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spk06: Hello, and thank you for standing by for Energy Monster's 2021 Third Quarter 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 is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host today for today's conference call, Director of Investor Relations, Hansen Shi.
spk03: Thank you. Welcome to our 2021 Third Quarter Earnings Conference Call. Joining me on the call today are Mars Tai, Energy Monster's Chairman and Chief Executive Officer, and Maria Xin, Chief Financial Officer. For today's agenda, management will discuss business updates, operations highlights, and financial performance for the third quarter of 2021. Before we continue, I refer you to our safe harbor statement. in the earnings trust release which applies to this call as we will make forward-looking statements. Also, this call includes discussion of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in R&D. I would now like to turn the call over to our chairman and chief executive officer, Mark Tsai, for the business and operation highlights.
spk01: Thank you, Hanson. Good day and good night, everyone. Welcome to our 2021 third quarter earnings call. We are pleased to announce the third quarter results with revenues being on the high end of our guidance. Despite so, we continue to see challenges from the continuous outbreaks of COVID-19 during the quarter. After the outbreak in Jiangsu in late July, there was a significant drop in offline activity and traffic throughout China. The outbreak in July and August had a significant impact on our operations. In the first half of July, which was before the outbreak, our GMV grew by around 30% year over year. And GMV per power bank per day was approximately 2.2 RMB. In the first half of August, however, our GNV decreased by about 9% year over year, and GNV per power bank per day was approximately 1.7 RMB. For the full month of August, Jiangsu Province GNV decreased by more than 40% year over year, Henan down around 30, and Hunan also down around 30. The impact that started in July had a countrywide impact as both affected and unaffected regions alike experience decreases in offline food traffic and spending resulting in a decline in traffic to our location partners. Both business and leisure travel were hit especially hard during the outbreak with hotel POIs. same-store GNV decreasing by more than 24% year-over-year during third quarter. Transportation hubs and tourist attraction POIs were also down on a year-over-year basis. Entertainment venue, same-store GNV also experienced a 14% decline year-over-year due to the general decline in offline traffic and travel. The overall decline in offline traffic has resulted in a short-term secular challenge for us, as well as for players in the restaurants and hospitality industries. We continue to remain confident that both the consumer market, both online and offline, will recover in due time once COVID outbreaks are better systematically controlled. Until then, Closure rate of smaller offline locations is expected to be on the rise and offline traffic will remain at a sub-normalized level. We are also seeing that the competition within the industry is on the decline as a number of our peers are reducing their aggressive expansion and revenue sharing policy recently. As the number one player in China's mobile device charging service, our advantage across the board will be more pronounced during times of decreasing competition. We believe once the short-term impact of COVID and the general offline traffic in China normalized, our operations will be able to return to normal levels. The fundamentals of our operations and our clear value proposition to both our customers and to our partners remains unchanged. During this period of volatility, and external impact, we will dedicate more time to optimizing our internal management and operational structures in preparation for the eventual recovery of COVID. To better navigate ourselves during these special times, we have implemented a number of key initiatives to lessen our exposure to the volatility in offline traffic, similar to how we carried through the initial COVID outbreak in early 2020. And it came out as the clear market leader in mobile device charging industry. Now, let me walk you through these core strategies in coverage, operations, and technology that will help us reduce our exposure to COVID outbreaks and enhance our overall competitive advantage. First is our continuous expansion of our service network. During the third quarter of 2021, we increased our network coverage by 49,000 new location partners, of which approximately 60% were for location partners in higher tier cities and 40% were for lower tier cities. The pace of our expansion reflects that there continues to be significant room for increasing mobile device charging service penetration in both higher and lower tier cities, and regions across China as well. As of the end of the third quarter, our mobile device charging service now covers over 1,700 counties and county-level cities across China, cementing us as the largest and most comprehensive mobile device charging service network within the industry. In terms of POI category, shopping centers remain one of the fastest growing POI category, while restaurant followed. With the increased coverage, we are able to continue rapidly grow our user base. As of the end of the third quarter, our accumulated registered user reached 273 million, implying nearly 18 million newly registered users when compared to the end of the second quarter of 2021. This indicates that as we scale our operations into new POIs, we are able to reach and convert new users into our user base. Our direct model continues to be at the forefront of our growth in high-altitude cities and coverage of KAs. In reactions to the impact of external factors on offline traffic, we have slowed down the hiring pace of our business development personnel since the fourth quarter. Instead, we are focusing more on their training procedures in order to better prepare them for the eventual recovery of the offline market. We are also making adjustments to their KPI matrix to better meet the condition of the market and encourage them into expanding to more reputable POIs have a lower single point closure rate. This will help us secure our assets from the higher than normal closure levels we are seeing in the restaurant POIs and to increase the efficiency of our power banks and cabinets. This brings us to our K strategy. We are committed to continue quickly bringing our service into leading brands and chain stores so that we can effectively cover more users. During times of COVID, KAs are generally less impacted by the drop in offline traffic when compared to single point smaller brand locations. Our ability to create tailored system and marketing solutions for our K partners remains unparalleled within the industry. This gives us best-in-class conversion rates of KAs within the industry and serves as a foundation to a long-term partnership with these KAs. Going forward, KA expansion will be a key strategy in mitigating the short-term impact of COVID outbreak on our operations. and will also serve as a long-term pillar of growth to our mobile device charging service. On network front, we continue to acquire new network partners around China, mostly in lower-tier cities. By doing so, we will be able to more quickly expand our network scale to cover more regions and to reinforce our network effect. We have launched a series of campaigns during third quarter to help us acquire high quality partners and to help them more quickly scale their operations. These campaigns will effectively lower the initial investment for each cabinet, giving them the ability to invest in more cabinets. At the same time, for top forming network partners, The campaign offers them higher incentives so that they can more quickly scale their operation up. During the third quarter, we increased the number of network partners by over 150. Going forward, these campaigns will help us work with more high-quality network partners and unlock their ability to more quickly scale their operations and ultimately help EnergyMonster further fortify its number one position. China's mobile device charging service market. Next is our initiatives on the operations side. We continuously make strides in optimizing our day-to-day operations in order to further expand our industry-leading efficiency. Because of the impact of COVID, our BDs KPI matrix are revised to require them to more cautiously use upfront entrance fees instead We are pushing for a wider adoption of revenue sharing models. In the long run, this will help us adjust our expense structure and make us less susceptible to fluctuation in the offline traffic that impact our top line. We also launched a new power bank optimization program during the third quarter. This new program dynamically calculates the suitable amount of power bank in each cabinet. based on the local and historical trends. These power bank numbers are then given to our BD through their tool via the to-do list section. On our BD side, they are recommended to adjust the power bank numbers based on the ideal number as calculated by our system. The implementation of this program has a few benefits. One is that our users are more likely to find a cabinet that has a power bank that is readily available for use. And then at the same time, they can find a cabinet that has a slot available for returns. This will greatly improve the user experience, paving ways for increased repeat purchase and satisfaction rate. Also, this program will help us optimize power banks to where they are needed the most instead of a standard amount in each cabinet. In essence, this will help increase power bank efficiency, resulting in a higher revenue and order per power bank. Lastly, this increased efficiency will eventually transition into lower capex for each location and lower percentage of depreciation expenses. Improvements such as the power bank optimization program continue to be drivers for increasing our operational efficiency. Now, one of the key differentiators that sets EnergyMonster apart from any of our peers within the industry in terms of both growth trajectory and margin profile is our operational excellence. And at the center of the ability to efficiently scale our operation is our technology. EnergyMonster's vast IoT network is the front end of our data inside development process. Our network spans across 1,700 counties across China with more than 820,000 locations and 5.8 million power banks in circulation. Our 273 million plus cumulative users and another layer of sophistication to the equation. Our extensive IoT network collects an average of over 400 million data points each day, ranging from all the statistics, hardware status, POI status, and other data points. These data points serve as fundamental layer for our analysis and optimization. Once the data is generated, our data analysis layer automatically restructure it and analyze the data into actionable insights We first divide the data into micro level insights so that our on the ground teams can better manage their POIs and expand into new ones that generate positive economics for the company. On the macro level side, higher level trends are calculated and delivered both to the data analysis layer for automatic adjustment and to managers and partners so that they can better understand the underlying trends. These insights serve as the pillar of the underground decision-making and operational strategies both for our own teams and for our partners. Our proprietary tool serves as the platform for our data insight to be delivered to the relevant parties. To us, data insights that are granular and relevant enough for action is the key. Our goal is to supply our on-the-ground teams and managers with actionable insights for database decision-making. This way, our team and external partners can better identify the impact of their actions on their performance. During the third quarter, we launched the updated version of our proprietary tool with updated feature and interface. This update will help both our internal BDs and external partners more clearly navigate through our system features and leverage new features such as localized heat map to more efficiently expand into locations that generate long-term positive economics for the company. Overall, by leveraging technology to the everyday management of our operation, we have been able to increase efficiency across the board allowing us to quickly become number one player in the mobile device charging service industry. In the future, we continue to see significant way in which our technology and data-driven approach can help us extract opportunities in operational efficiency, strategic applications, and new initiatives. Operationally, we will continue leveraging our AI technology to enable us to expand into high-quality POIs across China by taking into consideration of both micro and macro trends. Strategically, our hardware and software end-to-end capability will allow us to create the largest IoT network both in China and in the whole world. Lastly, these data-enabled insights will give us insights to consumption trends here in China, paving the way for us to explore more business opportunity within EnergyMonster platform. Overall, The challenges set forth by ongoing regional COVID outbreaks in China have brought challenges to our operation during the third quarter and will continue to impact the fourth quarter. The outbreaks since the one in July have negatively impacted our operation in the third quarter. In the fourth quarter, the wider-scale outbreak in Fujian Province and Heilongjiang Province during September have brought similar level of challenges to our operation for the fourth quarter. For example, during China's golden week of October, average same location, we see the GNV is down approximately 25% year over year. Localized travel restrictions and testing requirements for cross-city level have contributed to the decline. The general weakening of consumption power as a result of the outbreak, is also weighing down the fourth quarter. But I would like to emphasize that such factors are short-term in nature, as these results are mostly a result of COVID outbreaks. Our ability to deliver clear value proposition to our stakeholders is the fundamental to our long-term success. And this had not changed at all. We met similar challenges during the initial outbreak of COVID last year and was able to come out as number one player in the mobile device charging service industry. We are confident that we can do it again this time by focusing on our key strategies that help us reduce our exposure to COVID outbreaks and leveraging our competitive advantage in efficiency and network effect. We will come out of this time as the clear leader in China's mobile device service industry. Thank you. I will now turn the call over to Maria Xin, our CFO, for the financial highlights.
spk07: Thank you, Mark. Now let me walk you through the financial results in greater detail. For the third quarter of 2021, revenues were 930 million, representing 0.6% year-over-year increase. Revenues from mobile device charging business were $895.4 million and accounted for 96.3% of our total revenues for the quarter. The flat year-over-year change is due to the impact of COVID-19 during the third quarter of 2021. Revenues from power bank sales were up 14% year-over-year to $27.4 million and accounted for 2.9% of our total revenues for the quarter. The increase was primarily attributable to the increase in available-for-use power banks and the numbers of customers and purchased power banks. Other revenues were up 47.5% year-over-year to $7.2 million and accounted for 0.8% of our total revenues. The increase was primarily attributable to the increase in users, advertisement efficiency, and new business initiatives. Cost of revenues were up 20.6% year-over-year to $139.8 million for the third quarter of 2021. The increase of cost of revenue was primarily due to the increase in the operational scale resulting in increased depreciation and maintenance costs. Gross profit was down 2.3% year-over-year to $790.2 million for the third quarter of 2021. The decrease was primarily due to the increase in cost of revenues. Operating expenses for the third quarter of 2021 were $872.5 million, up 26.7% year-over-year. Excluding share-based compensation, non-GAAP operating expenses were $866.1 million, representing a year-over-year increase of 27.4%. Research and development expenses for the third quarter of 2021 were 29.1 million, up 63.2% year-over-year. The increase was primarily due to the increase in personnel-related expenses. Sales and marketing expenses for the third quarter of 2021 were 814 million, up 23.8% year-over-year. The increase was primarily due to the increase in incentive fee paid to the location partners and network partners from the increase in POS coverage and the increase in personnel-related expenses. General and administrative expenses were $32 million in the third quarter of 2021. up 68.2% year-over-year. The increase was primarily due to the increase in personnel-related expenses. Loss from operations for the third quarter of 2021 was 82.3 million compared to an income from operations of 120.1 million in the same period last year. The loss from operations was primarily attributable to the impact of regional COVID-19 outbreaks in China. Net loss for the third quarter of 2021 was $79.4 million compared to a net income of $108.6 million in the same period last year. Non-GAAP net loss, which includes share-based compensation expenses, was $73 million in the third quarter of 2021 compared to a non-GAAP net income of $120.2 million in the same period last year. As of September 30, 2021, the company had cash and cash equivalents, restricted cash, and short-term investment of $2.9 billion. Cash flow generated from operations for the third quarter of 2021 was negative $93.7 million. Capital expenditures for the third quarter of this year were $108.3 million. Energy Monster currently expects to generate $800 million to $830 million of revenues for the fourth quarter of 2021. Please note that the forecast reflects Energy Monster's current and preliminary view on the industries and its operations, which is subject to change. The COVID-19 outbreak has brought us short-term challenges financially, but we believe our efforts at optimizing our operations and controlling costs will alleviate the impact. We will leverage our health cash reserve to continue strengthening our competitive advantage and extend our coverage of high-quality location partners. Once COVID-19 outbreaks are fully contained in China, our competitive advantage will position us to capture the long-term goals in China's mobile device charging services industry. Thank you for listening. We are now ready for your questions. Operator,
spk06: Thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. As a reminder, to ask a question, you will need to press star one on your telephone. For your question, please press the pound or hash key. And our first question comes from the line of Vicky Wei from Citi. Your line is open.
spk04: Good evening, management. Thanks for taking my question. I have a small question. Can management share with us more details on the impact of the COVID-19 on the fourth quarter in terms of GNV per power bank and other user habit major? Thank you.
spk01: Yeah, Mar speaking. Thanks for the question. Sure. It is important to point out that the occasional outbreak of COVID in China has been impacting operations both before and in the fourth quarter. Whenever there is the outbreak, there's a general drop in food traffic, both in the region of outbreak and out of the region as well. For example, as I just shared in my sharing, During August, after the outbreak in Jiangsu, GNV decreased 40%, 30%, and 30% in Jiangsu, Henan, and Hunan. So the impact of these outbreaks are significant as it results in a large drop in food traffic to our location partners and a general decline in offline spending. These outbreaks are also followed by very strict public health control measures in the form of travel restrictions or testing requirements, which further weighs down the recovery of our business. While this impact has historically been short-term in nature, the continuous outbreak in terms of frequency remains a challenge. In the fourth quarter, the wider scale outbreak in Fujian and Heilongjiang during September have brought similar levels of challenges to our operation for the fourth quarter. As a result, during China's golden week of October, the holiday, the average same location GMV were down about 25% year over year. I think it's important to note that these outbreaks have negatively impacted not only us, but also all the industries. that rely on the offline traffic, like restaurant, hospitality, and entertainment industries. But we are very confident that in the long run, these impacts can augment our operations, and that we expect overall level of offline traffic normalized in the public are contained. In terms of user metrics We continue to maintain a health . We see it will continue to grow. Because of outbreaks, the GM power bank per day, 15%, the decline was primarily due to the lower usage rate as a result of the decreased food traffic to allocation partners during the outbreak of COVID. Overall, we believe that the offline food traffic will eventually normalize in the long run. Hope it will be very soon. And our GME Power Bank will also normalize to historical levels. Thanks.
spk06: Our next question comes from the line of Sophie Lee from Goldman Sachs. Your line is open.
spk05: Hi. Thanks, for taking my question. So I was wondering if management can give a bit more color on the competitive landscape and the revenue sharing trends during the quarter. And what is the outlook of the company's margin going forward and say for next quarter and 2022? OK.
spk07: Thank you for your questions. The general level of computation has been decreasing as COVID-19 outbreaks occur. Given that we have industry-leading levels of scale and efficiency, we believe our competitive advantage will be more apparent in the period of less computation. We will leverage our healthy cash reserve to continue strengthening our competitive advantage through optimized incentive fee structure, expanding our coverage of high-quality location partners, and acquiring strong performing network partners through our campaigns. Unfortunately, we do not offer additional guidance on the margins for the upcoming period, but we are confident that once these outbreaks in China are contained and a new one-stop occurring, our operations and finance will be able to return to the normalized level until then our efforts at optimizing our operations and the controlling costs will help alleviate the temporary impact. Thanks.
spk06: Once again, if you wish to ask a question, please press star 1 on your phone. Our next question comes from the line of Charlie Chen from China Renations. Your line is open.
spk02: Thank you. Thanks, management, for taking my questions. I have a question regarding the number of POIs. So can you share a bit more on the program that has resulted in a decline in power bank accounts for the quarter? And also, how does the company anticipate the expansion rate of the power bank's account in light of the COVID-19 impact? Thank you very much.
spk01: Oh, sure. Thanks for the question. We launched the new power bank optimization program during the third quarter. This program dynamically calculates the suitable number of power banks in each cabinet based on the location and also on the historical chain. Once the system calculates the ideal number of power banks, they are outputted to our BDs through their proprietary tool via the to-do list session. Our BDs are recommended to adjust the power banks based on the ideal number as calculated by our system. This system helps us give users better experience and optimize the usage rate of each power bank. For our users, the end result is that they can more easily find power banks that are readily available for use and find more cabinets that have slots for power bank returns. These benefits will help us improve the user experience and in the long run drive higher repeat purchase and satisfaction rate. On the operational side, this program will help increase power bank's efficiency by more clearly matching localized supply and demand. The increased efficiency will eventually transition into lower capex for each location and lower percentage of depreciation expenses. As for the question on the expansion rate, we continue to maintain a health rate of coverage expansion during the third quarter. Our network now spans over 220,000 locations across over 1,700 countries or cities across China. The growth in coverage comes from all POI types and city tier, both under the direct and network partner models. We continue to see opportunities to expand our coverage and especially for key accounts. We also launched a series of campaigns tailored to attract more high-quality network partners by providing more attractive economics and lower CapEx to unlock their growth capabilities. But given the COVID outbreak impact on higher peer cities, we have started slowing down our BD recruitment under the direct model. Instead, we are focusing on providing additional training so that they can more efficiently expand our coverage and service in the existing locations. Thank you.
spk02: Thank you.
spk06: And our next question comes from the line of Sophie Lee from Goldman Sachs. Your line is open.
spk05: Thanks, Manjuan, for taking my question again. Can you share with us the measures that a company plans to implement to combat the COVID-19 outbreak in the future, given that these outbreaks may be a longer-term challenge going forward?
spk01: Yeah, totally. Thank you. To better navigate ourselves during these special times, we have implemented a number of key initiatives to lessen our exposure to the volatility in offline food traffic as a result of COVID. Namely, we have four key initiatives that we have launched during the third quarter. First is the launch of the new network partner campaign tailored to attracting new high-quality network partners. These campaigns, as I shared, will effectively lower the initial investment for each cabinet, giving our network partner the ability to invest in more cabinets. At the same time, the campaign gives high-performing network partners additional incentives, which translates into faster scaling up of their operation. So far, the effects of these campaigns are positive. as we were able to increase our network partner account by more than 150 during the quarter, which is nearly one-fourth of the total number of our network partners, and continues to unlock their network partners' growth potential. We believe these network partner campaigns will continue gaining traction and help us extend our network through a light asset model. Number two, the second is our control on expenses and finances. Given the current conditions of the market, which are periodical outbreaks, we have implemented tighter budget control measures. We continue to optimize our BD and employee counts in order to make sure that our efficiency level continues to improve. We have also slowed down the overall hiring pace. Instead, we are focusing on better training and better technology building in preparation for the eventual recovery of the market. Thirdly, because of the impact of COVID, our BDs KPI matrix are revised to require them to do things more cautiously. The decreasing use of fixed upfront entry fee and increasing use of variable incentive fees is crucial for lowering the ratio of scales and marketing expenses as a percentage of revenue. Going forward, the transaction of fixed sales and marketing expenses to variable ones will benefit our financials during the period of external impact. And lastly, we have also launched our new power bank optimization program as I shared so that we can continue to reducing the effective capex amount for each location and thus reducing our long-term depreciation as a percentage of the revenue. Combined, these actions will help us both financially and operationally cope with the challenges of COVID outbreaks and develop into additional layer of competitive advantage similar to how we overcame the challenge during the initial outbreak of COVID last year. We are very confident that we will come out of these outbreaks as a stronger and better energy monster in the competition. Thank you very much.
spk04: Thank you.
spk06: Once again, if you wish to ask a question, please press the star 1 on your phone and wait for your name to be announced. Again, star one to ask a question. None of our questions at this time, and we are now approaching the end of the conference call. I will now turn the call over to EnergyMonster's CFO, Maria Shin, for closing remarks.
spk07: Once again, thank you for joining us today. Please contact us if you have any further questions. Thank you for your continued support, and we look forward to speaking with you in the coming months. Thank you.
spk06: Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.
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