Uxin Limited (NASDAQ:UXIN) Q4 2019 Earnings Conference Call April 27, 2020 8:00 AM ET
Nancy Song – IR Director
Kun Dai – Founder and CEO
Zhen Zeng – CFO
Michael Jinbo Yao – Chairman and CEO, 58.com
Conference Call Participants
Ronald Keung – Goldman Sachs
Eddy Wang – Morgan Stanley
Ladies and gentlemen, thank you for standing by and welcome to Uxin’s Fourth Quarter and Full Year 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. After management prepared remarks there will be a question-and-answer session. Today’s conference call is being recorded. If you have any objections, you may disconnect at this time.
I would like to turn the call over to Nancy Song, Investor Relations’ Director of Uxin. Please go ahead.
Thank you, operator. Hello everyone. Welcome to Uxin’s fourth quarter and full year 2019 earnings conference call. On the call today are D.K., Founder and CEO and Zhen Zeng, our CFO. D.K. will review business operations and the company highlights followed by Zhen who will discuss financials and the guidance. They will both be available to answer your questions during the question-and-answer session that follows.
Before we start, I would like to remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements are made — are based on the management’s current knowledge and assumptions about future events that involves known or unknown risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements.
Uxin does not undertake any obligations to update any forward-looking statement, except as required under applicable law. For more information about the potential risks and uncertainties, please refer to the company’s filings with the SEC.
With that, I will now turn the call over to our CEO, D.K. Go ahead please.
Thank you, Nancy. Hello everyone. Thank you for joining our fourth quarter and full year 2019 earnings conference call. We are pleased to finish off the year on such a solid note with our Q3 revenue increased by 65% to RMB388 million in the quarter.
Not only did we record over 28,300 online used car transactions during the quarter, but we also increased our total 2C take rate to 11.7%, which is equivalent to a per-unit revenue of over RMB13,700.
2019 marked an important milestone for Uxin as we shaped our strategic focus to 2C online transactions. Throughout the year, we continued to improve our platform by optimizing product and service offering, enhancing service quality, and strengthening our fulfillment capability and infrastructure.
What encouraged us the most is we helped over 97,000 consumers buy their car of choose online without the need to visit a dealership in person. This is a truly differentiated and innovating car buying experience for the average consumer in China when compared with the traditional way of spending weeks or even months visiting several dealerships to find his ideal car.
With the national-wide online selection of inspected and certified used car, we help customers conveniently buy a car that you might not be able — available in their local market and enable them to find a better deals across the country by simplifying comparing each car’s price to performance.
Coupled with the professional service and the convenience we deliver, our business model offers consumer a unique value proposition that reinforce our competitive position in the market and increase barriers to entry. This will help us generate a long-term sustainable growth going forward.
We are now currently focused on our 2C online transaction business divesting from the loan facilitation, service car, and 2C business will allow us to devote all our attention and resource towards developing and scaling up our 2C online business.
In addition, the divestiture of our loan facilitation business enables us to drive further growth without incurring additional currency obligations or credit risk starting from November 2018. This will place us on a much stronger routine for the next stage of our development.
As we move further into 2020, we are keenly aware of the challenges created by both the softening macro environment and volatility created by the coronavirus outbreak. China’s used car industry has been favorably [ph] impacted by the pandemic with disruption taking place across the industry’s infrastructure and the supply chain.
During the first quarter, we saw considerable barriers to the used car purchase process and fulfillment due to people reinforce from offline activities, temporarily closed local used car market and dealerships, and the challenging used car logistic and the title transfer.
As a result, our business operations during the first quarter will also be favorably disrupted. While the used car industry has been recovering steadily in recent weeks, and overall operations gradually returning to normal, it will take some time before the market completely digested overall impact. With this in mind, we expect the outbreak will continue to weigh down our results for the second quarter.
That said we believe the outbreak presents just as many opportunities as it does challenging and remaining confident in our ability to face the long-term growth opportunities in China used car market.
Buying used car online continues to turn upward in China. Since we launched our 2C online used car transaction services in earlier 2018, we have been dedicated to transforming the entire buying process in the transaction online each step in the sales process.
The outbreak is actually accelerating our online initiative as offline activities remain significantly constraint [ph]. In response to the situation, we immediately implement two stage to adopt our business; service model upgrade and cost structure optimization.
On the service model front, we upgrade our products, standardized pace, and transform the way consumer are served and procedure they go through to complete a purchase to facilitate a customer’s self-help online buying experience.
Instead of assigning sales consultant to assist in an offline in-person for choice once a customer [Indiscernible] their intention to purchase online. We are now offering online sales consulting and assistance services.
Going forward, customer will be empowered to complete the purchase entirely online all by themselves, including learning about and selecting a car, making a payment, and filling in all purchase-related document.
During the entire buying process, our online consultant are always available to address any issues that a consumer may have in order to facilitate these online transactions. As a result, service model for online consulting and assistance will simplify the process of serving — servicing customers, increased sales productivity, and even truly enable us to significantly reduce the sales [Indiscernible].
On the cost structure front, in response to outbreak of coronavirus, we immediately implemented a temporary workload-based staffing program company-wide to fortify our cash flow and financial position by bringing costs and expenses under carefully control.
More important, we optimized our cost structure according to our current service model. On top of reducing sales expense by simplifying the buying and selling process, we are also streamline the corresponding corporate management structure and process.
All these adjustments not only enable us to reduce cost and expense for better economies, but also allow us to improve overall operation efficiency. As the impact of outbreak being [Indiscernible], we believe the used car market will gradually bouncing back into — in the coming quarters, capitalized by people’s growing preference for owning their own car and pent-up demand for used cars the outbreak has created.
With an upgraded service model and optimized cost structure already in place, we will benefit from further growth opportunities once the market rebounds. With our focus squarely on becoming a one stop online destination for buying used car, we are confident we will be able to further solidify our market leading position as a national-wide online used car dealer and creating long-term value for our shareholder.
Before I turn the call to Zhen for our financial details, I want to extend our deepest sympathies to all those who faced and continue to face extremely difficult as a result of the coronavirus outbreak. I want to also express our sincere gratitude to those who fought and continue to fight on the frontline to compete the disease. Thank you.
With that, I’d like to turn the call over to our CFO to walk you through the financial result. Zhen please.
Okay. Thanks D.K. Hello everyone. Thanks for joining us today. As the D.K. mentioned — as already highlighted, we are pleased to see our continuing business generate a solid and consistent topline gross and the gross margin improvements throughout 2019.
If back-held the account loss from the currency liabilities and the provision for credit losses, which are primarily associated with our historical financial assets, our adjusted loss from continuing operations continued to narrow for the fourth consecutive quarter of RMB135 million in the fourth quarter of 2019.
As we continue developing our 2C online used car transaction business, we are incurring additional credit risk going forward. As a result of the divestiture of our loan facilitation business, we have also taken active measures to assess and managing the impact from the guaranteed obligations associated with our historical loans that we are now transferred to Golden Pacer.
In the fourth quarter of the last year, a series of regulations in relation to lending and debt collection, including the prohibition on exchange data collection practices were jointly issued by the relevant authorities. This adversely affects the delinquency rate as well as the collection and repossession rate in the connection with our historical loans.
After reevaluating the loan performance, we made a significant provision for the credit losses and incurred additional loss on the guarantee liabilities for the fourth quarter.
Moving into the first quarter of 2020, in response to the new accounting standard for credit losses effect on January the 1st, 2018, and the hard breakout of the coronavirus, we have fully reviewed the quality of our historical financial assets again and carefully assessed other relevant impacts.
As a result, a significant provision for credit losses and the loss from guarantee liabilities will be provided for the first quarter of 2020. But we believe the impact from the fluctuation of asset quality on our further cash flow will be limited with careful control and proper solutions already in place to manage the guarantee obligations associated with this portion of loans.
Under the current arrangements with our financing partners, we believe the cash outflow for buying back further default loans as a result of our historical guarantee obligations will be carefully controlled at limited level going forward.
Looking ahead, as D.K. just mentioned, the transformation of our service model will have us effectively reduce corresponding cost and expenses and improve operational efficiency.
In addition to reducing sales headcount by providing online consulting and assistance services, we are also able to reduce the inspection relative to cost by focusing on selecting and impacting higher price-to-performance used card based on our accumulated experience and the knowledge in the inventory.
Benefiting from the streamlined corporate management structure and process, we are able to bring our headquarter-related expenses to an optimized and efficient level. In addition, our cash position will be strengthened in the coming quarters as a result of our recent divestitures and sufficient to support our business development in next 12 months. This will provide us a greater flexibility to invest in our further generate long-term sustainable growth.
Now, let me walk you through our financial details for fourth quarter and the full year 2019. Please note that the results I will discuss relative to continuing operations only. All numbers are in RMB unless otherwise stated. Also, please note that some numbers I refer to are non-GAAP numbers. You can find a reconciliation of these numbers at bottom of our earnings release.
In the fourth quarter, total revenues increased by 61% to RMB466 million from RMB289 million in the same period last year. The increase was primarily due to the increases in 2C transaction volume, GMV commission rate, and VAS take-rate. Our total 2C revenue was RMB388 million, up to 65% year-over-year RMB236 million in the same period last year.
Online used car transaction volume increased by 26% year-over-year to 28,302 units and its corresponding GMV increased by 32% year-over-year to RMB3,308 million.
Looking at revenue stream of our 2C business, commission revenue was RMB207 million, 69% from RMB123 million in the same period last year, primarily due to the increase in the transaction volume, GMV, and commission rate.
The unique value proposition we are now able to offer the consumer along with improved user experience and higher pricing power, resulted in the commission rate expanding to 6.3% from 4.9% in the same period last year.
Value-added service revenue was RMB180 million, up to 60% from RMB113 million in the same period last year, primarily due to the increases in the transaction volume, GMV, and VAS take rate.
VAS take rate increased 5.5% in the fourth quarter of 2019 from 4.5% in the same period last year, primarily due to our higher pricing power as a result of our increasingly optimized and diversified services.
Looking at other businesses, other revenue was RMB79 million in the fourth quarter of 2019, up 46% from RMB54 million in the same period last year. Cost of revenues increase by 21% year-over-year to RMB190 million. The increase was primarily due to increases in salaries and benefits for employees engaged in car inspection, quality control, customer service, and after sales services, as well as an increase in the fulfillment costs driven by an increase in transaction volume.
Gross profit increased by 109% to RMB276 million from RMB132 million in the same period last year. Gross margin increased to 59% in the quarter from 46% in the same period last year, driven by the growing economies of scale and optimized cost structure. Total operating expenses was RMB862 million.
Non-GAAP operating expenses, excluding the impact of share based income were RMB853 million. Sales and marketing expenses decreased by 31% year-over-year to RMB255 million. The decrease was driven by our continuous efforts to enhance operating efficiency.
Share based compensation expenses associated with the sales and marketing expenses were nil during the quarter. As a percentage of total revenue, sales and marketing expenses, including share-based compensation expenses equates to 55% from 127% in the same period last year.
And G&A expenses increased by 20% to RMB125 million, the increase was mainly due to an increase in salaries and benefits, as well as the professional fees. G&A expenses, excluding share-based compensation expenses were RMB8 million were RMB116 million. As a percentage of total revenues, G&A expenses excluding share-based compensation expenses were 24.9%, compared with 12% in the same period last year.
R&D expenses increased by 26% to RMB41.8 million, the increase was primarily due to an increase in IT infrastructure services-related expenses. R&D expenses excluding share-based compensation expenses of RMB0.6 million were RMB40 million.
As a percentage of total revenues, R&D expenses excluding share-based compensation expenses was 9%, a decrease from 11% in the same period last year.
Loss from guarantee liabilities were RMB170 million. The incurred guarantee liabilities associated with the remaining guarantee obligations from the portion of the historically-facilitated loans which were not transferred to Golden Pacer.
In addition, due to the impact from a series of regulations relating to lending and debt collection in the first quarter of 2019, the performance of the aforementioned portion of loans were adversely affected, which led to a significant loss from guarantee liabilities in the reported quarter.
Provision for credit losses was RMB271 million, compared with nil in the same period last year. Due to the impact of the aforementioned new regulations in relation to lending and debt collection, an impairment was incurred as a result of the adversely-affected performance of the company’s financial assets, which mainly including loans recognized as a result of payment under the guarantee and financial lease receivables.
Loss from continuing operations was RMB586 million, compared with RMB368 million in the same period last year. If not taking into account guarantee liabilities and provision for credit losses, loss from continuing operations would be RMB144 million.
Non-GAAP loss from – from continuing operations, which excludes the impact of share-based compensation expenses of was RMB577 million compared with RMB300 million in the prior year last year. If not taking into account, guarantee liabilities and provision for credit losses, non-GAAP loss from continuing operations would be RMB135 million.
Net loss from continuing operations was RMB589 million, compared with RMB392 million in the same period last year. If not taking into account guarantee liabilities and provision for credit losses, net loss from continuing operations would be RMB148 million.
Non-GAAP net loss from continuing operations, which excludes the impact of share-based compensation expenses was RMB580 million in the fourth quarter, compared with RMB323 million in the same period last year. If not taking into account, guarantee liabilities and provision for credit losses, non-GAAP net loss from continuing operations would be RMB139 million.
Turning to our cash position, as of December 31, 2019, we had cash and cash equivalents of RMB478 million. That’s our fourth quarter result.
Now, let me briefly go through some highlights of our full year results. Full year 2019 total revenues increased by 141% to RMB1,588 from RMB659.1 million in the prior year. Total 2C revenue was RMB1,347 million up 265% year-over-year from RMB370 million in the prior year.
Online used car transaction volume, increased by 154% year-over-year to 97,100 units and its corresponding GMV increased by 155% year-over-year to RMB11,268 million.
Looking at two revenue streams of our 2C business, Commission revenue was RMB711 million up 250% from RMB203 million in the prior year, commission rate increase 6.3% from 4.6% in the prior year.
Value-added service revenue was RMB636 million up to 282% from RMB166 million in the prior year. VAS take rate increased to 5.6% from 3.8% in the prior year.
Gross profit increased by 274% to RMB899 million from RMB240 million in the prior year. Gross margin increased to 57% in 2019 from 36% in the prior year. Loss from continuing operations was RMB1,292 million, a decrease from RMB2,488 million in the prior year.
Non-GAAP loss from continuing operations which exclude the impact of share-based compensation was RMB1,208, a decrease from RMB1,486 million in the prior year. Net loss from continuing operations was RMB1,328 million compared with RMB1,352 million in the prior year.
Non-GAAP adjusted net loss from continuing operations, which exclude the impact of share-based compensation was RMB1,243 million in the 2019, a decrease from RMB1,535 million in the prior year.
Moving on to our guidance for the three months ended 31, March 2020, taking into account of the factors mentioned earlier. Regarding the Coronavirus and the business divestiture, we expect our total revenue from continuing operations to be a ranger RMB80 million to RMB85 million.
This forecast reflects our current and preliminary views on the market and operational conditions and is based upon the current situation and uncertainties associated with the coronavirus outbreak, which are subject to change.
That concludes our prepared remarks.
Thank you, Mr. Zheng. Operator, we’d like to open up call for questions now. Thank you.
Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Ronald Keung from Goldman Sachs. Please ask your questions.
[Foreign Language] Thank you. Hi, DK, Michael, Nancy and team. So, two questions. Firstly, just given the current virus situation and your first quarter guidance of revenue down around 78% to 79%, which is the RMB80 million to RMB85 million. So, I was wondering here how are we seeing the March trends and the recovery part recently in April, and when do we see or expect the levels to return to more normalized level through the year?
And my second question will be on your loan business, which has been divested, but seems like there’s still some that haven’t moved on to Golden Pacer. So at the current situation current level, what do we expect to see on impact more on a cash flow perspective from now on? Or would it be more on non-cash P&L while assuming here is anything from the cash flow on your cash that we should be aware of? Thank you.
So because of the outbreak of the coronavirus, the used car factor in Q1 has been significantly disrupted mainly because the flows the used car market and the vehicle built locally. They don’t go back to the operation. And the second thing is that the cost of some of the highway has been closed, we cannot deliver the car to the consumers. So the fulfillment has been constrained during that period of time.
So, basically all the transaction volume in Q1 happens in January before the Chinese New Year. So volume in February and the March there, basically there is no transaction volume happens in this two months.
Yes. So, entering into April, we didn’t see significant pickup in the volume. So, based on our current knowledge, we think it will be the second half of the year we will see significant recovery in our volume. So, in Q2 basically the transaction volume will be constrained by three factors.
The first one is because although the outbreak has been largely contained in China, but there are few local governments have adopted strict measures to give a response to the outbreak, and also because of the softening natural environment, consumer’s ability to uphold buying a car will be a situation now.
For those consumers who are very eager to buy a car at the very moment is normally want to have the car waiting a couple of days. But our current fulfillment period of time normally lasts for around two weeks. So, including the logistics, title transfers and vehicle registration, et cetera. So, we are not able to meet these type of demands or consumers are not willing to wait.
So, the overall used car demand in market now is basically are the cars with price range at low end or to mid-end, but if you look at our average selling price, our platform is basically RMB120,000.
So, our used car selection of price range is basically mid to high end. So, this type of cars, if we look at our transaction volume it will recover a little bit slower than the low price end cars.
Yes. Our full recovery will depend on the development of the outbreak. So, based on our — based on current situation, we expect to see significant recovery starting from the second half of this year. If we use last December as a normalize level, we expect to see we can return back to that level next year — in the first half next year. Thank you.
Michael Jinbo Yao
Hi, Ronald. It’s Michael here. I’ll try to address your second question. So for the cash flow and the provision and guarantee and credit risk, so is that given the regulatory changes in the last the fourth quarter and the coronavirus outbreak in the first quarter, we have fully reviewed our historical financial assets and assessed the relevance impact on the asset quality.
In the Q4 last year, we made a provision for credit losses about RMB270 million and incurred a loss from the guarantee liabilities of RMB170 million. In this Q1, taking into the account of the new accounting standards for credit losses, which had been time to take consideration of the coronavirus outbreak, we will provide a significant provision for credit losses and the loss from guarantee liabilities as well to sufficient that reflect the impact. This item will hit our P&L but won’t affect the cash flow too much.
Overall, speaking so as we have divest our loan facilitation business since last November, starting from this point, we don’t need to take any guarantee obligations for the new loans referred through our platform. So, we now can drive our business grows without incurring any guarantee, credit risk or cash outflow in our guarantee obligations.
Regarding of our historical loans, more than half has been transferred to Golden Pacer already and the rest are still with us, but we already have a proper solution in place to manage the guarantee obligations and responding cash flow.
Sichuan Bank relative loans are the portion that has been transferred to Golden Pacer. So, for this part, the Golden Pacer will take fully guarantee obligations for this historical portion and be held responsible for buying back further default loans.
So, there won’t be any cash outflow from us. Instead, we can have additional cash inflow going forward from this portion of loan when Sichuan Bank relative with cash can fully cover the actual loss from the guarantee liabilities. Meaning if there eventually will be a net cash inflow after the maturity of this portion of loan, we will be entitled for 85% of such amount of net cash.
Regarding the loan that will not transfer, over 90% are loan for revamp and the remaining small portion is sitting on our own balance sheet. So, for the revamp portion and the current arrangement with our financing partner, the further — the cash outflow as a result of corresponding guarantee will be controlled at a limited level and won’t impact our cash position much.
For the remaining small portion of our own balance sheet, it represents the loan we historically have bought back in a guarantee. So, going forward, we will only be cash inflow from this depending on how much we can collect back.
So, overall, we believe the impact of the VAS loan facilitation on our operating cash flow will be limited. It also will ease out along with the maturity of all these loans. Additionally, our tax position can be strengthened as we will receive additional cash as a result of a business divestiture and sufficient to support our business development in the next 12 months.
Okay. Thank you very much. That’s very clear. Thank you, D.K., Michael, Nancy.
Thank you very much.
Your next question comes from the line of Eddy Wang from Morgan Stanley. Please ask your question.
Hi, D.K., Michael, and Nancy. [Foreign Language]
Please let me translate myself. So, as I mentioned that the COVID-19 outbreak has accelerated your transformation of the entire buying process and transaction online of each step in the sales process. Just one would you please elaborate more about have you witnessed any long-term trend in the industry — used car industry that you believe that online transformation will benefit? And how do you compare with your — the online transformation model versus your major competitors? Thank you.
Our key strategies for 2020 is to accelerate our progress and continue of enabling selling cars.
So, we believe the hours [ph] car connection something when customer value at the same time can create great growth opportunities for ourselves as well.
With our online car connecting model through our online national-wide selection of used cars and services, we can provide consumers with high price to performance used cars, as well as simplified as transparent flat purchase process, as well as the well-rounded after sales warranty services.
The way of connecting online to a higher degree, our operations will become more efficient which will bring our costs and expenses to a much lower level. So, on one hand, the consumers can enjoy better prices. On the other hand, we can also continue to improve our financial performance during the process.
The offers actually accelerate the transaction to online used car conventions because of being very cautious about personal offline contact amidst of the outbreak and the consumer showing preference for online purchases. We are accepting buying used cars online actually also gets increasingly higher as well.
The rest following the outbreak, we have fully devoted ourselves to operating our online transaction model. So, we have been working on three areas. The first one is we transformed and upgraded our products and service process. So, consumers will be able to complete the online searches in a more simplified and straightforward way, while without the need to be assisted by our offline sales.
So, second, based on our analysis in our transaction data, we have accumulated extensive activities and know-how interacting high-performance used card inventories. So, it will not only help consumers to find a car of their choice more quickly and accurately, in return, it can also help us to reduce our inspection-related cost.
So, the third on is we upgraded our service package. So, now consumers can have three days free test-drive. Also we extend our 30 days policy — return policies through one year and extended warranty coverage as well. So, all of these will eliminate consumers’ concerns to buy a used car online.
With all of these matters in place, our cost structure will be significantly changed and therefore, optimized with more accurate selection of used current inventory and the consumers’ self-help online purchase; we are able to reduce costs and expenses accordingly.
Our [Indiscernible] sales conversion and simplified service process will also help us improve our operational efficiency. All of these will eventually be reflected in our optimized cost structure.
Our upgraded strategy this year is actually of long-term significance. The optimized — our optimized cost structure will enable us to narrow our losses and take us to the breakeven point at a lower volume level and I will strengthen our ability to — our profitability as well.
So, ahead in time, we now can devote more resources and energy to create customer value for our consumers. So, all these changes will not only ensure our business continuity during the coronavirus outbreak, but also creates more solid conditions for future growth once the market rebounds.
Thank you Eddy.
There are no further questions at this time. I would like to hand the conference back to Ms. Nancy Song. Please continue.
Thank you again for joining our call today and for your continued support in Uxin. We look forward to speaking to you soon in the future. Thank you.
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may all disconnect.
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