Phoenix Tree Holdings Limited (DNK) Q1 2020 Earnings Call Transcript

Phoenix Tree Holdings Limited (DNK)
Q1 2020 Earnings Call
Jun 10, 2020, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, welcome to Danke's first-quarter 2020 earnings conference call. [Operator instructions] Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Kobe Ge, director of corporate finance at Danke for opening remarks and introduction.

Please go ahead.

Kobe Ge -- Director of Corporate Finance

Thanks, operator. Hello, everyone, and welcome to Danke's first-quarter 2020 earnings conference call. The company's earnings results were released earlier today and are available on companies IR website at ir.danke.com. Please note that the discussion today contains forward-looking statements made under the Safe Harbor provision of the United States Private Securities Litigation Reform Act of 1995.

Statements that are not historical facts, including statements about Danke, beliefs, and expectations are forward-looking statements. Forward-looking statements involve inherent risk and uncertainties. Further information regarding these and other risks is included in Danke's filing with the SEC. All information provided today is as of the day of this call and Danke does not undertake any obligation to update any forward-looking statements.

Except as required under applicable law which would factor in any non-GAAP measures discussed during today's call. Reconciliation information related to these measures can be found in earnings release issued earlier today. Now, allow me to introduce the management team on the call today. Mr.

Derek Shen, chairman at Danke will discuss finished updates for the quarter. Mr. Jason Zhang, our CFO will provide financial highlights. Following management's prepared remarks, we'll open up the call to the questions.

With that said, I would now like to return -- turn the call over to Mr. Derek Shen, chairman of Danke. Derek, please go ahead.

Derek Shen -- Executive Chairman

Thank you, Kobe, and thank you all for joining us on our first-quarter 2020 conference call. Thanks to the hard work and dedication of our team, so we continued our strong execution during the quarter despite the challenges of COVID-19. We operated approximately 220,000 apartment units as of March 31st, 2020 and our revenue for the quarter increased 63% year over year. In addition, we continued to see improvements in our margins and Jason will discuss these financial improvements later in greater detail.

Similar to many companies around the world, our businesses were adversely impacted by the COVID-19 outbreak. Our apartment units in Wuhan and our local operations in the city were adversely impacted by various travel restrictions and quarantine measures were implemented starting from an -- from an -- not expected and unprecedented lockdown of the city of Wuhan on January 23rd, 2020. Recent spread of COVID-19 pandemic throughout China, our business and operations in other cities were also challenged. As a result, the occupancy rates of our apartment units decreased during the quarter as money rather than delayed to their return to work which in turn had a negative impact on our revenue.

We took measures to counteract some of the worst impacts from the decrease in occupancy rates including reducing the rates of sourcing and renovation of additional apartment units and negotiating with property owners for early termination of certain leases. As a result, the number of apartment units we operated decreased sequentially. At the same time, the house and safety of our residents and employees is of paramount importance, and we implemented various preventive and control measures during the quarter. For example, we are providing best-in-class cost services to help residents stay clean and healthy as part of the company's commitment to delivering high-quality one-stop services that allow a hassle-free living experience.

Where in-house -- our in-house cleaning and maintenance services team allowed us a response in a candid way and provide superior and consistent services to our residents. During the COVID-19 pandemic, Danke has taken quick action to make sure that its sales team, housekeepers, and maintenance staff all take the necessary precautions to provide safe services to its residents. With the pandemic outbreak seems to be under control in China, we have started to see early signs of recovery recently. As the Chinese government began relaxing its tribal restrictions on quarantine measures in recent weeks, more residents have begun to return to the cities where they work.

As a result, our recent data indicates that both the rate of renting out our apartment units and our occupancy rates have shown improvements since the COVID-19 outbreak. Throughout the challenging environment, we remain focused on our strategic growth priorities and make a few more attunement. First of all, I'm excited to say that we are the first co-living platform in the world to obtain international industry recognition for the high quality of our co-living project. The International WELL Building Institute awarded the WELL Building Standard for our Model Room Center in Beijing.

The WELL Building Standard is a global benchmark for healthy communities. Its rating system consists of more than 100 evaluation standards in seven categories including air, mind, nourishment, comfort, light, water, and fitness. It has always been a priority for us to provide a safe, healthy, and comfortable living environment for our residents, and we are proud that our efforts are being recognized on an international level. Secondly, we launched our Co-living Apartment Indoor Air Quality Control Standard which is the first in China residential rental industry.

Our standard consists of five components including sourcing and design, procurement of materials, renovation and furnishing, inspection, and maintenance. Developed in conjunction with the China Environmental United Certification Center, a state-owned enterprise affiliated with the Ministry of Ecology and Environment of China. The standard was evaluated and approved by experts from across China leading real estate and standardization institutions. This standard further reflects our commitment to our residents' safety, health, and comfort.

And we hope to enhance consumers' trust and satisfaction with Danke, as well as, the co-living rental industry toward a greener and more sustainable development. Lastly, to improve our brand awareness we have gained Guo Ailun, a popular player in the Chinese Basketball Association as the brand ambassador for our Starling Projects. The Starling Projects which we launched in 2016, aims to help college graduates find affordable apartments in their desired cities. Through the program, we have helped more than one million graduates from over 2,000 colleges and universities in the past five years.

Guo Ailun's positive personality and attractive attitude and the confidence will set an optimistic and reassuring tone for our program this year. As a record, 8.74 meeting college graduates will need to find suitable housing during this challenging time. We are confident in the long-term outlook of our industry and our company. We will remain focused on our core mission and the growth strategy which includes improving our technology products and services, ecosystem, and breadth of earnings.

Workloads also include leveraging technology to better serve our residents such as by improving our housing matching system and responding to residents' needs more accurately and in a more timely manner. In addition, we will further improve our management team efficiently, as well as, recognize, identify, and deploy more talent. We believe our team, resources, and ability to execute will enable us to navigate through the pandemic and macro headwinds to develop long-term sustainable value for our shareholders. Meanwhile, we will also leverage our strengths to help alleviate the impacts brought by the pandemic, by the epidemic such as through our Starling Project to help college graduates.

Last but not least, on behalf of Danke's management team, I want to thank our employees who continue to work hard to serve our customers and the community. Even in the face of the adversity, your dedication to our company and our mission is averring and we couldn't be more proud of them. Now, please allow me to turn the call over to our CFO, Mr. Jason Zhang who will discuss the financial results of our first quarter.

So, Jason. Please go ahead.

Jason Zhang -- Chief Financial Officer

Thank you, Derek. I will now provide an update on our financial performance including the reporting quarter. Please note that all the numbers provided are in renminbi terms. In that order, comparisons are made on a year-over-year basis.

As Derek said just now, despite the impacts of the COVID-19 outbreak, we delivered a solid financial result and we continue to see margin improvement on a year-over-year basis. Our revenue during the quarter reached RMB 1,940 million, representing an increase of 66% which is primarily due to the increase in open apartment units. In terms of the expenses, our operating expenses were RMB 3,102 million, representing an increase of 59%. And of these expenses, the rental cost increased to 58% to RMB 1,956 million, the increase was primarily due to an increase in the number of the open apartment units that we operated.

As we increased the number of apartment units renovated and opened, our depreciation and amortization expenses increased 67% to RMB 328 million. In addition, our other operating expenses increased 106% to RMB 2,051 million and this was due to the three -- mainly because of the three drivers below. The first is a loss on the early termination of the rental agreement due to the -- as we mentioned before that, the adjusted of our asset portfolio, the early termination of the certain lease with property owners, and to connect to the adverse impact from the COVID-19 pandemic. And because of that, this resulted in a loss for the related leasehold improvements and the deposits to the product owner for the first quarter of 2020.

And second is the cost of -- it's the increase in the cost of service as we operate more apartment units because the business started to increase. Third is the increase in the incentive -- incentives for department sourcing. Because as we have more and more open apartment units and record more amortized commissions, and lead-generation fees for sourcing such apartment. For our pre-opening expenses and it decreased by 89% to RMB 9 million in the first quarter of 2020 because we proactively slowed down the rate of the sourcing new apartments in response to the COVID-19 pandemic.

As a result, there were few pre-opening apartment units during the quarter and compared to the same quarter last year. We do have some new apartments, which we sourced in last year and toward the end of last year, which is in the renovation stage during the first quarter of 2020. Our sales and marketing expenses decreased by 10% to RMB 204 million. This increase was due to our proactive action to control the cost and expenses, particularly, on advertising expenses.

The decrease was partially offset by an increase in incentive for apartment range and an increase in payroll costs, as a result of the resignation group of the share-based compensation at the SBC expenses upon the completion of our IPO in January 2020. At the same time, our G&A expenses increased by 142% to that RMB 2,074 million, mainly due to the recognition of a substantial amount of SBC expenses, which are primarily allocated to the G&A expenses. Excluding the effect of the SBC expenses, our G&A expenses will be RMB 133 million and the G&A expenses as a percentage of the revenue would decrease by 2.6 percentage points, as compared with the same quarter -- first quarter of 2019. Our R&D, technology, and product development expenses increased by 26% to RMB 61 million and also primarily due to the SBC expenses, which are -- which were partially offset by our proactive cost saving expense control.

So, I would like to spend a little bit more time here to explain our SBC expenses for the first quarter of 2020 because the excise ability of the share option that we grounded was conditional upon the completion of our IPO. Actually, we didn't recognize any SBC percentage relating to the share option granted before the IPO. Upon the completion of the IPO, we immediately recognize a substantial amount of SBC expenses associated with the vested options toward in the first quarter of 2020. The total SBC expenses were RMB 206 million during the first quarter -- first quarter of 2020, compared to RMB 1.5 million same quarter last year, in which, RMB 141 million allocated to G&A expenses, RMB 32 million allocated to technology and product development, R&D expenses, RMB 19 million to sales and marketing expense, and RMB 14 million to other operating expenses.

Our loss operating expense related to the impairment of the loan lease assets, which amount to RMB 19 million and the recognition of the impairment was due to the underperformance of certain apartment units relative to their project operating results during our impairment test in the first quarter of 2020 -- during the quarter. The underperformance was primarily due to the impact of the COVID-19. So as a result, the operating loss was RMB 1,162 million during the quarter, compared to RMB 763 million same period last year. Our interest expense was RMB 85 million, representing an increase of 15% and that increase was due to the interest expense related to the grant financing and also the additional bank loans.

Our net loss was RMB 1,234 million, compared to RMB 860 million last -- same quarter last year. Adjusted net loss, which was representing net loss before the SBC incentives for apartment sourcing and the impairment of the loan lease assets was RMB 979 million, compared to RMB 799 million last year -- same quarter last year. We are pleased that the net loss margin improved by around 5 percentage points and that adjusted net loss margin improved by over 16 percentage points. EBITDA, which was representing the net loss before the depreciation and amortization, interest expenses, interest income, and the income tax benefit and expenses was negative, RMB 834 million compared to negative RMB 567 million last year.

Adjusted EBITDA was negative RMB 578 million, compared to negative RMB 550 million in first quarter of 2019. Adjusted EBITDA representing the EBITDA before SBC incentive for apartment sourcing and the impairment for -- of the long-lived assets. EBITDA margin improved by around 5 percentage points and adjusted EBITDA margin improved by over 16 percentage points. Finally, our cash position remains strong as the end of first quarter of 2020 and our cash and the resisted cash position totaling RMB 4,226 million, approximately USD 600 million largely.

Overall, and despite the challenges during the quarter, we are pleased with our implementation of the disciplined financial control policy and the progress on the continued improvement of our operational efficiency gains from the dominative scale. Looking forward, as Derek mentioned just now, we expect that the second-quarter revenue to be -- should order size of the recovery, and the second-quarter revenue will be between RMB 1,850 million and RMB 950 million. The forecast reflects the management talent and the preliminary view, which is subject to the change based on the market conditions. This concludes my prepared remarks.

Thank you.

Questions & Answers:

Operator

I would now like to turn the conference back over to management for any closing remarks.

Kobe Ge -- Director of Corporate Finance

This concludes today's call. Thank you again for joining us. We appreciate your ongoing support. If you have any questions, please do not hesitate to reach out to the investor relations team.

See you next quarter.

Operator

[Operator signoff]

Duration: 24 minutes

Call participants:

Kobe Ge -- Director of Corporate Finance

Derek Shen -- Executive Chairman

Jason Zhang -- Chief Financial Officer

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