This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Thank you for standing by and welcome to the Energy Monster second quarter 2022 earnings conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mars Kai, chairman and CEO. Please go ahead.
spk10: Thank you. Welcome to our 2022 Second Quarter Earnings Conference Call. Joining me on the call today are Mark Tsai, Energy Monster's Chairman and Chief Executive Officer, and Maria Xien, Chief Financial Officer. For today's agenda, management will discuss business updates, operation highlights, and financial performance for the second quarter of 2022. Before we continue, I refer you to our safe harbor statement in the earnings press 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, as otherwise stated, all figures mentioned during this call are in RMB. I would now like to turn the call over to our Chairman and Chief Executive Officer, Mark Tye, for the business and operation highlights. Thank you, Hanson.
spk11: Good day, everyone. Welcome to our 2022 second quarter earnings call. The second quarter of 2022 continued to be a challenging quarter for EnergyMonster due to a number of larger scale COVID outbreaks, notably in Shanghai, Beijing, Shenzhen, and Chongqing. However, the impact of these outbreaks, along with the lockdown measures implemented, were better than expected. as we were able to achieve revenues above our guidance. During the second quarter, we continued to expand our services to more locations across China. The total number of POIs has increased to 895,000 locations, an increase of 4% quarter-on-quarter, and a 16% year-over-year. The total number of counties and county-level regions with EnergyMonster service has now reached 1,800 for the first time as we continue to strive to increase our coverage to reach more users that need our service. The increased accessibility of our service has allowed us to attract 11.6 million newly registered users during the second quarter. That has put us at a new milestone as accumulated registered users reached over 300 million. for the first time. Even though COVID outbreaks continue to weigh us down financially, we continue to place ourselves for long-term success operationally through increased service coverage, both in terms of POI count and regions covered, and in terms of user coverage. Now as for the impact of COVID on our operations during the second quarter, let me share a bit more details on the impact. Whenever a region has active discovery of new COVID cases, a few things happen. A stricter COVID testing procedure is implemented at the regional level. This generally means that regional population has to take recent COVID test results before entering commercial or public locations. With larger outbreaks, a number of commercial locations where our cabinets are typically placed, are required to be temporarily shut down. And in the cases where there is an even larger scale threat of COVID, more restrictive lockdowns for the general population of the region are implemented, such as the one in Shenzhen during March and Shanghai during April and May. All of these counter measurements directly impacts the amount of people in active circulation within a certain region, meaning that less food traffic passes our cabinets each day. This ultimately reduces the revenue efficiency of our cabinets and power banks. In April, larger outbreaks in Shanghai, Changchun, Guangzhou, and Chengdu resulted in 95% 90-60%, 30-60%, and 30% year-over-year declines in GNV, respectively. In May, outbreaks in Shanghai, Beijing, and Tianjin resulted in 96%, 76%, and 51% year-over-year declines, respectively. And also in June, outbreaks in Beijing and Shanghai resulted in 54% and 68% declines, respectively. The second quarter was riddled with these regional outbreaks, impacting both the region's internal food traffic and resulting in a general decline in food traffic in nearby regions. Overall, in April and May, our G&E declined by 34% and 27%, respectively. as a result of COVID outbreaks. We also continue to observe that the impact of COVID outbreaks is completely correlated with the amount of active COVID cases in a given region. In regions where COVID cases are contained in April, recovery trends in May and June are clear. For example, Guangzhou's GNV increased by 26% month over month in May and 14 in June. Hangzhou's GMV increased by 36% month over month in May and 13% in June. Similarly, Suzhou's GMV increased by 143% month over month in May and 93% in June. We see similar recovery trends across all regions where outbreaks are fully contained. meaning that COVID-related impacts are short-term in nature. That is why we remain focused on longer-term strategies of extending our coverage network and increasing our efficiency. We believe the increased coverage through the combination of our direct and network partner models will help us further extend the energy monster network effect, which makes it easier for us to acquire users, location partners, and network partners. The increased efficiency through the declining usage of fixed incentive fees and the reduction in hardware capex per cabinet will reduce the impact of COVID on our operations and serve as the basis of reaching higher levels of efficiencies in the future. We believe EnergyMonster's strategic initiatives and longer horizon approach to strategy development are crucial in depreciating ourselves from market peers in the future and will allow us to be best positioned to capture market opportunities within the industry. Now let me go through our core strategies in terms of expanding our coverage and increasing our efficiency in greater details. First is our coverage expansion strategy. which continues to be fueled by both our direct and network partner models. During the second quarter, we continue to extract the synergy between the two models by allowing our direct model business development personnel to leverage their own network to identify and acquire new network partners. This new program initially launched in April, but has quickly gained traction amongst our business development personnel. During the quarter, 40% of our BD participated in the program and acquired at least one new network partners. By leveraging the scale and existing capabilities of our direct model, we have drastically accelerated the pace of our network partner acquisition. And approximately 1,800 new network partners were acquired during this quarter. of which more than 70% were sourced through our direct models personnel. The increased network partner has helped us grow our presence across the board by further penetrating existing regions and especially moving into newer regions. With the significant increase in our network partner count, the next natural thing to focus is helping these network partners grow alongside EnergyMonster. Newer network partners, a lot of the times, are new to the market. So providing guidance is the most important aspect. We focus on early periods so that they can quickly achieve scale. We offer guidance primarily by sharing our know-hows of industry, as well as providing one-on-one consultation on their current progress. We also provide a complete set of backend systems so that they can clearly see the key matrix of their own team, POIs, and cabinets. It is due to these various avenues of providing operational and strategic support that our network partners are able to grow alongside our company and maintain higher levels of efficiencies compared to those who work with our peers in the industry. We believe that our ingrained values of helping our network partner maintain sustainable returns is the key differentiator. Defining EnergyMonster's network partner model and also the reason why we maintain the highest market share in China's mobile device charging service industry and the network partner model. We continue to explore ways to synergize and to promote collaboration between our two models. The earlier opened up all direct model regions to network partners in order to further extend our leading market share in existing regions. We now launched a program to allow our direct model personnel to also help increase our network partner acquisition. This unique balance and collaboration between the two models have paved the way for market share acquisition. as we expand the coverage in all regions. We also have the largest direct model workforce within the industry, allowing us to continue moving into KAs and larger size POIs. Once the impact of COVID diminishes, we are uniquely positioned to quickly acquire market share as direct model typically acquires POIs at a faster pace than network partners due to its higher level of execution capabilities. Overall, we believe that increasing POI coverage remains our number one priority. The increased POI count allows more customers to use our service, which ultimately converts into more registered users. This self-reinforcing cycle allows us to continuously scale our operations and reach higher levels of benefit from the network effect. That's why we continue to rapidly increase our network partner count and maintain our direct model personnel so that we can continuously expand our POI coverage even during times of COVID impact. Next is our strategies on improving EnergyMonster's efficiencies, both on the front and back end sides. While the expansion of our coverage is crucial to our long-term development, improvements to our efficiency is also important, especially during period with external events like COVID outbreaks. The outbreaks of COVID has resulted not only in decline of food traffic to a number of POIs, but it has also resulted in the permanent closure for some of these locations. That is why we continue to reduce the amount of upfront payments we make to location partners in order to reduce our exposure to the decline in food traffic and increase risk of POI closure during the outbreaks. During the second quarter, we continue to significantly reduce the number of new POI signings using upfront or fixed fees. 95% of all new POI signings only use variable incentive fees. This is up from 54% during the same period last time. And we continue to scale down fixed type of incentive fees in new signings. The declining usage of the fixed fees will benefit us during the COVID when revenues slow down due to decline food traffic significantly drag down our bottom line. The increasing contribution from network partner model also increases our efficiency, especially during COVID. Under the network partner model, the company takes a fixed share of the revenue generated by the cabinets of our network partners. This reduces us exposure to fixed expenses, closure rate of POIs, and the general effect of COVID. We are also making significant improvements to efficiency of our direct model business In the second quarter of 2022, our BD, the coverage of them, of POI per person, has increased 43% year over year, making a significant increase in terms of efficiency of people. As we continue introducing new back-end system features that enhance our personnel's ability to manage more POIs and optimizing the workflow of our business development personnel's tasks, The introduction of our new program, the Direct Model Business BD, are also able to acquire network partners paved the way for unlocking the higher level of efficiency. These business development personnel can now contribute both through the direct model and help accelerate our network partner acquisition progress, which increase their overall contribution to the company. per person. We believe this innovative program will take energy monsters already market leading operation efficiency to a new level. In terms of technology, we continue to innovate our software and hardware technologies to increase our competitiveness in terms of operating efficiency and asset efficiency. Our software is closely tailored to our operating workflow and the needs of our employees, location partners, and network partners. We design our software in order to increase the levels of automation for each workflow segment in order to help them increase their efficiency. That is why we recently launched a new system for our network partner that helps them more systematically manage their relationships with location partners. This system is gaining wide levels of adoption amongst our network partners and has proven itself in helping network partners better manage their operation. Aside from software, we also continue to make progress optimizing our hardware and the maintenance process of this equipment. The CapEx power bank cabinet will continue to go down go into the second half of 2022 as we scale up the production of our new cabinets, which will have a significant reduction in terms of cost. We are also improving the maintenance process of our cabinets and power banks so that we can maximize the lifetime value of each equipment. These improvements to hardware will continue helping us driving up the asset efficiency when going forward. Overall, the continuous outbreaks of COVID have a significant impact on our operations during the second quarter. And both newer outbreaks and existing outbreaks carrying over from the second quarter continue to be headwinds in the third one. Although the recovery trend is clear cut, smaller outbreak within the region can still weigh down the recovery speed. New outbreaks such as the one in Sanya resulted a year-over-year decline of 31% in July and 75% in August. Similarly, following a spike in new COVID cases since late August in Chengdu, a lockdown has been imposed. GNV from Chengdu declined by 83% on week-over-week base. While the impact of COVID continues to drive down both our revenue and profitability, the size and frequency of these outbreaks are slowing down in third quarter when compared to the second one. In conclusion, I would like to emphasize that although COVID has been challenging in terms of its direct impact on our operation, but we continue to see that Its impact is not a systematic change in user behavior. As regions coming out of COVID impact are able to scale back to normalized level within two months after the outbreak is fully contained. In the meantime, we will continue to strengthen the foundation of our competitive advantages by focusing on our strategies in coverage expansion and efficiency optimization. Both our direct and the network partner model continue to serve as the pillars of our coverage expansion. But new ways of synergizing the two models has been proven to be a new driver for coverage expansion. Our efficiency is expected to improve as we scale back all forms of prepaid and fixed incentive fees, increase the contribution of the network partner model and optimize the asset efficiency of our equipment. Our focus on these strategies will serve as the foundation of our market share growth and market leading operational efficiency in the future. And especially once the impact of COVID impact is reduced. Again, we remain confident that EnergyMonster continues to be best positioned to capture the growth of China's mobile device charging service industry and to deliver long-term value for all of our stakeholders. Thank you. I'll now turn the call over to Maria Xin, our CFO, for the financial highlights.
spk06: Thank you, Mark. Now let me walk you through the financial results in greater detail. For the second quarter of 2022, Revenues were $690.5 million, representing a 29% year-over-year decrease. Revenues from mobile device charging business were down 27.8% to $672.6 million and accounted for 97.4% of our total revenues for the quarter. The decrease was primarily attributable to the impact of COVID-19 during the second quarter of 2022, which resulted in a significant decline in general offline food traffic in China due to COVID-19 restrictions. Revenues from power bank sales were down 57.7% year-over-year to $13.3 million and accounted for 1.9% of our total revenues for the quarter. The decrease was primarily attributable to the impact of COVID-19 during the second quarter of 2022, which resulted in a significant decline in general offline food traffic in China due to COVID-19 restrictions. Other revenues were down 50.8% year-over-year to 4.5 million and accounting for 0.7% of our total revenues. The decrease was primarily attributable to the decrease in user traffic as a result of the impact of COVID-19 during the second quarter of 2022. Cost of revenues were up 17.4% year-over-year to $162.9 million for the second quarter of 2022. The increase of cost of revenues was primarily due to the recognition of impairments for inventory and equipment and the increase in maintenance costs which was partially offset by the decrease in cost of product sold. Cost profit was down 36.7% year-over-year to $527.7 million for the second quarter of 2022. The decrease was primarily due to the decrease in revenues from mobile device charging business Operating expenses for the second quarter of 2022 were $718.7 million, down 11.8% year-over-year. Excluding share-based compensation, non-GAAP operating expenses were $711.7 million, representing a year-over-year decrease of 11.7%. Research and development expenses for the second quarter of 2022 were $27 $23.7 million, up 15.8% year-over-year. The increase was primarily due to the increase in personnel-related expenses. Sales and marketing expenses for the second quarter of 2022 were $664.9 million, down 13.8% year-over-year. The decrease was primarily due to the decrease in entry fees and the incentive fees paid to the location partners and the personnel-related expenses, which was partially offset by the increase in incentive fees paid to the network partners. General and administrative expenses were $28.5 million in the second quarter of 2022, down 0.8% year-over-year, The decrease was primarily due to the decrease in personnel-related expenses and office rental expenses, which was partially offset by the increase in professional service fees. Loss from operation was 191 million in the operating margin for the second quarter of 2022, with negative 27.7% compared to 1.9% in the same period last year. Net loss was $184.5 million in the second quarter of 2022. Net margin for the second quarter of 2022 was negative 22.6%. Non-GAAP net loss, which includes share-based compensation expenses, was $177.5 million in the second quarter of 2022 compared to a non-GAAP net income of $17.2 million in the same period last year. As of June 30, 2022, the company had cash and cash equivalents, restricted cash, and short-term investment of $2.9 billion. Cash flow generated from operations for the second quarter of 2022 was $136.1 million. Capital expenditure for the second quarter of this year was $85.5 million. Energy Monster currently expects to generate $770 million to $800 million of revenues for the third quarter of 2022. Please note that the forecast reflects Energy Monster's current and preliminary view on the industry and its operations, which is subject to change. Thank you for listening. We are now ready for your questions. Operator.
spk05: Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick a handset to ask a question. At this time, we'll pause momentarily to assemble our roster. The first question comes from Lynn from GS. Please go ahead.
spk08: Thank you, management, for taking my question. Can management give a bit more insight for the reason behind the increase in cost of revenues? And it would also be great if you can give a bit more color on the third quarter's revenue guidance and possibly any guidance on the bottom line. Thanks.
spk06: Thanks. I will take your question. The reason for the increase in cost of revenues was primarily due to a few things. First is the impact of COVID on POIs. This has resulted in a lot of closures of business where our cabinets are placed. And because of the disclosures, in some cases, our equipment cannot be returned to us. This has resulted in the recognition of impairments for inventory and equipment during the quarter. There was also some actual maintenance cost this quarter because we wanted to optimize some of the order's equipment to give our users a better experience and maximize the lifetime value for those equipment. Depreciation as a percentage of revenue also increased because we now have more POIs and But because of the COVID, the revenue per cabinet and power bank is down significantly during the second quarter. Overall, the primary reason for the increase in cost of revenues as percentage of revenue is still impact of COVID on revenues. As for the guidance, we continue to see outbreaks during the quarter, although to a lesser degree when compared to the second quarter. we were actually seeing the strong results in August as new large-scale outbreaks were less frequently. Our GMV was able to grow year-on-year in August, but the new outbreaks, such as one in Chengdu during the late August and the other outbreaks in early September, will weigh down our recovery for the third quarter. Given that, we can't actually assess the development of these We will now offer any guidance on our probability. Thank you.
spk08: Thank you, Maria.
spk05: Next question comes from Charlie Chen from China Renaissance. Please go ahead.
spk03: Thank you, management, for taking my question. Could management give us more color on the current competitive landscape in this industry? Is competition escalating? Or you also mentioned that the company is acquiring new network partners at record speed. So I just want to understand how the company balances the two models strategically. Thank you.
spk11: Sure. Thanks for the question. As for competition, we are seeing a general decline in competition for POIs, and especially for larger size POI and KAs. Most of our peers in the market have significantly downsized their direct model scale. And thus, we are seeing a lot less competition for new signings across the board. Also, because a number of our peers irrationally prioritize growth without much consideration of quality of growth, Energy Monster's POI quality is market leading. So when COVID came around, while we also experienced the challenges our peers faces even higher level of the pressure due to the differences in POI quality. As a result, incentive fee rates for new signings during the second quarter continues to trend down due to the lower level of competition. While it may take a bit of time for this decreasing competition to translate into financial matrix Given that new assignments are only a portion of the total contracts, we are optimistic on the current trend. For the second question, on the balance of the two models, I think the balance between the two largely depends on maximizing values for our shareholders and stakeholders. We don't have any exact percentage target for G&V contribution between the two models. because both models are important to the company. Our network partner model is growing more quickly than our direct model during this quarter because of the new program we introduced, which allows for our direct model BD people to also contribute to the acquisition of the new network partners. And because the network partner allows us to better mitigate risks coming from the COVID impact, we believe the network partner model will continue to be core driver of growth in the near future. But I think in the long run, both models will be equally important to the company. Direct model's advantage in terms of higher execution speed and ability to sign large KAs and network partners Advantage in coverage of long tail POIs and regions and risk mitigation shows that each model has its own set of advantages. So that's why we continue to innovate new ways for the models to work together and ultimately help Energy Monster increase its market share. Thank you for the question.
spk04: Thank you, Ma. Thank you very much.
spk05: Next question comes from Vicky Wei from Citi. Please go ahead.
spk07: Thanks, management, for taking my question. I just want to get your perspective on the COVID given that these outbreaks are happening on and off for some time now. How will the company cope with the pandemic if it continues to next year? Thank you.
spk11: Hi, thanks for the question. Yes, COVID outbreaks are very unpredictable and there's no way for us to know for sure when, where it will happen and the size of outbreak. While the challenge is there, we are seeing a slight improvements in terms of the size of outbreak when compared to the second quarter. On a longer horizon perspective, we believe COVID impact will eventually diminish as containment measures become even more precise and the danger of the virus diminishes as well. That's why we continue to expand the scope of our service coverage and strengthen EnergyMonster's network effect because we remain very optimistic about the eventual but permanent containment of COVID. But for the near future, we are prepared to coexist with COVID. We continue to find ways to reduce our exposure from COVID, namely in ways such as reducing upfront or fixed incentive fees, expanding our network partner account, increasing the efficiency of our business development personnel, optimizing our upfront and backend process, and enhancing both software and hardware technologies. These are just some of the things that we focus on in order to increase our efficiency during COVID. I think when we're able to fully implement these initiatives, we can then really mitigate most COVID-related risks and really be able to coexist with COVID. But again, I think COVID will not be a long-term challenge. But the company is taking all measures necessary in order to reduce the short-term impact. Thank you.
spk01: Thank you.
spk05: There are no further questions at this time. I'll now hand it back to Maria Xin for closing remarks.
spk06: Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continue to support and we look forward to speaking with you in the coming quarter. Thank you.
spk05: That does conclude our conference for today. Thank you for participating. You may now disconnect. Thank you. Thank you. Thank you. Music playing you Thank you.
spk00: Bye. Thank you.
spk05: Thank you for standing by. Welcome to the Energy Monster second quarter 2022 earnings conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mars Kai, chairman and CEO. Please go ahead.
spk10: Thank you. Welcome to our 2022 Second Quarter Earnings Conference Call. Joining me on the call today are Mark Tsai, Energy Monster's Chairman and Chief Executive Officer, and Maria Xien, Chief Financial Officer. For today's agenda, management will discuss business updates, operation highlights, and financial performance for the second quarter of 2022. Before we continue, I refer you to our safe harbor statement in the earnings press 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, as otherwise stated, all figures mentioned during this call are in RMB. I would now like to turn the call over to our Chairman and Chief Executive Officer, Mark Tsai, for the business and operation highlights.
spk11: Thank you, Hanson. Good day, everyone. Welcome to our 2022 second quarter earnings call. The second quarter of 2022 continued to be a challenging quarter for EnergyMonster due to a number of larger scale COVID outbreaks, notably in Shanghai, Beijing, Shenzhen, and Changchun. However, the impact of these outbreaks along with the lockdown measures implemented were better than expected. as we were able to achieve revenues above our guidance. During the second quarter, we continued to expand our services to more locations across China. The total number of POIs has increased to 895,000 locations, an increase of 4% quarter-on-quarter, and a 16% year-over-year. The total number of counties and county-level regions with EnergyMonster service has now reached 1,800 for the first time as we continue to strive to increase our coverage to reach more users that need our service. The increased accessibility of our service has allowed us to attract 11.6 million newly registered users during the second quarter. That has put us at a new milestone as accumulated registered users reached over 300 million. for the first time. Even though COVID outbreaks continue to weigh us down financially, we continue to place ourselves for long-term success operationally through increased service coverage, both in terms of POI count and regions covered, and in terms of user coverage. Now as for the impact of COVID on our operations during the second quarter, let me share a bit more details on the impact. Whenever a region has active discovery of new COVID cases, a few things happen. A stricter COVID testing procedure is implemented at the regional level. This generally means that regional population has to take recent COVID test results before entering commercial or public locations. With larger outbreaks, a number of commercial locations where our cabinets are typically placed, are required to be temporarily shut down. And in the cases where there is an even larger scale threat of COVID, more restrictive lockdowns for the general population of the region are implemented, such as the one in Shenzhen during March and Shanghai during April and May. All of these countermeasurements directly impacts the amount of people in active circulation within a certain region, meaning that less food traffic passes our cabinets each day. This ultimately reduces the revenue efficiency of our cabinets and power banks. In April, larger outbreaks in Shanghai, Changchun, Guangzhou, and Chengdu resulted in 95% 90-60%, 30-60%, and 30% year-over-year declines in GNV, respectively. In May, outbreaks in Shanghai, Beijing, and Tianjin resulted in 96%, 76%, and 51% year-over-year declines, respectively. And also in June, outbreaks in Beijing and Shanghai resulted in 54% and 68% declines, respectively. The second quarter was riddled with these regional outbreaks, impacting both the region's internal foot traffic and resulting in a general decline in foot traffic in nearby regions. Overall, in April and May, our G&E declined by 34% and 27%, respectively. as a result of COVID outbreaks. We also continue to observe that the impact of COVID outbreaks is completely correlated with the amount of active COVID cases in a given region. In regions where COVID cases are contained in April, recovery trends in May and June are clear. For example, Guangzhou's GMV increased by 26% month-over-month in May and 14 in June. Hangzhou's GMV increased by 36% month-over-month in May and 13% in June. Similarly, Suzhou's GMV increased by 143% month-over-month in May and 93% in June. We see similar recovery trends across all regions where outbreaks are fully contained. meaning that COVID-related impacts are short-term in nature. That is why we remain focused on longer-term strategies of extending our coverage network and increasing our efficiency. We believe the increased coverage through the combination of our direct and network partner models will help us further extend the energy monster network effect, which makes it easier for us to acquire users, location partners, and network partners. The increased efficiency through the declining usage of fixed incentive fees and the reduction in hardware capex per cabinet will reduce the impact of COVID on our operations and serve as the basis of reaching higher levels of efficiencies in the future. We believe EnergyMonster's strategic initiatives and longer horizon approach to strategy development are crucial in depreciating ourselves from market peers in the future and will allow us to be best positioned to capture market opportunities within the industry. Now let me go through our core strategies in terms of expanding our coverage and increasing our efficiency in greater details. First is our coverage expansion strategy. which continues to be fueled by both our direct and network partner models. During the second quarter, we continue to extract the synergy between the two models by allowing our direct model business development personnel to leverage their own network to identify and acquire new network partners. This new program initially launched in April, but has quickly gained traction amongst our business development personnel. During the quarter, 40% of our BD participated in the program and acquired at least one new network partners. By leveraging the scale and existing capabilities of our direct model, we have drastically accelerated the pace of our network partner acquisition. And approximately 1,800 new network partners were acquired during this quarter. of which more than 70% were sourced through our direct models personnel. The increased network partner has helped us grow our presence across the board by further penetrating existing regions and especially moving into newer regions. With the significant increase in our network partner count, the next natural thing to focus is helping these network partners grow alongside EnergyMonster. Newer network partners, a lot of the times, are new to the market. So providing guidance is the most important aspect. We focus on early periods so that they can quickly achieve scale. We offer guidance primarily by sharing our know-hows of industry, as well as providing one-on-one consultation on their current progress. We also provide a complete set of backend systems so that they can clearly see the key matrix of their own team, POIs, and cabinets. It is due to these various avenues of providing operational and strategic support that our network partners are able to grow alongside our company and maintain higher levels of efficiencies compared to those who work with our peers in the industry. We believe that our ingrained values of helping our network partner maintain sustainable returns is the key differentiator. Defining EnergyMonster's network partner model and also the reason why we maintain the highest market share in China's mobile device charging service industry and the network partner model. We continue to explore ways to synergize and to promote collaboration between our two models. The earlier opened up all direct model regions to network partners in order to further extend our leading market share in existing regions. We now launched a program to allow our direct model personnel to also help increase our network partner acquisition. This unique balance and collaboration between the two models have paved the way for market share acquisition. as we expand the coverage in all regions. We also have the largest direct model workforce within industry, allowing us to continue moving into KAs and larger size POIs. Once the impact of COVID diminishes, we are uniquely positioned to quickly acquire market share as direct model typically acquires POIs at a faster pace than network partners due to its higher level of execution capabilities. Overall, we believe that increasing POI coverage remains our number one priority. The increased POI count allows more customers to use our service, which ultimately converts into more registered users. This self-reinforcing cycle allows us to continuously scale our operations and reach higher levels of benefit from the network effect. That's why we continue to rapidly increase our network partner count and maintain our direct model personnel so that we can continuously expand our POI coverage even during times of COVID impact. Next is our strategies on improving EnergyMonster's efficiencies, both on the front and back end sides. While the expansion of our coverage is crucial to our long-term development, improvements to our efficiency is also important, especially during period with external events like COVID outbreaks. The outbreaks of COVID has resulted not only in decline of food traffic to a number of POIs, but it has also resulted in the permanent closure for some of these locations. That is why we continue to reduce the amount of upfront payments we make to location partners in order to reduce our exposure to the decline in food traffic and increase risk of POI closure during the outbreaks. During the second quarter, we continue to significantly reduce the number of new POI signings using upfront or fixed fees. 95% of all new POI signings only use variable incentive fees. This is up from 54% during the same period last time. And we continue to scale down fixed type of incentive fees in new signings. The declining usage of the fixed fees will benefit us during the COVID when revenues slow down due to decline food traffic significantly drag down our bottom line. The increasing contribution from network partner model also increases our efficiency, especially during COVID. Under the network partner model, the company takes a fixed share of the revenue generated by the cabinets of our network partners. This reduces us exposure to fixed expenses, closure rate of POIs, and the general effect of COVID. We are also making significant improvements to efficiency of our direct model business In the second quarter of 2022, our BD, the coverage of them, of POI per person, has increased 43% year over year, making a significant increase in terms of efficiency of people. As we continue introducing new back-end system features that enhance our personnel's ability to manage more POIs and optimizing the workflow of our business development personnel's tasks, The introduction of our new program, the Direct Model Business BD, are also able to acquire network partners paved the way for unlocking the higher level of efficiency. These business development personnel can now contribute both through the direct model and help accelerate our network partner acquisition progress, which increase their overall contribution to the company. per person. We believe this innovative program will take energy monsters already market leading operation efficiency to a new level. In terms of technology, we continue to innovate our software and hardware technologies to increase our competitiveness in terms of operating efficiency and asset efficiency. Our software is closely tailored to our operating workflow and the needs of our employees, location partners, and network partners. We design our software in order to increase the levels of automation for each workflow segment in order to help them increase their efficiency. That is why we recently launched a new system for our network partner that helps them more systematically manage their relationships with location partners. This system is gaining wide levels of adoption amongst our network partners and has proven itself in helping network partners better manage their operation. Aside from software, we also continue to make progress optimizing our hardware and the maintenance process of this equipment. The CapEx power bank cabinet will continue to go down go into the second half of 2022 as we scale up the production of our new cabinets, which will have a significant reduction in terms of cost. We are also improving the maintenance process of our cabinets and power banks so that we can maximize the lifetime value of each equipment. These improvements to hardware will continue helping us driving up the asset efficiency when going forward. Overall, the continuous outbreaks of COVID have a significant impact on our operations during the second quarter. And both newer outbreaks and existing outbreaks carrying over from the second quarter continue to be headwinds in the third one. Although the recovery trend is clear cut, smaller outbreak within the region can still weigh down the recovery speed. New outbreaks such as the one in Sanya resulted a year-over-year decline of 31% in July and 75% in August. Similarly, following a spike in new COVID cases since late August in Chengdu, a lockdown has been imposed. GNV from Chengdu declined by 83% on week-over-week base. While the impact of COVID continues to drive down both our revenue and profitability, the size and frequency of these outbreaks are slowing down in third quarter when compared to the second one. In conclusion, I would like to emphasize that although COVID has been challenging in terms of its direct impact on our operation, but we continue to see that Its impact is not a systematic change in user behavior. As regions coming out of COVID impact are able to scale back to normalized level within two months after the outbreak is fully contained. In the meantime, we will continue to strengthen the foundation of our competitive advantages by focusing on our strategies in coverage expansion and efficiency optimization. Both our direct and the network partner model continue to serve as the pillars of our coverage expansion. But new ways of synergizing the two models has been proven to be a new driver for coverage expansion. Our efficiency is expected to improve as we scale back all forms of prepaid and fixed incentive fees, increase the contribution of the network partner model and optimize the asset efficiency of our equipment our focus on these strategies will serve as the foundation of our market share growth and market leading operational efficiency in the future and especially once the impact of covert impact is reduced again we remain confident that energy monster continues to be best positioned to capture the growth of China's mobile device charging service industry and to deliver long-term value for all of our stakeholders. Thank you. I'll now turn the call over to Maria Xin, our CFO, for the financial highlights.
spk06: Thank you, Mark. Now let me walk you through the financial results in greater detail. For the second quarter of 2022, Revenues were $690.5 million, representing a 29% year-over-year decrease. Revenues from mobile device charging business were down 27.8% to $672.6 million and accounted for 97.4% of our total revenues for the quarter. The decrease was primarily attributable to the impact of COVID-19 during the second quarter of 2022. which resulted in a significant decline in general offline food traffic in China due to COVID-19 restrictions. Revenues from power bank sales were down 57.7% year-over-year to $13.3 million and accounted for 1.9% of our total revenues for the quarter. The decrease was primarily attributable to the impact of COVID-19 during the second quarter of 2022, which resulted in a significant decline in general offline food traffic in China due to COVID-19 restrictions. Other revenues were down 50.8% year-over-year to 4.5 million and accounting for 0.7% of our total revenues. The decrease was primarily attributable to the decrease in user traffic as a result of the impact of COVID-19 during the second quarter of 2022. Cost of revenues were up 17.4% year-over-year to $162.9 million for the second quarter of 2022. The increase of cost of revenues was primarily due to the recognition of impairments for inventory and equipment and the increase in maintenance cost, which was partially offset by the decrease in cost of product sold. Cost profit was down 36.7% year-over-year to $527.7 million for the second quarter of 2022. The decrease was primarily due to the decrease in revenues from mobile device charging business. Operating expenses for the second quarter of 2022 were $718.7 million, down 11.8% year-over-year. Excluding share-based compensation, non-GAAP operating expenses were $711.7 million, representing a year-over-year decrease of 11.7%. Research and development expenses for the second quarter of 2022 were $27 23.7 million, up 15.8% year-over-year. The increase was primarily due to the increase in personnel-related expenses. Sales and marketing expenses for the second quarter of 2022 were $664.9 million, down 13.8% year-over-year. The decrease was primarily due to the decrease in entry fees and the incentive fees paid to the location partners and the personnel-related expenses, which was partially offset by the increase in incentive fees paid to the network partners. General and administrative expenses were $28.5 million in the second quarter of 2022, down 0.8% year-over-year, The decrease was primarily due to the decrease in personnel-related expenses and office rental expenses, which was partially offset by the increase in professional service fees. Loss from operation was 191 million in the operating margin for the second quarter of 2022, with negative 27.7% compared to 1.9% in the same period last year. Net loss was $184.5 million in the second quarter of 2022. Net margin for the second quarter of 2022 was negative 22.6%. Non-GAAP net loss, which includes share-based compensation expenses, was $177.5 million in the second quarter of 2022, compared to a non-GAAP net income of $17.2 million in the same period last year. As of June 30, 2022, the company had cash and cash equivalents, restricted cash, and short-term investment of $2.9 billion. Cash flow generated from operations for the second quarter of 2022 was $136.1 million. Capital expenditure for the second quarter of this year was $85.5 million. Energy Monster currently expects to generate $770 million to $800 million of revenues for the third quarter of 2022. Please note that the forecast reflects Energy Monster's current and preliminary view on the industry and its operations, which is subject to change. Thank you for listening. We are now ready for your questions. Operator.
spk05: Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick a handset to ask a question. At this time, we'll pause momentarily to assemble our roster. The first question comes from Lynn from GS. Please go ahead.
spk08: Thank you, management, for taking my question. Can management give a bit more insight for the reason behind the increase in cost of revenues? And it would also be great if you can give a bit more color on the third quarter's revenue guidance and possibly any guidance on the bottom line. Thanks.
spk06: Thanks. I will take your question. The reason for the increase in cost of revenues was primarily due to a few things. First is the impact of COVID on POIs. This has resulted in a lot of closures of business where our cabinets are placed. And because of the disclosures, in some cases, our equipment cannot be returned to us. This has resulted in the recognition of impairments for inventory and equipment during the quarter. There was also some actual maintenance cost this quarter because we wanted to optimize some of the other equipment to give our users a better experience and maximize the lifetime value for those equipment. Depreciation as a percentage of revenue also increased because we now have more POIs and But because of the COVID, the revenue per cabinet and power bank is down significantly during the second quarter. Overall, the primary reason for the increase in cost of revenues as percentage of revenue is still impact of COVID on revenues. As for the guidance, we continue to see outbreaks during the quarter, although to a lesser degree when compared to the second quarter. we were actually seeing the strong results in August as new large-scale outbreaks were less frequently. Our GMV was able to grow year-on-year in August, but the new outbreaks, such as one in Chengdu during the late August and the other outbreaks in early September, will weigh down our recovery for the third quarter. Given that, we can't actually assess the development of these We will now offer any guidance on our probability. Thank you.
spk08: Thank you, Maria.
spk05: Next question comes from Charlie Chen from China Renaissance. Please go ahead.
spk03: Thank you, management, for taking my question. Could management give us more color on the current competitive landscape in this industry? Is competition escalating? Or you also mentioned that the company is acquiring new network partners at record speed. So I just want to understand how the company balances the two models strategically. Thank you.
spk11: Sure. Thanks for the question. As for competition, we are seeing a general decline in competition for POIs, and especially for larger size POI and KAs. Most of our peers in the market have significantly downsized their direct model scale. And thus, we are seeing a lot less competition for new signings across the board. Also, because a number of our peers irrationally prioritize growth without much consideration of quality of growth, Energy Monster's POI quality is market leading. So when COVID came around, while we also experienced the challenges, our peers faces even higher level of the pressure due to the differences in POI quality. As a result, incentive fee rates for new signings during the second quarter continues to trend down due to the lower level of competition. While it may take a bit of time for this decreasing competition to translate into financial matrix Given that new assignments are only a portion of the total contracts, we are optimistic on the current trend. For the second question, on the balance of the two models, I think the balance between the two largely depends on maximizing values for our shareholders and stakeholders. We don't have any exact percentage target for G&V contribution between the two models. because both models are important to the company. Our network partner model is growing more quickly than our direct model during this quarter because of the new program we introduced, which allows for our direct model BD people to also contribute to the acquisition of the new network partners. And because the network partner allows us to better mitigate risks coming from the COVID impact, we believe the network partner model will continue to be core driver of growth in the near future. But I think in the long run, both models will be equally important to the company. Direct model's advantage in terms of higher execution speed and ability to sign large KAs and network partners Advantage in coverage of long tail POIs and regions and risk mitigation shows that each model has its own set of advantages. So that's why we continue to innovate new ways for the models to work together and ultimately help Energy Monster increase its market share. Thank you for the question.
spk04: Thank you, Mark. Thank you very much.
spk05: Next question comes from Vicky Wei from Citi. Please go ahead.
spk07: Thanks, management, for taking my question. I just want to get your perspective on the COVID given that these outbreaks are happening on and off for some time now. How will the company cope with the pandemic if it continues to next year? Thank you.
spk11: Hi, thanks for the question. Yes, COVID outbreaks are very unpredictable and there's no way for us to know for sure when, where it will happen and the size of outbreak. While the challenge is there, we are seeing a slight improvements in terms of the size of outbreak when compared to the second quarter. On a longer horizon perspective, we believe COVID impact will eventually diminish as containment measures become even more precise and the danger of the virus diminishes as well. That's why we continue to expand the scope of our service coverage and strengthen EnergyMonster's network effect because we remain very optimistic about the eventual but permanent containment of COVID. But for the near future, we are prepared to coexist with COVID. We continue to find ways to reduce our exposure from COVID, namely in ways such as reducing upfront or fixed incentive fees, expanding our network partner account, increasing the efficiency of our business development personnel, optimizing our upfront and backend process, and enhancing both software and hardware technologies. These are just some of the things that we focus on in order to increase our efficiency during COVID. I think when we're able to fully implement these initiatives, we can then really mitigate most COVID-related risks and really be able to coexist with COVID. But again, I think COVID will not be a long-term challenge. But the company is taking all measures necessary in order to reduce the short-term impact. Thank you.
spk01: Thank you.
spk05: There are no further questions at this time. I'll now hand it back to Maria Xin for closing remarks.
spk06: Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continue to support and we look forward to speaking with you in the coming quarter. Thank you.
spk05: That does conclude our conference for today. Thank you for participating.
Disclaimer