Momo Com Inc

TWSE:8454

Earnings Call Transcript

[Terrisa Liu, executive]

Welcome, everyone, to join Momo.com's fourth quarter earnings conference call. We have uploaded presentations and equity report on our website. For today's call, President, Jeff Ku, will kick off with opening remarks, and I will discuss the financial results. After that, we will open the line to questions from analysts and investors.

I would like to remind you the following discussions, including the responses to your questions, reflect management's view as today's date only. We do not undertake any obligations to update or revise the numbers. With that, I will turn the call over to Jeff.

[Jeff Ku, executive]

Thanks, Terrisa. Hello, everyone. Thank you for joining us today. I'm going to share with you some highlights from our fourth quarter and the whole year 2022 operating results. We delivered a strong fourth quarter results with revenue achieved a record high of TWD 31.8 million, growing 18.4% year-on-year and operating profit of TWD 1.3 billion, increasing 18.7% year-on-year.

That indicates that we have passed the influence of high base of previous year and reopening effect. As for 2022, the revenue was TWD 103.4 billion and operating profit was TWD 4.3 billion. Take rate and operating margin obtained a little bit lower than previous year, mainly due to the favorable COVID resulted high base of 2021.

However, despite all the negative factors such as inflation with economy reopening, et cetera, surrounding us during that period of time. On November revenue grew to TWD 14.5 million is a record high for a single month and with Y-o-Y 18.9%. And the December revenue of TWD 9.5 million year-on-year as 19.3%, only attributed to our successful Double 11 and Double 12 that triple promotions.

And also, it shows we start greatly regain our growth momentum. It also shows the low penetration and the growth potential of the EC market in Taiwan and the capabilities momo projected to grab this opportunity.

With fast expansion of our logistic network in the past few years and the finalization of the [indiscernible] of 3 distribution centers around Taiwan, we will shift our strategy from expansion to optimization, which means with completion of new warehouses added to the network.

The focus will be in optimization. The automation equipment, IT systems and the big data will play a big role here. Also, our own delivery fleet is responsible for 25% of our parcel deliveries today, and we will gradually increase it by expanding our service area from Tier 1 to Tier 2 city in Taiwan.

According to our government data 2022 general goods retail market grew 7.8% year-on-year in Taiwan, the highest in recent years, mainly due to the low base of physical channel in the previous years, affected by COVID. Among those retail channels, department store gain the most year-on-year as 15.2%, with online business case sections year-on-year 11.5%. Even with post-COVID reopening, e-commerce still shows a strong growth year. It reflects the stickiness of customer behavior post-COVID. With still low penetration rate of just about 13% in this market, it presents a great future growth potential.

In order to capture future growth, we will continue adding more product selections, means more SKUs and more brands based on our 1P and 3P mixed models. As for our 3P platform, we have seen encouraging results. This enable us to enlist those long-tail products such as clothes, toys, home improvement items, et cetera, which can greatly enrich our selections and attract wider customer segments such as young people.

In fourth quarter, momo EC customer spending increased 7% year-on-year. The strong growth can be seen across all product categories, even the mature categories such as 3C and the Home Appliance posted a 17% year-on-year growth versus Taiwan online sales, 11% Y-o-Y in fourth quarter of last year. Fashion and Luxury showed the lowest fourth quarter year-over-year growth because of the reopening influencer luxury goods sales and the warm winter weather hindered the winter cold sales.

Regarding profit, fourth quarter overall take rate maintained at 14.1%, with less favorable revenue mix of TV and EC, but favorable EC take rate improved to 12.8% versus 12.4% in fourth quarter 2021. EC take rate improvement was driven by favorable product mix, less margin -- net margin product weighting less low-margin product weightings and a stronger bargaining power with suppliers as we scale. In the meantime, we saw a positive impact from the economy of scale, helping B2C operating profit to grow 22.8% year-on-year.

Now let me touch on a few new initiatives. First for the live streaming, we are happy to see that in November, live streaming traffic jumped 13x, of course, is great help from the big [ virtual ] promotion. But the whole year revenue also increased 1.5x. The strong growth rate shows its potential in complementing our e-commerce operation. We will continue enhancing the live streaming platform capabilities and host more shows, including opening more time slots to our merchant originated content.

We expect a strong live streaming growth this year in both traffic and revenue. Regarding digital advertising, we have noticed other market players' impressive performance such as Amazon. As a leading EC player in Taiwan with a large traffic volume, customer base, number of merchants and more importantly, the first-party data in hands, we think we are well positioned to enter this business, and we will allocate more resources to it and the nurture it to grow into a significant income source in the coming future.

To sum up my opening remarks, I have 3 points to deliver here. First, we delivered good results in 2022 and that further strengthened our market position despite the uncertainties faced in the macro environment. This reflected the high-quality execution of our team, scale benefit and the logistic infrastructure investments made over those years. On top of this solid base, we are looking forward to extending the leading position this year.

Looking into 2023, we remain vigilant about future macro headwinds and the retail market growth in Taiwan. However, we continue to prioritize growth. In the meantime, we have taken a prudent pace in further infrastructure expansion and put more focus in efficiency.

Overall, we expect a mid- to high teens year-on-year revenue growth this year. As far as the bottom line is concerned, we expect to maintain a similar operating profit margin as the previous year. As operations become larger and more complicated, we have started several operational efficiency improvement projects to streamline processes, increase automation label and many of these projects involve leveraging data technology.

This is also part of our intention of making our IT and systems, particularly data, as well with the long-term competitive advantages. Now I'll turn the call over to Terrisa to review the financials in more detail.

[Terrisa Liu, executive]

Thanks, Jeff. Jeff has discussed some of our financial highlights. So I will only focus on my comments on the other relevant metrics. We recorded group revenues of TWD 31.8 billion during the fourth quarter, driven by the strong B2C sales growth of 20% Y-o-Y, further widening the divisions in the growth performance with media competitors and continuing to grow much faster, mainly the non-store retail sales of 9.6% against the high base.

The fourth quarter group EBITDA recorded at TWD 1.6 billion and EBITDA margin sustained at 5.1% versus 5.2% in the fourth quarter last year on the back of improvement in fulfillment efficiency despite the larger scale of marketing campaign amid weaker macro retail environment.

Moving to the fourth quarter. Group net income to parent increased 11.4% Y-o-Y, which can be attributed to the group's operating profit increase 18.7% Y-o-Y and the non-op loss of TWD 52.5 million, and we recognized onetime loss of TWD 82 million regarding the Global Mall goodwill impairment.

More importantly, fourth quarter group recurring basic EPS came in at TWD 5.05, increased 20.5% Y-o-Y. At the end of the fourth quarter, net cash position was TWD 8 billion, a decrease of 8.6% Y-o-Y. That was primarily due to the TWD 2.4 billion for DC construction expenses, also TWD 2.3 billion cash dividend paid and TWD 994 million income tax paid.

In terms of the cash CapEx. In 2022, we paid down TWD 2.7 billion for DC building construction based on the actual spending time line.

Having discussed the financial highlights, let's turn to the industry and operation part. Based on the data points released by the government, the above chart show the non-store sales growth has been outperformed against the total retail even during the economic downturn in 2008 to 2009. Also the retail industry decline in 2015 and 2020 affected by the crude oil price drop and pandemic. Left hand side chart show the Momo's revenue Y-o-Y grew much faster than the non-store retail sales. That said, we continue our share gain amid ongoing industry consolidations and amid the global digitalization trend that induce people doing more and more online shopping.

The bottom right-hand side indicate, by the end of the fourth quarter last year, Taiwan online penetration was only 13.9%, remaining comparatively lower versus other leading Asia peers.

Next let's touch on the Momo operation update. You can see from this slide the major 5 categories performed resiliently in the fourth quarter, thanks to successful Double 11 and the Double 12 online promotions. 3C and Home Appliance, up 17% Y-o-Y; Household increased 23% Y-o-Y. Beauty and Healthcare, up 22% Y-o-Y; Fashion and Luxury, up 16% Y-o-Y; and the last Sports and Leisure, up 23% Y-o-Y. The key drivers -- actually, we constantly sharpen our customers' value proposition to increase widest product selections to offer the better price and to provide faster delivery service and improve user engagement and experience.

We believe the non-electronics categories looks more exciting with FMCG, daily necessity, health and beauty, home improvement, home appliance, fashion categories are expected to drive greater growth in the coming years. Again, it's relatively limited presence currently.

The following new initiatives aiming to improve user experience and deepen penetration in the various categories. For example, just suggest trend, hybrid 3P model to enhance the long-tail SKU, for example, like clothing, toys, raw material, home improvement and fashion. We also provide installation service for white goods. Exclusive bundles for healthcare supplements and give the web service amid holiday seasons, also omnichannel strategy for massage chairs dmassagers.

In addition, we are developing a virtual makeup trial. I think we will launch this new technology later this year as we foresee rising cosmetic demand once the MAC policy is linked.

As for the emerging format of new initiatives such as the new video show video like streaming should broaden our active user base. This realtime interactive nature of e-commerce [indiscernible] to the online shopping experience and often triggers impulsive shopping.

On key customers' metrics despite the top base last year's owing to COVID and work-from-home demand, we are pleased to see the solid customer citation rate and purchase frequencies are holding up well post reopening. You can see in the fourth quarter, active users increased 12% Y-o-Y and customer spend continued to grow 7% year-over-year, supported by the growing customer stickiness and loyalty.

Moreover, MAU, the monthly average visitors rose further by 4% Y-o-Y against a top base, demonstrating our market position has been probably strengthening. Regarding momo-Fubon co-branded credit card with an industry meaning 5% Momo coin rebate for the all the purchase on the platform, cardholder spending contributed around 33% of our B2C revenue. In the fourth quarter, with 1.8 over frequency versus a normal user and 2.1 spending.

Finally, on warehousing, this year, we target to add 3 main warehouses and 6 more satellite warehouses, leasing along the major 6 cities. However, the net increased number of warehouses this year will be lower than this because we are planning to terminate a couple of short-term lease main warehouses.

On DC, the second automated distribution center, SDC, will be completed towards the later part of this year with partial operations in the fourth quarter and fully operated in 2024, considering around 50 years depreciation period for the building and 10 years depreciation for the equipment.

So far we estimate around $150 million annually for the depreciation. However, the number may be slightly different, maybe slightly increased once the operation with the new automations will come in. The third DC in Changhua in Central Taiwan, CDC will start operations in the second half of this year. It will take around 2 to 3 years for building aiming for 2026 operations.

As for the budget, CapEx budget this year, mainly focused on the CDC, the third automated distribution center. So, on the slide, you can see for its construction engineering first phase of automated agreement and solar power system is budgeted at TWD 6.3 billion. With that, we would like to highlight the actual cash payment will be spread to second half of this year to 2026, depends on the various states of building process and spending timeline.

Well, now, we are ready to open the line for questions. Meanwhile, you are also welcome to send your questions via a chat box on the webcast. Operator?

[Operator]

[Operator Instructions] Our first question comes from [ K.C. Cheng ] with Allianz Global Investors. Please go ahead.

[Unknown Analyst]

Can you hear me?

[Jeff Ku, executive]

Yes.

[Unknown Analyst]

So my first question is regarding gross margin in fourth quarter. I think it was up about 50 basis points quarter-over-quarter. But when I look at your B2C rate was down and it doesn't mix perfectly up. Those are both negative to gross margin yet you do deliver Q-o-Q expansion. So I'm just wondering are the main drivers in fourth quarter mainly comes from -- on the cost side? And can you share with us on this? That's my first question.

[Jeff Ku, executive]

Well, I think the -- as far as the gross profit margin is concerned, I think the fourth quarter mainly helped by the take rate or good take rate of the B2C business. And that is really get help from the higher scale we have, so we can get more support and the resource for all the different merchants.

And however, company overall take rate because the high margin of the TV business become less important as part of the percentage. So that become unfavorable factors. Others rates is that TV revenue become less important, so that impact becomes less.

[Unknown Analyst]

Yes. But Jeff, when I look at -- your business take rate was actually down quarter-over-quarter, right, about 40 basis points. So my question was, even with this B2C take rate down quarter-over-quarter, your gross margin is still up quarter-over-quarter. So I was guessing the main contributor comes from the cost side. I do know this, you probably add much fewer warehouses, about 2 warehouses in fourth quarter, but I'm not sure if that's the main reason for margin expansion in the fourth quarter.

[Jeff Ku, executive]

No, I think that's because the absolutely number is different from quarter-to-quarter because first quarter revenue is much larger than third quarter, which would dilute the operation cost to some way. So even the take rate is less than third quarter. However, the absolute number we get can help us to dilute that percentage in the customer operational costs.

[Unknown Analyst]

Okay. Got it. So basically still some scale effect here. And my second question is a quick follow-up with I think Terrisa just mentioned the net adds in warehouses will be lower than 9 for this year. So can you elaborate on that? How many ware you probably terminate this year?

[Jeff Ku, executive]

Right. The number you show on Page 17 are the newly added warehouse we're going to have. Some of them had already been -- the contract already been signed last year. However, what hasn't reflected to that number is we also plan to take down a few of sure lease warehouses because those warehouses will not be able to come online in time.

And so you probably will see this year, we add a few big main warehouses online and will take down a few less efficient or put that way or smaller main warehouse so we can gain the efficiency layer. So the number you see here haven't really do the deduction yet. So the actual number will come less that. The reason why we haven't deducted that number is we are not quite sure the schedule of the new leased warehouses when they're going to be come online because we have suffered a major delay last year.

We are still not certain about the schedule. And the delay maybe caused by a few major fire happened last year. So the building code regarding the fire becomes stringent. So it's harder to get the operational license. So last year why we haven't really taken out that part. So ensure total number of warehouse will be less than what you have seen on the Page 17.

[Unknown Analyst]

Got it. That makes sense. Will we see the percentage of increase in terms of warehouses, warehouse numbers will be much lower this year compared with last year?

[Jeff Ku, executive]

Yes.

[Unknown Analyst]

Okay. And a quick follow-up on this. So is it fair assume that the warehousing and related labor costs as a percentage of our revenue should come -- ratio should come down this year as well?

[Jeff Ku, executive]

That will depend because the way we run this is we always prepare the warehouse before the revenue. So we're always in the situation which we haven't really 100% utilized our infrastructure because we anticipate it as a future growth. So we still anticipate we're going to grow late year. That's the reason why we have to prepare warehouse beforehand.

So what we are saying here is we will slow down adding new capacity in the warehouses so that we can gain some efficiency through the high utilization and to improve the efficiency inside the warehouse operation. So that after that optimization period, and we'll run that optimization for a period of time and then revisit our revenue growth and to see whether we will add a few to which part was the area. And that will make -- come back to add a few in the coming years, but we don't know yet.

So 2023, you will see we still warehouses we committed before going to add it to the network, which we will try to utilize with the newly generated business. So we're still trying to catch up the efficiency rate. But I think that's going to improve over time. But we're not -- it doesn't mean if we don't run the warehouses, you will get the efficiency immediately.

[Operator]

Our next question comes from Bill Lin with JPMorgan.

[C. Lin, analyst]

I have 2 questions. First of all, in 2022, what we are seeing is deleverage as your year-over-year operating depends increases higher than your revenue increase. So will we see the similar case in 2023 again as I think the company still want to gain share? And how would you control the spend side to maintain the margin?

Second is, I think Jeff mentioned this year, you will start to enter into the digital advertising basins. Can you tell us about the company's strategy? And how will this impact the overall P&L in next maybe 1 to 2 years?

[Jeff Ku, executive]

Okay. We always believe the scale is going to pay back sooner or later. That's the reason why we always emphasized a lot on growth. However, last year, 2022, we're facing a very difficult situation. In the beginning of the year, we still think COVID going to play an important role. However, suddenly that disease is not that fearful. And so that it leads to reopening and a lot of things happen after that, plus the macro uncertainties, all those things are a headwind for us last year.

So that in order to drive this sales growth, we spend a lot of resources on the marketing and the promotion. So could you mean to spend more money. But that on a larger customer base and higher frequency, I think it's still worthwhile. And we have seen -- we don't see the customer behavior, return to the pre-COVID era. So we are confident with that we can capitalize on the spending the money we spent last year.

And so I will not call it deleverage. I would say that is for that time, and that's the thing we need to invest, I would say. And so looking into 2023, current competitive landscape actually become friendlier. So we don't see any rational behavior from our competitor or from the retail market as a whole. So now the only thing we are not certain is the macro conditions.

So if since turning to a good way and the situation will improve, then that will make our marketing become more efficient to run. And for the cost side, and I have said before, the major cost for us is in logistics. And that efficiency gain will be realized gradually once we add in that new warehouse into the network and start optimizing and raise the utilization rate. And your second question is?

[C. Lin, analyst]

Digital advertising.

[Jeff Ku, executive]

Digital advertising, yes. We have seen a player 0in other markets like Amazon, Alibaba, they all had found a way to monetize their traffic. And with the more, tighter progress here on the user data, we can see there's an opportunity for us to enter this business, particularly, we have very close relationship with all the merchants. And traditionally, they are the major source of those advertising spending.

So we have decided we will move resource in this area and then start making this business. As I said, this also means we are in the very early stage. So far, we don't see the revenue going to be significant at least not for this year. However, the emphasis on this year will be to build the necessary IT platform to recruit the team and make it as officially a business unit. Sorry, I can't hear you clearly.

[Terrisa Liu, executive]

Have we answered your questions?

[C. Lin, analyst]

Yes.

[Operator]

[Operator Instructions] And next we have a follow-up question from Daniel Chen with UBS.

[Daniel Chen, analyst]

Jeff and Terrisa, could you hear me?

[Jeff Ku, executive]

Yes.

[Daniel Chen, analyst]

My first question is also about the warehouse expansion target in 2023. I see in the presentation, Page 17, you plan to add warehouse space of 88,000 square meter in 2023. This is higher than the addition of 57,000 square meters in 2022. So is this 88,000 square meter also not the final numbers. And the final number may close to the 57,000 square meter in '22 or even below it. Is my understanding correct?

[Jeff Ku, executive]

Yes. As I explained before, we didn't take out the planned deduction yet. So the number is higher than we expected.

[Daniel Chen, analyst]

Okay. Got it. And my second question is about the product mix. In 2022, 3C sales underperformed overall sales and the sales mix declined year-over-year and less to some degree, help improve our B2C take rate. And my question is, going to 2023, did you expect 3C mix to decline that much year-over-year? Or it will remain largely the same, given the destocking of consumer electronic product and in the first half. And at the same time, 3C still our important revenue driver, and we are still gaining market share.

[Jeff Ku, executive]

Well, we're still gaining market share, but it doesn't mean, as a percentage of revenue, will increase. We are gaining market share is because we see gradually industry consolidation. We gain more of the market share from our competitors. And so as far as our own revenue mix, we still be conservative in term of the 3C particularly for this year. However, as you pointed out, is a major part of our revenue component.

So I would say it probably maintain the same kind of position as last year, which means we will grow more in other categories. But however, in the 3C we will still be competitive, which means compared to our competitors, we're still gaining the market share larger than theirs.

[Daniel Chen, analyst]

Okay. That's very clear. And my final question is that I recall previously, we targeted 20% to 30% revenue growth in the mid- to long term. And I understand this year, we target mid to high teens due to some macroeconomic uncertainty. But how about the midterm to long-term target, is the 20% to 30% target unchanged?

[Jeff Ku, executive]

When we say 20% to 30%, we may be talking about how we're going to reach TWD 100 billion revenue mark. We haven't formed a consensus in terms of the mid- to long-term revenue growth because, as you know, we are still facing a lot of macro uncertainties. And together with our higher base year-on-year. So we cannot answer your question yet for the midterm to long term. Although, for this year, we will try to make at least the mid- to high teens. And I think hopefully things become clear in the second half of the year.

[Operator]

[Operator Instructions] And our next question comes from Angela with Citi.

[Hui-Chao Hsu, analyst]

Jeff and Terrisa, can you hear me?

[Jeff Ku, executive]

Yes, please.

[Hui-Chao Hsu, analyst]

Yes. And first of all, congrats on the strong results. And my first question is about -- so I noticed that our monthly average visitors stayed very strong, even post COVID and that is very, very impressive in my view. So what's the driver behind the strong MAU and based on your observation? And also, do we expect the cap on the monthly average visitors in the longer term?

[Jeff Ku, executive]

Well, I think the main reason to -- the first is we become larger and we become more attractive to customers. One of the evidence is no matter where I go I have around with people I know or I just newly met, everyone had some experience with Momo. So that's the -- so the Internet, the larger become larger. And secondarily, I think is due to the successful marketing and the promotion we did last year. And so I think we get rewarded of that effort.

[Hui-Chao Hsu, analyst]

Got it. And also, do we expect a cap, i.e., a limit on the MAU in the longer term?

[Jeff Ku, executive]

Obviously, when we reach to this scale, it's harder to find new customers, although we're still adding news every month. But the weighting was shifted to the retention side, which means to increase existing customer frequency. However to do that is, as I said in the opening, we need to add more of these selections from non-brand and from the long brands, which is the 1P and the 3P model we were talking about.

[Hui-Chao Hsu, analyst]

Yes. Got it. And my second question is about our third-party business. So how do we work with our 3P partners? Do we charge them like commission fee or is there other way we work with them? And also, how to provide incentive to our potential partner to work with us, do we do any subsidies to our third-party potential partners? And what's our current contribution from the third-party business? And what would be our long-term target.

[Jeff Ku, executive]

Well, the business churn quite similar to the B2C quite similar to 1P model. However, the management the way they run business is different. We give them more flexibility and allow them to do a lot things by themselves. But one thing we still hold to ourselves is facing to the customers, although it's a 3P merchants, we are always facing a customer.

Customer has any problem they always can call momo. The 3P model really just give the merchant flexibility so that they can put a lot of long-tail product on our shelf efficiently and then manage it in a way so that they can make the business work for them. As far as the commission, we have to go with whatever the commission is going to work. And so it depends on the product category carrying different commission percentages.

[Terrisa Liu, executive]

Okay. Good. There is one question from the chat box from new sales growth. The size of the central and southern distribution center are bigger than the northern distribution center. Does this reflect the view of the bigger e-commerce market potential in central and southern Taiwan. And the second question is what is the target of in-house fleet this year?

[Jeff Ku, executive]

No, it doesn't reflect that. However, as you all know, the land sales part, sorry -- in those part of Taiwan always more expensive in central than south. So, it's not easy to find a proper land in those part of Taiwan. And also, it happened in different times.

And when we built the north distribution center, we were still very small. And when we grown larger in terms of the business scope and we found that we're always shorter in the warehousing space. That's the reason why we always try to build the one in south and central. We're always looking for a big land so we can have more space.

The south distribution center actually has probably roughly the same space as the northern one, just slightly larger. And the central is going to be much larger than these 2. I think also came to list without planning because we just happen to find a land in the central part of Taiwan to meet our needs and is large enough. But the result is good because the central one can really become a supporting role if we relate the distribution standard in those and in those particularly the central can really take more responsibility to [indiscernible] is loading. And what is the...

[Terrisa Liu, executive]

What's the target of in-house fleet this year?

[Jeff Ku, executive]

For our in-house fleet currently account for 25% of our cost of delivery. We -- as I said, we will move from the first-tier city to second-tier city. I think in terms of the percentage increase will be not that much. We are looking at 28% to 30% because the second-tier cities will not extend as the first-tier.

And also our business still grow year-on-year. So the percentage increase is not only -- is not based on the previous year's number. So that's our current view. But as we were constantly to review this and see whether we have a room to grow faster. And normally in the second half of the year, we will revisit again.

[Terrisa Liu, executive]

Okay. There are more questions on the check box. Regarding the digital advertising, I think we have mentioned that and also regarding the depreciation and hybrid 3P model. And I think we have covered most of the questions. And due to the time constraints, this concludes our Q&A session.

And thank you all for your joint participation today. We are very much looking forward to speaking to all of you again for the next quarter. Bye. Thank you.

[Operator]

Thank you for your participation. This concludes the conference. Goodbye.