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spk01: Hello, and thank you for standing by for Energy Monster's 2022 Third Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the conference, the meeting over to your host for today's conference call, Director of Investor Relations, Hanson Shee.
spk03: Thank you. Welcome to our 2022 Third Quarter Earnings Conference Call. Joining me on the call today are Mark Tsai, Energy Monsters Chairman and Chief Executive Officer, and Maria Hsien, Chief Financial Officer. For today's agenda, management will discuss business updates, operation highlights, and financial performance for the third 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 working 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&B. I would now like to turn the call over to our Chairman and Chief Executive Officer, Mark Tsai, for the business and operation highlights.
spk04: Thank you, Hanson. Good day, everyone. Welcome to our 2022 third quarter earnings calls. In third quarter, the effects of COVID continues to impact our operation as quarantine and lockdown measures resulted in a general decline in offline food traffic in a number of regions within China. We, however, remain resilient against these challenges and committed to delivering value to all of our partners. We continue to transition our operations to better mitigate the impact from COVID-related reasons, namely through the increasing contribution of the network partner model and the decreasing usage of entry fees or upfront fees for new signings. Revenues for the third quarter was above our guidance as the recovery from COVID was above our previous expectation. and as we continue implementing measures to effectively expand the coverage of our mobile device charging operation despite the COVID headwinds. Our mobile device charging service network is as expensive as ever. As of the end of the third quarter, our network features 965,000 POI locations, 6.4 million power banks, in circulation, and 325 million registered users across 1,800 counties and county-level regions. The recovery during the third quarter was strong quarter over quarter, with revenue increasing by 18 percent, revenue per power bank increasing by 11 percent, and adjusted net loss declining 50 percent. While the recovery trend is clear-cut, the impact from COVID is also evident across various regions. In the third quarter of 2022, notable COVID outbreaks in Xi'an and Xiamen in mid-August, Chengdu and Shenzhen starting from late August resulted in 49%, 68%, 84%, and 50% week-over-week declines in revenue, respectively. Recovery rate from the outbreaks is also more pronounced. Chengdu, Xi'an, Shenzhen, and Xiamen bounced back to 94%, 82%, 85%, and 62% in the following week when COVID cases are fully contained. While those outbreaks have been less severe compared to the outbreaks in Shanghai and Beijing during the second quarter. The frequency of these outbreaks have increased during the third quarter and continues to weigh down our operational and financial performance. The headwinds set forth by COVID continues to be the largest challenge to our operation on and off in the past three years. In recent weeks, there has been a clear trend towards the easing of COVID-related quarantine measures across the country. We believe this trend will be able to unlock the full recovery of the offline traffic and release the growth potential of the mobile device charging service here in China. While we are excited about the long-term outlook and the general recovery of the industry, we expect the impact from COVID to remain during the fourth quarter and going into early next year. That is why we remain committed to effectively increasing the coverage of our mobile device charging service network. On the coverage expansion side, our increased coverage through the combination of our direct and network partner models will help us further expand the energy monster network effect, which makes it easier for us to acquire users, location partners, and network partners. This network effect continues to be a vital differentiating factor in our industry-leading growth as the industry is posed to for a recovery. On the efficiency side, Our focus on lowering incentive fee rates for new signings with less usage of fixed incentive fees, reducing hardware capex per cabinet, and increasing efficiencies of our employees continue to help us reach higher levels of efficiency. These initiatives in improving our efficiency will be especially apparent once the offline food traffic fully normalized in China. The impact from COVID has challenged us operation in recent years. But now, more than ever, we are expecting a gradual recovery to full normalization. Our strategies in expanding our network coverage and improving our efficiency have developed into our competitive mode and will serve as the key drivers for our growth. as the industry enters into an overall recovery trend. Now, let me go through our core strategies during the third quarter in terms of expanding our coverage and increasing our efficiency in greater details. First of all, it is the coverage, which continues to be primarily driven by our network partner model. POIs operated under the network partner continued its upward trajectory as of the end of the third quarter. POIs under the network partner model reached 47%, reaching a historical high. Compared to the 43% last quarter and 36% during the same period last year, the rapid growth in our network partner contribution is driven by the increase in our network partner count and the growing strategy synergy between our two models. We continue to acquire network partners at record speed. During the third quarter, the number of active network partner reached more than 5,300, a substantial increase from the approximate 3,000 during the second quarter of this year, and 800 during the same period last year. This growth momentum in network partner is primarily fueled through the combination of the program, allowing for our direct model business development personnel to acquire network partners, as well as the increase driven by network partners development team. The network partner program under the direct model initially launched in April this year and was designed to give our direct model team an alternative avenue to effectively increase Energy Monster's coverage because our direct model business developing personnel are locally based and have extensive relationships with local partners within their region of coverage. They also accumulate relationships with potential network partners as well. Notably, their understanding of the regional competitive landscape in conjunction with their ability to deploy either the direct or network partner model gives us the ability to more flexibly increase our market presence. This program continues to be widely popular amongst our direct model business development team and a key driver for our network coverage expansion. With the large influx of new network partners, our operational collaboration after launching the new partnership becomes all that more important. A number of these new network partners have existing expertise in other industries, but with limited experience in the mobile device charging service industry. That is why it is important to help these new partners hit the ground running. To do so, we have dedicated teams of operational expertise that closely monitor the performance of each network partner. They constantly share the know-how of the industry that we have accumulated over the years to these network partners so that they can successfully manage their own teams. For more experienced network partners, we also provide advanced metrics such as local heat maps and competitive landscape analysis so that they can scale their operation to new heights. During the quarter, we also launched more features for the network partners' back-end system so that they can more efficiently manage their POIs and teams. Our focus on providing post-engagement consultation and operational tools for our network partners is the main differentiator for EnergyMonster. Our commitment to these values helps helps our network partners achieve industry-leading returns and help EnergyMonster effectively and constantly increase its market share in China's mobile device charging service industry. While the ability for our direct model team to also leverage the network partner model greatly increase our expansion and the network partner model. Our direct model also continues to maintain its commitment to effective expansion. The impact of COVID has been challenged, especially for our direct model, given that outbreaks typically affect higher tier cities, where our direct model typically reside more frequently and severely than lower tier cities. These outbreaks have resulted in an increase enclosure for location partners within the regions of impact. As a result, the number of POIs under the direct model decreased to 53% as of the end of third quarter 2022. Our direct model will, in the future, focus more on high traffic locations, or KAs, and higher tier cities. We believe the ability for our direct model team to utilize either the direct or network partner synergizes the two models and paves the way for EnergyMonster to continue effectively and efficiently increase its network coverage. And by increasing our POI coverage, more customers will be able to find our service when they are in need of a power bank. which ultimately converts into more registered users. This self-reinforcing cycle stemming from increased coverage allow us to continuously scale our operation and reach higher levels of benefit from the network effect. Next is our initiatives in improving EnergyMonster's overall efficiency. COVID's impact in the last few years has demanded us to further improve our industry-leading levels of efficiency to higher level. Even with the general easing of quarantine and lockdown measures in sight and the gradual recovery to full normalization in progress, we believe efficiency was and always will be a part of our core competency. We continue to reduce the amount of fixed and upfront fees made to local location partners during the quarter as we further offload fixed types of expense and better mitigate ourselves from COVID. During third quarter, more than 70% of newly signed POIs were purely revenue sharing, while less than 15% utilized some form of fixed fee. We currently primarily reserve the usage of fixed fees strictly for KAs with established scale due to its lower closure rate and higher traffic. Now, a centerpiece of our efficiency derives from the cost efficiency and capabilities of the hardware we place into the market. With that, we are pleased to announce that we have completed the development is started the mass production of our latest generation of power banks cabinets. Based on the references of our users, these new six or 12-slot cabinets feature redesigned bodies with a futuristic touch that visually differentiates our cabinet from that of our peers. The internal feature a complete redesign so that it is more easily assembled on the production front. The functionality and capabilities have all been upgraded from previous versions, but features a significant reduction in capex per cabinet. Compared to the last generation of cabinet, the newer ones featured 40% plus reduction in capex per cabinet. The reduction in cost is significant and it will increase the asset efficiency for both EnergyMonster and for our network partners. This reduction in cost of our cabinet is also especially helpful for attracting new network partners and expanding the scale of existing ones given that it reduces the amount of investment that a network partner has to invest, which effectively increases the rate of return of the investment. We are excited to ramp up the production and development of the last generation of cabinet as it will increase EnergyMonster's competitiveness and further enhance the experience of the millions of users that rely on our hardware for their everyday charging needs. Our pledge to improving operational efficiency has also reached every corner of our operation. We have left no stone unturned in this regard. During the third quarter, we continue refining the details of our operation in place such as enhancing the logistics and warehousing of our hardware. and optimizing the headcount so that every function performs at an industry-leading level of efficiency. In each of these regards, we continue to elevate the competitive mode surrounding EnergyMonster one block at a time. And by doing so, our pursuit for operational excellence will set us apart from our peers within industry. and unlock higher levels of return for our stakeholders and investors. In the fourth quarter, COVID continued its course and significantly impacted a number of regions. Outbreaks in Beijing resulted in an approximately 70% week-over-week declines in revenue compared to the week before Guangzhou and Xi'an down about 40%, Chongqing down 80%, and Changsha down about 30%. In recent weeks, we are also seeing a general trend to the easing of quarantine and lockdown measures across the country. We remain cautiously optimistic with this easing trend. We are optimistic in the sense that this will be the first step to the normalization of the offline traffic here in China. But we also remain cautious as the road back to normalization will take a bit of time and where there will be ups and downs during this path to recovery. In recent weeks, after the easing of quarantine and lockdown measures across country, the recovery trend was strong. The outbreaks of the virus on the general population in the last week has driven demand down significantly. We expect the impact from the spread of the current virus to continue impacting us during the fourth quarter and into early 2023. We have continued to expand our network coverage and improve our efficiency during the past three years alongside the COVID, while the impact has challenged us operationally and financially. We are confident that energy monster will come out of it stronger than ever. Our coverage network is as expansive as ever, and our efficiency is evolving to better meet the changing environment. While we remain cautiously optimistic With the short-term recovery, we are fully confident that the normalization of the traffic in China is inside, and we are better than ever to capture the recovery and growth of China's mobile device charging service industry. Thank you very much. I'll now turn the call over to Maria Xin, our Chief Financial Officer, for the financial highlights.
spk02: Thank you, Mars. Now let me walk you through the financial results in greater detail. For the third quarter of 2022, revenues were $815 million, representing a 12.4% year-over-year decrease. Revenues from mobile device charging business were down 11.7% to $791 million and accounted for 97.1% of our total revenues for the quarter. The decrease was primarily attributable to the impact of COVID-19 during the third 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 33.9% year-over-year to $18.1 million, and accounted for 2.2% of our total revenues for the quarter. The decrease was primarily attributable to the impact of COVID-19 during the third 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 19% year-on-year to $5.8 million and accounted 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 third quarter of 2022. Cost of revenues were down 10.2% year-on-year to $125.5 million for the third quarter of 2022 The decrease of cost of revenue was primarily due to the decrease in maintenance cost and the cost of power bank sold, which was partially offset by the increasing logistic cost for the delivery of equipment to the network partners. Growth profit was down 12.8% year-over-year to $689.4 million for the third quarter of 2022, The decrease was primarily due to the decrease in revenues from mobile device charging business. Operating expenses for the third quarter of 2022 were $786.4 million, down 9.9% year-over-year, excluding share-based compensation. Non-GAAP operating expenses were $779.3 million, representing a year-over-year decrease of 10%. Research and development expenses for the third quarter of 2022 were $24.3 million, down 16.7% year-on-year. The decrease was primarily due to the decrease in personnel-related expenses. Sales and marketing expenses for the third quarter of 2022 were $752.5 million, down 7.5% year-on-year. The decrease was primarily due to the decrease in entry fees and the incentive fees paid to location partners and the personnel-related expenses, which was partially offset by the increase in incentive fees paid to network partners. General and administrative expenses were $29.4 million in the third quarter of 2022, down 7.9% year-on-year. The decrease was primarily due to the decrease in personnel-related expenses, which was partially offset by the increase in share-based compensation expenses. Loss from operation was $97 million, and operating margin for the third quarter of 2022 was negative 11.9%. compared to negative 8.8% in the same period last year. Net loss was 95.8 million in the third quarter of 2022. Net margin for the third quarter of 2022 was negative 11.7%. Long-term net loss, which excludes share-based composition expenses, was 88.6 million in the third quarter of 2022, compared to a non-GAAP net loss of $73 million in the same period last year. As of September 30, 2022, the company had cash, and the cash equivalent restricted cash and short-term investment of $3.1 billion. Cash flow generated from the operation for the third quarter of 2022 was $268.6 million. Capital expenditures for the third quarter of this year were $101.2 million. Energy Master currently expects to generate $550 million to $570 million of revenues for the fourth quarter of 2022. Please note that the forecast reflects Energy Master's current and preliminary view on the industry and its operations, which is subject to change. We are now approaching the end of the conference call. Thank you for joining us today. Please don't hesitate to 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.
spk01: Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
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