111, Inc.

Hello, everyone, and thank you for joining us today for 111's first quarter 2021 conference call. On the call today from 111 are Dr. Gong Yu, co-founder and executive chairman, Mr. Junling Liu, co-founder, chairman, and CEO, Mr. Luke Chen, DFO of our major subsidiary, Mr. Harvey Wong, co-COO, Mr. Barry Zhu, Co-COO, Ms. Tiffany Zhuge, SVP of Investor Relations and Business Development, Ms. Monica Mu, Investor Relations Director, and Mr. Alex Liu, Finance Director. As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. The company's earnings press release was distributed earlier today and together with our earnings presentation are available on the company's IR website at ir.111.com.cn. Before we get started, let me remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties, and other factors all of which would cause actual results to differ materially. For more information about this risk, please refer to the company's filings with the SEC. 111 does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under applicable law. Please note that all numbers are in RMB and all comprehensives refer to year-over-year comprehensives unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year-over-year basis. I will turn the call over to our CEO, Mr. Junling Liu.

Good morning and good evening, everyone. Thank you for joining our 2021 first quarter earnings call. I'll begin with an overview of the company's business and operational performance before handing it over to Luke to take you through the financials in Section 2. We will then conclude our prepared remarks with guidance for Q2 2021 before opening the call for Q&A. We're pleased to report another quarter of strong growth. In the first quarter, net revenue rose 64.7% year-over-year to 2.6 billion RMB, which marks the 11th consecutive quarter of year-over-year revenue growth since our IPO. In China, Q1 is typically a soft quarter in the health care space, as well as for the general retail industry due to the Lunar New Year holiday. In addition, Q1 2020 was unusually strong due to the sudden surge in demand for pandemic-related products. So we're pleased with the year-over-year growth, which Excluding one-time pandemic-related sales was 89% in Q1 2021. Non-GAAP net loss attributable to ordinary shareholders as a percentage of net revenue was also decreased from 6.9% in the first quarter of 2020 to 4.2% in this first quarter, which shows our continued momentum towards profitability. Our top-line growth is driven by our S2B2C model as we continue to take the lead in the modernization and advancement of China's healthcare system. Our growth is a testament of the tremendous progress in our mission to digitally connect patients with medicine and healthcare services. Given the transformative nature and leading-edge technology of our S2D2C model, I will briefly highlight its core fundamentals. First, the S in our S2D2C model represents our powerful supply chain platform that encompasses not only the technology behind the platform, but also our network of suppliers, such as pharmaceutical companies, distributors, and other service providers. This S is digitally connected to the D, our rapidly growing network of pharmacies, doctors, clinics, and so on. To further strengthen our supply chain capabilities, the two new fulfillment centers in Northwest and Northeast China we announced in March are now fully operational. We're also expanding and upgrading some of our existing fulfillment centers to meet the growing demand for our services. The expansion of our supply chain network has been key to supporting businesses and doctors and allowing them to serve their patients effectively and efficiently. These improvements will also expand our ability to help marketplace vendors sell their products via our online platform. There are currently over 900 marketplace vendors utilizing our platform. By leveraging our supply chain infrastructure and online presence, they are able to expand their geographical reach and attract new customers. With regulatory policies in China trending towards lowering healthcare costs and increasing transparency and efficiency, pharmaceutical companies need new sales models to address the challenges presented by these regulatory changes, such as volume-based procurement, more intense local competition, and taking full advantage of accelerated NRDL approvals. In the past, one drug may be able to enjoy a decade plus of high sales volume, but in today's environment, both international and domestic pharmaceutical companies need to capitalize on the patent exclusivity period and reach peak sales volume for their product in the shortest time possible. To help them achieve this, we continue to broaden our partnerships with pharmaceutical companies in our omnichannel commercialization platform, offering them access to our large network of retail pharmacies, our network of both in-house and affiliated doctors, as well as our nationwide supply chain network. A good example of this is our strategic cooperation agreement with Beijing, announced in March. Beijing currently markets two internally discovered oncology medicines in China and also markets or plans to market in China additional oncology products licensed from a number of well-known global pharma companies. 111 and Beijing will cooperate around an internet plus medicine plus healthcare model, leveraging our internet hospital smart supply chain network data-driven AI solutions, and online and offline DTT delivery of medicines to create a unique oncology management platform and expand the commercial reach of Beijing's innovative drugs. As of March 31st, we have over 360 similar partnerships with pharmaceutical companies, and these partnerships allow for a win-win scenario for all parties involved. Patients benefit by being able to access a much wider variety of medication, along with newly approved medication faster than ever before without waiting for medicine to enter the hospital system. Doctors benefit from no longer being limited to prescribing drugs available within a certain hospital system, allowing them a wider range of treatment options. Pharmacists benefit by leveraging our models of scale to provide better pricing, wider selection, and the ability to fulfill single unit orders. Pharmaceutical companies benefit by gaining a wider access to doctors and patients nationwide, and the ability to sell products in multiple channels without relying exclusively on hospitals for sales. We benefit as well by being able to acquire products at lower cost and offer revenue-generating services to pharmaceutical companies. Let me break up the B in our S2B2C model in a little more detail. We continue to develop our S2P2C model. supply chain platform to pharmacy to consumer. Here, we provide pharmacies with a wide selection of products and services from our economies of scale, which includes over 340,000 pharmacies, accounting for more than 60% of China's total retail pharmacy network. Pharmacies leveraging our supply chain platform can take advantage of our cloud CRM and cloud clinic, a wide variety of products and services like CD home delivery and inventory and supply chain management. We also offer a suite of enterprise solutions, such as tools and support necessary to enable previously offline businesses to establish an online presence and reach more consumers. At the same time, we're expanding the reach of our supply chain platform to doctors to consumers. By harnessing the power of our industry-leading technology, we are modernizing the traditional in-person medical care process by offering telehealth and the patient management tools to provide convenient and timely medical care from diagnostics to treatment to follow-up and routine care. We're proud at the forefront of the healthcare industry's new era of internet plus medical care plus medicine. Doctors can utilize our cloud pharmacy, cloud clinic, and doctor-patient platforms to provide online consultations, e-prescription services, and follow-up care to patients. which improves the quality of the doctor-patient experience and results in more positive care outcomes. This platform removes the element of geography and the hurdle of physical distance between businesses and patients. Doctors can engage and interact with their patients while at home, allowing for effective and efficient follow-up care. or the mitigation of potential complications early in the diagnosing process. This foundation of our model is extended to the consumer, or the patient, who is digitally connected to doctors, medicine, and other healthcare providers and services. Consumers can leverage a wide network of doctors and a pharmacist that were previously out of reach or unknown. We believe that the benefits to having this integrated digital platform is clear. Improved access to healthcare and better patient outcomes. As a result, our omni-channel digital platform fills many gaps in the traditional healthcare ecosystem. And we have seen that increase the demand for our innovative solutions. This is demonstrated by the fact that in the first quarter, our service revenue, while nascent and therefore not yet making a substantial contribution for our total revenues grew to 17 million RMB, representing 161% increase over first quarter 2020. I would further like to highlight the potential for growth in these spaces and the increasing market opportunities we are seeing. According to a report from Frost and Sullivan, China's online consultation market is expected to rapidly increase from 6% in 2019 to 42% in 2024 and 68.5% in 2030, respectively. This increase is partially driven by China's enormous chronic disease management market, which is expected to triple from 4.5 trillion RMB in 2019 to 14.9 trillion RMB in 2030. Accordingly, China's online pharmaceutical market is expected to grow nearly tenfold to 1 trillion RMB by 2030. Given the industry tailwind and the leadership position 111 has established in our space, we continue to make significant investments in our team, technology, and supply chain platform. This also shows our confidence in driving more business momentum. Technology expenses grew more than 100% over the past 12 months. And we have also made significant investments in our patient management portals and other technology offerings. In addition, we continue to add to the pharmaceutical and doctor support team that we began building last year, consisting of professionals with expertise in specific disease areas, such as endocrinology, oncology, neurology, and others. Our established S2B2C model, or specifically S2P2C and S2B2C models, are a win-win for all. And our strong Q1 2021 results reflect that. Our dedication to improving and expanding the foundation of our industry-leading technology and omni-channel network, along with growing market opportunities in healthcare, telehealth, And the pharmaceuticals put us in an excellent position to continue to deliver outstanding value to our shareholders. With that, I will hand the call to Luke to walk through our financial results. Thank you.

Thank you, Junlin. Moving to the financial sections on slide 13, you can see the details of the first quarter 2021 results. from slide 14 to 16 of our presentation. I would like to highlight a few key business and financial metrics, and I will focus on year-over-year comparisons. All numbers are in R&B unless otherwise stated. Let's start with the first quarter results. Total net revenues for the quarter grew 63.4 percent to $2.6 billion, which is at the high end of our guidance range. Our B2B segment revenue grew 77.6 percent to 2.45 billion, and our B2C segment revenue was down 27 percent to 142 million. The decrease is attributed to the first quarter being generally slower for the entire retail industry due to the New Year holiday, as well as first quarter 2020 being unusually strong for online purchases. due to the mandated quarantine. Our B2B gross margin was 3.6 percent, up from 3.3 percent, while our B2C gross margin remained stable at around 20 percent. The improvement in gross margin of our B2B segment reflected our ability to continuously improve the margin by maintaining robust top-line growth. Overall, our gross profit grew by 32.2% to $116 million. Total operating expenses for the quarter were up 43.6% to $2.9 billion. As the percentage of net revenue, total operating expenses for the quarter decreased to 11.1% compared to 12.8%. For human expenses, as the percentage of net revenue for the quarter was 2.6%, down from 3.5% in the same quarter last year. Sales and marketing expenses, as the percentage of net revenue for the quarter was 4.7%, down from 6.1% in the same quarter of last year. G&A expenses, as the percentage of net revenue for the quarter was 2%, up from 1.9% in the same quarter last year. Technology expenses accounted for 1.9% of net revenue, up from 1.3% in the same quarter last year. This is primarily driven by an increase in the number of personnel in the R&D and IT teams, reflected our continuous investment in our infrastructure. As a result, the net gap net loss attributable to ordinary shareholders for the quarter was $109.3 million, as compared to $109.4 million in the same quarter last year, which accounted for 4.2% of net revenue, down from 6.9%. As to the guidance for the second quarter of 2021 on slide 18, the company expected total net revenue to be between $2.92 billion and $3.08 billion. representing a year-over-year growth of approximately 80 percent to 90 percent. The above outlook is based on current market conditions and respect the company's current and the preliminary estimates of the market and operating conditions, as well as consumer demand, which are subject to change. Please refer to slides 20 to 22 of appendix section for selected financial statements. And a quick note on our cash position as of March 31st, 2021. We had cash and cash equivalent, restricted cash, and a short-term investment of $1.16 billion compared to $1.62 billion as of December 31st, 2020. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.