Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Secoo Holding Limited (NASDAQ:SECO)
Q3 2019 Earnings Call
Dec 5, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for Secoo Holding Limited Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded.

I will now turn the call over to your host, Ms. Jingbo Ma, Board Secretary of the Company. Please go ahead, Jingbo.

Jingbo Ma -- Investor Relations

Hello, everyone. And welcome to the third quarter 2019 earnings conference call of Secoo Holding Limited. The Company's results were issued via newswire services earlier today, and have been posted online. You can download the earnings press release and sign up to the Company's email alerts by visiting the IR section of our website at ir.secoo.com.

Mr. Richard Li, our Founder, Chairman and Chief Executive Officer; and Mr. Shaojun Chen, our Chief Financial Officer will start the call with their prepared remarks, followed by a question-and-answer session. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the Company's registration statement on Form F-1 and Form 20-F as filed with the US Securities and Exchange Commission.

The Company does not assume any obligation to update any forward-looking statement, except as required under applicable law. Please also note that Secoo's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Secoo's earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to our Chairman and CEO, Mr. Richard Li. Please go ahead.

Richard Rixue Li -- Chairman of the Board and Chief Executive Officer

[Foreign Speech] Hello, everyone, and thank you for joining us today.

[Foreign Speech] We are pleased to report Secoo's growth momentum in the quarter has carried over from the first half of 2019, and delivered another period of solid operational and financial results. This quarter, our GMV increased by 66.8% year-over-year to RMB3.66 billion, underpinned by our successful execution of corporate strategies. As of December, the number of active customer increased 58.7% year-over-year to 482,500, of which 69.6% have paid memberships.

Our business continued to benefit from the purchasing power and the secular growth of China's middle class, driving the growing demand for luxurious good and high-end lifestyle offering both our on and off platform.

To aid this, Secoo maintains a strong focus on improving our platform's customer service capacity by utilizing leading-edge technologies, such as AI, Big Data and cloud services, in addition to our vibrant boutique product and service portfolios, integrated with intelligent operating program, so as to provide the best possible luxurious shopping experience to consumers in China.

[Foreign Speech]

These increases improved the brand awareness and influenced around domestic and overseas market. They not only continue to expand and deepen collaborations with top tier brands, but also actively expand its categories by adding limited addition, premium long-term brands to meet the different preferences of high end consumers.

Since the beginning of the third quarter to date, they have established the new direct collaborations with 143 brands, including Valentino, Thom Browne and Genavant. Notably, Secoo partnered with Prada to release Prada Spring and Summer 2020 limited edition exclusively available on Secoo. Moreover, we collaborated with Stella McCartney to exclusively unveil limited edition shoes, Elyse series. This exclusive brand collaboration reaffirms Secoo's significant influence in the luxurious industry. Recently, the Stadium Goods, a prestigious premium sneaker and streetwear marketplace in the US aligned with Secoo and joined the platform. Also, Secoo had partnered Vestiaire Collective, Europe's largest pre-owned luxury fashion website, to connect China's savvy shoppers with world-class pre-owned fashion trends.

[Foreign Speech]

In the continuous efforts to develop cutting edge fashion activities both online and offline, we launched the 707 anniversary promotion festival in July, and Secoo Outlets offering promotion festival in September. In recent times, they have successfully established securing of our customer demographics in terms of the customer life cycle and buying power to offer customized perks, which will help improve retention.

More excitingly, in the third quarter, the incremental paid membership increased by 64.6% compared to the incremental paid membership in the second quarter, and the conversion rate of paid membership increased by 21.3% sequentially.

[Foreign Speech] With our continuous dedication to deploying AI into operations, to build up the digital Secoo, in this quarter, we launched AI powered operating system, building on our own proprietary DaaS system that able to provide the data analytics, merchandise price, sales and user behavior, enabling the smarter match between the merchandise and customers and leading more accurate recommendations than they getting from the system. 80% of flagship stores on the Secoo platform have implemented increased automation in product recommendation and merchandising, reducing the manual operation, so as to improve the operating efficiency.

In the future, they will increasingly employ this system across our greater supply chain system, customer service system and internal decision making system to empower more brand and suppliers to make better pricing, smarter product recommendation and the customer engagement. Additionally, in this quarter, we officially launched the AI-powered customer service system, and currently around one-third of customer feedback have been taken by the AI-powered customer service system.

[Foreign Speech]

Further on the technology initiative brand, we completed the migration of our user system, order system and transaction system on to our newly deployed proprietary cloud platform before the Double 11 Shopping Festival event, as cloud infrastructure optimize our handling of traffic during peak times, having us tackle the high volume of transactions during the big promotion event.

[Foreign Speech]

Additionally, we refreshed the Secoo's app homepage, featuring a clearer navigation and simpler shopping processes. They greatly optimize the customer service interface, making purchase experience on the platform more friendly and reliable. Spotlighting our content strategy, we made positive strides on content creation and curation in our online community. Achieving significant increase in the area of UDC including the product sharing hot topics and activities. We are seeing content distribution model on the Secoo platform taking shape.

This quarter, Secoo successfully launched the stream function, devoted to experiencing the luxurious brand online shopping through the airing of live stream shows, featuring a wide range of top tier boutique shops around the globe, including Europe and Hong Kong of China. As consumers turning into becoming consistent viewer of shopping for the latest fashion, there are more than a 1000 midstream events.

[Foreign Speech]

Being an important revenue stream in our diversified growth strategy, our big data driven advertising business EEC maintains its rapid growth trend. In the quarter, the advertiser based on Secoo EEC remained robust across diverse sectors, such as automobile, luxury, finance, sportswear, 3C Digital and the vast consumer goods, there is a total of 20 brands including 15 new brands such as PT Platinum, Montblanc, Qatar Airline, Metro Group, Maserati, Ping An Insurance, IA III, TV, iQiyi and iRobot. The Secoo EEC advertising platform has been receiving positive feedback from more and more merchants, underpinned by registered merchants in the Q3 versus Q2.

[Foreign Speech]

As the leading luxury and upscale lifestyle platform, Secoo was once again invited to attend the Second China International Import Expo this year. Aligning with the Expo, Secoo and Deloitte jointly released the Secoo-Deloitte CIIE 2019 Blue Paper, which accurately analyze the current luxurious goods market in China's lower-tier cities based on Secoo's high-end consumption big data. Through big data analysis, the Blue Paper classified the customer by their characteristics and brand preferences, which also help brands better understand the demand and the purchase decision factors of different class of consumers. Thereby customizing exclusive brand promotion and marketing events to achieving precise outreach driven by data.

[Foreign Speech]

Looking ahead, Secoo will remain focused on advancing our technology such as AI, Big Data and cloud computing in order to expand at the deployment of intelligent operation across wider area, improving user experience on our integrated platform, increasing the economies of scale with the healthy growth in GMV, in addition to continued optimization in our paid membership ecosystem and the expansion of our online and offline integrated platform, there is a full spectrum of product distractions.

Furthermore, we will continue to broaden and deepen brand relationships, further develop the supply chain capacity and explore more opportunities for crossover partnership across a broad range of categories, while offering the trendsetting and high-quality shopping services for high-end customers. We will be committed to strengthening our core capacity in technology, management and supply chain system along with our advantage across our online and offline channels, to achieve sustainable growth in both business operation and financial performance.

[Foreign Speech]

With that, I will now turn the call over to our CFO, Mr. Shaojun Chen, who will discuss our key operating metrics and the financial results.

Shaojun Chen -- Chief Financial Officer

[Foreign Speech]

Thank you, Richard, and hello everyone.

[Foreign Speech]

During the third quarter, we reported record high revenue of RMB1,900 million, which is in line with our expectations. The solid third quarter, without -- coupled with our ability to increase operating leverage brought about a healthy profitability. During the quarter, the income from operations and net income increased by 35% and 38.3% respectively on a year-over-year basis.

Our focus going forward is to continue to balance profitability by increasing operating efficiency, while at the same time expanding our suite of boutique offerings. Moreover, we will strengthen our influence across the value chain in the online luxurious retail industry to further solidify our position as a leading player in the market, both in China and internationally.

[Foreign Speech] Now I like to walk you through our detailed financial results in the third quarter of 2019.

[Foreign Speech] GMV increased by 66.8% to RMB3.66 billion for the third quarter of 2019 from RMB2.19 billion for the third quarter of 2018.

[Foreign Speech] Total number of orders increased by 74.2% to RMB1.04 million for the third quarter of 2019, from 594,000 for the third quarter of 2018

[Foreign Speech] Total revenues for the third quarter of 2019 increased by 23.5% to approximately RMB1.94 billion from RMB1.57 billion in the third quarter of 2018, primarily attributable to the continuous expansion of our operation, our lush offerings of merchandise and service SKU combined with our creative and effective marketing activities driving the rapid growth in our total active customers, and total number of orders served during the period.

[Foreign Speech] Cost of revenues increased by 23.8% to RMB1.61 billion for the third quarter of 2019 from RMB1.3 billion for the third quarter of 2018, which was in line with the increase of total net revenues.

[Foreign Speech] Gross profit increased by 22.1% to RMB329 million for the third quarter of 2019, from RMB270 million for the third quarter of 2018.

[Foreign Speech] Operating expense increased by 17.6% to RMB234 million for the third quarter of 2019, from RMB199 million for the third quarter of 2018. Operating expense have been effectively managed this improvement in efficiency as a whole. Now I'd like to walk you through the Company's expense items in detail.

[Foreign Speech] Our fulfillment expense increased by 18.4% to RMB49.6 million for the third quarter of 2019, from RMB41.9 million for the third quarter of 2018. The increase was primarily attributable to the increase of sales volume including the third-party payment commission, as well as the increased staff cost of during the period.

[Foreign Speech] Our marketing expense increased by 0.3% to RMB110 million for the third quarter of 2019, remaining flat compared with the year ago period, primarily due to improved marketing efficiency and our efforts to enhance our customer retention and repeated purchase.

[Foreign Speech] Technology and content development expense increased by 23.6% to RMB26.2 million for the third quarter of 2019 from RMB21.2 million for the third quarter of 2018. The increase was primarily due to the continuous investment in the technology department in order to strengthen the driving force of technology for operation.

[Foreign Speech] General and administrative expenses increased by 84.6% to RMB47.8 million for the third quarter of 2019, from RMB25.9 million for the third quarter of 2018. The increase was primarily attributable to the rising staff costs, professional fees, rents and office expense associated with the relocation of the office during the period.

[Foreign Speech] Our income from operations was RMB94.9 million for the third quarter of 2019, representing an increase of 35% compared with RMB70.3 million for the third quarter of 2018. The increase was due to the combined impact of revenue growth and the improvement on the Company's marketing efficiencies.

[Foreign Speech] Non-GAAP income from operations, which excludes the share-based compensation expense for the third quarter of 2019, was RMB97.5 million, representing an increase of 31.2% compared with RMB74.3 million for the third quarter of 2018.

[Foreign Speech] We recorded a net income of RMB62.1 million for the third quarter of 2019, representing an increase of 38.3% compared with RMB44.9 million for the third quarter of 2018.

[Foreign Speech] Non-GAAP net income, which excludes the share-based compensation expense for the third quarter of 2019, was RMB64.7 million representing an increase of 32% compared with RMB49 million for the third quarter of 2018.

[Foreign Speech] Now for our fourth quarter of 2019 outlook.

[Foreign Speech] The Company currently expects total revenue for the fourth quarter of 2019 to be in the range of RMB2.2 billion and RMB2.3 billion, which would represent an increase of approximately 22.7% to 28.3% on a year-over-year basis.

[Foreign Speech] The above guidance is based on current market conditions and reflects the Company's current and preliminary estimate of market and operating conditions and customer demand, which are all subject to change.

[Foreign Speech] This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

Questions and Answers:

Operator

[Operator Instructions] The first questions comes from the line of Ken Chong from Jefferies. Please ask the question.

Ken Chong -- Jefferies -- Analyst

Hi, management. Thanks for taking my question. [Foreign Speech]

So I have two questions. The first question is on regarding the GMV growth. I know that we are delivering around 60% to 70% GMV growth this quarter, that is still industry leading. But there were quite a slowdown from the first or second quarter this year. I'm just wondering if that is a result of the macro, because we have been offering subsidies or discount this quarter. And also, I would like to ask, looking toward the next quarter, this revenue guidance showed us GMV growth reimplying and when we look toward 2020, how should we think about the GMV growth. Thank you.

Richard Rixue Li -- Chairman of the Board and Chief Executive Officer

[Foreign Speech] First of all, I have a great confidence in the high-end consumer market in 2020. I also believe that growth momentum of consumption upgrade and also the high end online market will develop rapidly, which provide us with excellent market opportunities. 2019 is a year of faster growth for us, the premise of rapid development is that we are well prepared in terms of the supply chain, customer and membership operations, the technology operations and marketing.

Validated by nearly a year of rapid growth, the global supply chain system reviewed the smart merchandise selection and the user operations and also the paid membership ecosystem. They are based on precise marketing system, as well as the fashion content community system and also the AI-powered customer services system, all of which serve suppliers and partners and also the high end customers have all made significant progress.

In 2020, on the business I have to work on that, I believe we will continue to increase and deepen the investment in the AI, cloud services and also big data, so as to make the overall operation of Secoo smarter and more efficient. And also, we believe that Secoo's business will remain in the faster growth. Thank you.

Ken Chong -- Jefferies -- Analyst

[Foreign Speech]

My second question is regarding the number of brands that we work with. First, congratulation on the fact that we have access to 143 new on domestic and international brands this quarter. I'm just wondering how many luxury brands do we work with now and looking toward 2020, what is our strategy like to on-board more brands to further improve our competitive edge? Thank you.

Richard Rixue Li -- Chairman of the Board and Chief Executive Officer

[Foreign Speech]

Secoo has been committed to becoming a trendsetting high-end shopping service platform. So right now, we've already collaborated with around 4,000 brands already in total. So collaborating with these brands while introducing more and betterment in service to our platform is the long-term strategy of the Company. In the third quarter of this year, we established a direct collaboration with 143 more brands including the Valentino, the Genavant and also some brands and Prada will release, it's limited edition back with Secoo in Spring and Summer of 2020 collection. And also Stella McCartney, famous brand of shoe have launched the two limited edition shoe exclusively. And also the betterment of renewing a cloth brand also aligned with Secoo in its exclusive sales of T-shirt, hat and hoodies.

So Secoo actually value the limited edition and seasonal products, it's mainstream. And also at the China International Import Expo in November this year, the Genavant, British high-end shoe brand exclusively retailed all its sale on Secoo's platform, including its high-end customer miles that drove this shoe such as the Blue Ripple and also Spring Shine, new series [indecipherable] was also sold exclusively on Secoo online.

In the future Secoo will collaborate and further and deeper this brand to create the Secoo featured products and services, which will further establish the Secoo's reach as high-end fashion shopping platform. Thank you.

Ken Chong -- Jefferies -- Analyst

[Foreign Speech] Thank you very much.

Operator

Thank you. The next question comes from the line of Hugo Shen from Macquarie. Please ask the question.

Hugo Shen -- Macquarie -- Analyst

[Foreign Speech] I'll translate myself. I have two questions. The first one is, wondering if the management can give some update on the growth trend of different luxury product categories in this year, including jewelry, bags, clothing, sportswear and cosmetics. My second question is that I'm wondering if management can give any update on the Company's O2O strategy? And what's your expansion plan of offline experience centers for next year? Thank you.

Richard Rixue Li -- Chairman of the Board and Chief Executive Officer

[Foreign Speech]

According to several -- sorry, they remain stronger in 2019, and they achieved a year-over-year increase of 83% in the total GMV for the first three quarters. As of the end of September, or first three quarters, GMV from prominent bag category increased by around 97% year-over-year. And first three quarter GMV from clothing, footwear and accessories increased by 80% year-over-year. Also the growth of the newly extended category increased in two years, including cosmetic, travel and bag sales, [indecipherable] it has exceeded 200%. This shows that we're able to satisfy diverse customers, establishing upscale products and lifestyle service platforms. Thank you.

[Foreign Speech]

For the second question, according to our CEO, as we mentioned just now, that we are actively created the live stream videos recently under the collaborations with the boutique shops around the globe, including Europe and also Hong Kong of China. So the offline business, it has always been a important component in our business and we adhere to our new offline and online integrated models into our establishment. Looking at the directions of the business development, the Secoo offline experience center always serve as an important channel for Secoo to serve the high-end customers and engage with the customers.

This excludes the scale expansion of factor of our operation including the supply chain O2O technology platform, the membership operation, the customer service, logistics and warehouse management and also the installment service are going to be increasingly mature. So in the future, Secoo will continue to expand the offline presence by empowering the offline stores and also improving the offline service capacity of Secoo members, who will expand this offline markets more efficiently, but also because actually they've already have a leading position in the high end e-commerce industry. So actually they are not only going to open the offline experience centers by themselves, they will also collaborate with the partners to actually apply more offline consumption scheme and also to integrate with the online platform more efficiently as well. Thank you.

Hugo Shen -- Macquarie -- Analyst

Thank you. [Foreign Speech]

Operator

Thank you. As there are no further questions, now I'd like to turn the call back over to the Company for closing remarks.

Jingbo Ma -- Investor Relations

Thank you once again for joining us today. If you have further questions, please feel free to contact Secoo's Investor Relations through the contact information provided on our website or the Piacente Group Investor Relations, whose information is also on our website.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Jingbo Ma -- Investor Relations

Richard Rixue Li -- Chairman of the Board and Chief Executive Officer

Shaojun Chen -- Chief Financial Officer

Ken Chong -- Jefferies -- Analyst

Hugo Shen -- Macquarie -- Analyst

More SECO analysis

All earnings call transcripts

AlphaStreet Logo