, up from 3.2% in the Q3 of 2017. As we noted last quarter, we have adopted a different approach to serving customers with car selling needs. Excluding this impact, our B2B business achieved 18.6% year on year growth in a number of transactions. Cost of revenues increased by 60 56% year over year to RMB305 1,000,000 for Q3 of 2018, compared to RMB196 1,000,000 in the same period last year. The increase was primarily due to the increase in the number of personnel engaged in our car inspection, quality control, customer service and after sales services, as well as the cost of the title transfer, registration and fulfillment expenses, which was in line with the increase in our transaction volume. Gross margin was 65% in Q3 of 2018 compared to 64% in the same period last year. Total operating expenses was RMB112 1,000,000. Non GAAP operating expenses, excluding share based compensation, was RMB1025 1,000,000, representing a 40% increase year over year. Sales and marketing expenses increased by 40% year over year to RMB755 1,000,000 compared to RMB541 1,000,000 in the same period last year. The increase was primarily due to an increase in the number of employees, which was partially offset by the decrease in the branding expenses. Branding expenses decreased to RMB211 1,000,000. We also saw an increased conversion efficiency, which reflects more accurate customer targeting and the ramp up of sales consultant productivity. As a result of increasing operating leverage, sales and marketing expenses, including share based compensation expenses as a percentage of total revenue decreased to 88% during the quarter from 100% in the Q3 of 2017. G and A expenses increased by 3% year over year to RMB266 1,000,000 in the Q3 of 2018 from RMB259 1,000,000 in the same period last year. The increase was primarily attributed to the increase in the number of employees and offices expenses, which was partially offset by the decrease in the share based compensation expenses. G and A expenses, excluding the impact of share based compensation expenses, was RMB190 1,000,000, representing 22% of total revenues in the quarter, compared to 23% in the Q3 of 2017. R and D expenses increased by 68% year over year to RMB82 1,000,000 in the Q3 of 2018 from RMB49 1,000,000 in the corresponding period last The increase was primarily due to the increase in salary and benefit expenses of employees engaged in research and development, as well as the expenses related to the development of our IT system. R and D expenses, excluding the impact of share based compensation expenses, was RMB82 1,000,000, representing 9% of total revenues in the quarter at the same level of Q3 of 2017. We are confident that our increasing operating leverage and prudent approach to expenses and management will continue to improve our profitability over time. Gain from the guarantee liability was RMB2.4 million, compared to a loss of RMB19 1,000,000 in the prior year period. The slight gain was the result of a relative stable delinquency rate compared to that of the Q2 of 2018. Loss from operations in the Q3 of 2018 was RMB543 1,000,000 compared to a loss of RMB523 1,000,000 in the prior year period. Non GAAP loss from operations, which include share based compensation expenses, was RMB466 1,000,000 compared to RMB385 1,000,000 in the same period last year. Non GAAP loss from operations or a percentage of total revenue was 54% in the Q3 of 2018, decreased from 71% in Q3 of 2017. The change in fair value of derivative liability was nil in the Q3 of 2018, compared to a loss of RMB238 1,000,000 in the same period last year. We no longer see any impact of derivative liability as the preferred share was converted into ordinary share at the time of IPO. Net loss in quarter 3, 2018 was RMB594 1,000,000 compared to a net loss of RMB766 1,000,000 in the prior year period. The narrowed net loss was primarily due to the decrease in loss from the fair value change of derivative liability. Non GAAP adjusted net loss, which excludes share based compensation expenses, was RMB517 1,000,000 in the quarter, compared to a loss of RMB390 1,000,000 in the prior year period. Non GAAP adjusted net loss as a percentage of total revenue was 60% in the quarter 3 of 2018, decreased from 72% in the Q3 of 2017. Now turning to our cash position. As of 30 September 2018, Uxin had cash and cash equivalents of RMB677 1,000,000 compared to RMB292 1,000,000 at 31st December 2017. The company also had a restricted cash of RMB1838 1,000,000 compared to RMB1617 1,000,000 as of 31st December 2017. Finally, turning to the guidance. For the Q4 of 2018, we expect the total revenues to be in the range of RMB1.02 billion to RMB1.06 billion. So 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 now open the call for questions. Our first question comes from the line of Eddie Huang from Morgan Stanley. Please ask your question. Hi, D. K, Michael, Henry and Nancy. Good evening. Thank you for taking my question and congratulations on the great results. So I have three questions. The first one is about the 2C business take rate. We have witnessed quite impressive increasing trend of the 2C take rate this year, especially for the Q3, take rate increased around 20 bps sequentially, where the volume growth is also higher than that of the Q2. So would you please give more details about how you manage to achieve this and how we could expect the takeaway trend in the Q4 and onwards? This is my first question. And my second question is about the delinquency rate. The 3rd quarter delinquency rate also improved 10 bps versus the 2nd quarter. So also, I would like to management give more details about how we can achieve this and how it's a trend in the next few quarters. On a separate note, I noticed that the restricted cash balance at the 3rd quarter end actually is quite similar at the versus the second quarter end. So I'm just wonder if there is any I mean, the our auto finance partners have lower than requirement in terms of the deposit as a percentage of the outstanding loan balance we facilitated. So basically, which means that there's any more favorable terms from this our auto finance partners. Yes, this is second one. And the last question is about the overall market because we have noticed that the new car industry demand in this Q3 has been weak. So do you expect any negative impact from this weak demand to the used car industry in the short term? Although, so far, I think our 3rd quarter volume growth and the 4th quarter guidance seems quite new from this weak demand in China. But just want to hear your thoughts about any the thoughts of the weak new car auto demand in the impact to the used car industry? Thank you. Okay. Thank you, Eddie. This is D. K. And all right, we get all three questions. I think I would like to take the question 3 first. And then we just okay. Is that okay? I turn into Chinese and Henry will help me to translate. Okay. Thanks, Eddie. I think number 1, that was a great question. New cars obviously saw an impact from a broader economy in Q3. For the first time, we saw new cars worldwide trend actually declined in 2018. Now obviously, as we look at our business in used cars, we feel that used cars environment is a lot more constructive than the new cars, especially with a lot of consumers are very focused on affordability, which actually plays to used car strength. And then in terms of our own business, we feel that our model is unique in a way whereby we are actually providing users with a great used car purchasing experience by moving people's buying behavior from online to online. So now we're actually accelerating our own growth. And also with our strength and scalability of business model, we continue to expand our market share. So we feel that not only is used cars more constructive than in broader new car environment, we will continue to outgrow the broader used car market as well. Okay. Eddie, it's Michael here. So I would like to address your question on the take rate and delinquency rate and also the cash. So for the 2C take rate drivers, in this quarter, our 2C transaction facilitation take rate was 1.4% compared to 0.7% in the same period last year. This is mainly because we have been enhancing our service capabilities to better cater to car buyers' different needs. This also demonstrates consumers' higher appreciation of Uxin's unique value proposition. That is a broader car selection enabled by the across regional transactions and a better car conditions and the price transparency and the one stop services. With this integrated offering, we have been able to gain greater pricing power while increasing scale. This also enable us to deliver more value to dealers as we help them increase inventory turnover efficiency. And for the loan, our service fee rate or our loan facilitation also increased to 6.9% in this quarter compared to 6.1% in the Q3 of last year. This is mainly because we provided more diversification selection of loan products to meet various consumer needs and continue to optimize the loan product offering meet. And for the long run, we are confident that we can continue to increase our 2C take rate by adding more value added service and optimizing our product mix. And for the delinquency rate improvements, I'm saying in this quarter, our M3 plus delinquency rate continued to improve as we are enhancing our risk management capability as well as the pre and post financing management capability. We also taken a prudent approach to credit assessment, especially when entering new cities. As China's largest used car transaction platform, Uxin has aggregated massive transaction and user behavior data as well as used car condition data. We have a deeply understanding not only of vehicle, but also for the people, which gave us unique advantages in evaluating used car risk value and assessing user credit worth of risk profile. As we're expanding our used car financing business, we have also accumulated rich experience in risk management and capital optimizing our pre and post financing management capabilities. So we will continue to invest in the strengthening of our risk management system and drive to enhance credit performance to loan facilitations through our platform. For your last question for the restricted cash, our financing partner has been pleased with the credit performance of our user and our collateral management capability. As a result, we have been able to negotiate a better term with them, such as deposit that is required to hold a bank's escrow account. We are confident that as they learn more about our platform and get more confident of our track record, we will be able to continue to improve the terms. In addition, we have looking for a new way to work together with financing partners that will enhance our liquidity position. We will have more updates for you in the coming quarters. Okay. Thank you. Thank you, Michael. Thank you, D. K. Henry. Very clear. Thank you for taking my questions. Thanks, Eddie. Thank you. As there are no questions at this time, I'll hand the call back to Nancy. Please continue. 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. Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.