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YUNJI INC (NASDAQ:YJ)
Q2 2020 Earnings Call
Aug 25, 2020, 7:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and good evening, ladies and gentlemen. Thank you, and welcome to Yunji's Second Quarter 2020 Earnings Conference Call. With us today are Mr. Shanglue Xiao, Chairman and Chief Executive Officer; Mr. Chen Chen, Chief Financial Officer; Mr. Hui Ma, Chief Strategy Officer and Chief People Officer; and Ms. Kaye Liu, Investor Relations Director of the Company.

Now, I would like to hand the conference over to your first speaker for today, Ms. Kaye Liu, IRD of Yunji. Please go ahead, ma'am.

Kaye Liu -- Investor Relations Director

Hello, everyone. Welcome to our second quarter 2020 earnings call. Before we start, please note that this call will contain forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995 that are based on our current expectations and current market operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors of Yunji and its industry.

These forward-looking statements can be identified by certain [Phonetic] terminologies such as will, expects, anticipates, continues or other similar expressions. For a detailed discussion of these risks and uncertainties, please refer to our latest document filed with U.S. SEC.

Any forward-looking statements that we make on this call are based on assumptions as of today, and are expressly qualified in their entirety by cautionary statements, risk factors and details of the Company filing with SEC. Yunji do not undertake any obligation to update these statements expect as required under applicable law.

With that, I will now turn over to Shanglue Xiao, Chairman and CEO of Yunji.

Shanglue Xiao -- Chairman of the Board of Directors and Chief Executive Officer

[Foreign Speech] Hello everyone, welcome to Yunji's second quarter 2020 earnings call.

[Foreign Speech]. Despite the impact of the epidemic, we generated a total RMB7.8 billion in GMV and RMB1.49 billion in revenues during the second quarter, as a result of our outstanding team work. In the second quarter, we also achieved a non-GAAP net profit for three consecutive quarters.

Additionally, the upgrades we made to our membership enrollment system and also helped us to ramp up the total number of transacting members on our platform to 12.2 million for [Technical Issues] twelve months ended June 30, 2020.

[Foreign Speech]. Ever since our IPO as a leading membership based social e-commerce platform, we are committed to building a platform that benefits all participants by continuously investing in our supply chain upgrade and community network optimization. So I would like to provide an overview of the current development of our supply chain. In the first half year of 2020, many quality suppliers and leading manufacturers have find it difficult to adapt their business and grow their online traffic in the context of the new business environment. Retail business are having a hard time promoting their quality products and in generating sales also, especially in comparison to those top e-commerce brands capable of producing engaging content and providing more differentiated products.

Meanwhile, many users have experienced a consumption upgrade and are on the look out for an increasingly broad range of quality products that they are able to purchase at attractive prices. In light of these developments and in recognition of the increasing pain points, we have established our long-term strategy also supporting private labels and in joint venture brands on the supply side utilizing our resources to empower the risk managers on the service side and refining our platform experience and the user value proposition on the user side.

This strategy has helped us to achieve cost essential business growth without compromising our margins and in generating favorable returns for our suppliers and partners.

[Foreign Speech]. Now, turning to our partnerships. On the previous call, we discussed our commitment to establishing deep cooperation with top companies in the fast-moving consumer goods industry to further diversify our supply chain. As such, during the quarter, we continue to identify and resolve many of these companies pain points. For example, one of our partner company is a publicly traded skin care and cosmetic company with outstanding product design capability, patented technology and excellent annual product sales. However, as a result of previously aiming and marketing efforts as a mid to low end of the market, it had not been able to successfully market its high-end products. [Indecipherable] derivative sales on its own, we wanted to reach this company to jointly develop a new medical aesthetic brand on the high end and provide a target new marketing solutions on our platform.

These solutions were quite effective at helping the Company to fill their marketing gap allowing the Company to reach the high end of the market and providing the Company with the resources necessary to break its previous record for average transaction value as well as the profit margin. Our ability to deliver these outstanding results is largely a product of our service managers, who were able to create and share highly engaging content with our targeted users by utilizing their product quality and efficient beauty [Phonetic] effects. These arrangements was also quite beneficial for our service managers as these types of products produce a higher take rate and it starts providing service managers with a good income.

We have a developed a streamlined medical aesthetic product through these partnerships to date. Moreover as a result of our precision marketing capability, each of these products has achieved a positive user feedback rate above 95%.

[Foreign Speech]. Under our partnership programs with 12 emerging brands and a publicly traded fast-moving consumer company, we also partner with some big brands that have produced billions [Phonetic] of RMB in the annual sales. Through these partnerships, we co-produced the product of a quality equal to that of the dear [Phonetic] existing product line and ultimately send these products into our cross [Indecipherable] model where we create more exposure for them through reducing similar types of products.

So the introduction of these product at attractive price points has resulted in more profitable sales. Similarly, we recognize that selling those products provided by our incubated events and a differentiated supply chain has a higher profit potential than that of simply marketing and promoting other products from third-party brands.

Looking ahead, as our supply chain continues to improve, we believe that this model will also help to boost our platform sales and materially improve our growth trajectory in return.

[Foreign Speech]. Beyond these developments, we also continued to improve our community network and explore a better social sharing product system for promotion and marketing. And in second quarter, we began to explore developing a professional vertical community based on our insights on the service managers and members' interest and capability, which already generated some favorable results. Currently, we have established a true professional vertical communities for food and health supplement categories and achieved high user engagement in those communities. For example, one of our health supplement product generating over RMB500 million in GMV in just two months.

Going forward, we plan to develop more vertical communities for different categories based on business demands. In the meantime, we also focus on improving the capabilities of our service managers and our vertical communities. For example, we operated with top 20 institution to bring in lecturers experienced in marketing and training to provide our service managers with highly relevant training session. In addition to boosting service managers' marketing skills, nurturing skills and managing capability, these training also helped to improve the quality and the authenticity of the product related content produced by these service managers and increased engagement of the members. In the same community with key service managers, we believe that the accomplishment of the service manager upgrades, along with our promotion and marketing system improvement, will serve to further enhance the core competencies of our business model going forward.

[Foreign Speech]. As we advance throughout the remainder of 2020 and beyond, we remain confident that our highly effective marketing models will continue to drive long-term value through the integration of quality products, premium content and efficient content distribution.

With that, I will turn the call over to our CFO, Rex Chen to go through our financial results.

Chen Chen -- Chief Financial Officer

Thank you, Shanglue. Hello, everyone. Before I go through our financial results, please note that all numbers stated in the following remarks are in RMB terms, and all comparisons and percentage changes are on a year-over-year basis unless otherwise noted. We continue to accelerate our business transformation and to refine our membership enrollment system during the second quarter of 2020. In this quarter, an increasing amount of transactions were made through our marketplace business and are recognized on a net basis.

In addition, competition through China's e-commerce industry continued to ramp up during the period as the larger industry players increased their spending on promotional campaigns and buying [Phonetic] subsidies during e-commerce mid year shopping festival. In line with our long-term goals, we decided to forego the distractions of such short-term gains and instead focus our attention on refining our operational efficiency and bolstering our brand awareness.

We continued to advance toward healthy profitability during the second quarter of 2020 as a result of these efforts, as well as the progress made on other fronts, including supply chain and product differentiation. GMV in the second quarter of 2020 was RMB7.8 billion compared with RMB8.2 billion. GMV related to marketplace revenues in the second quarter of 2020 increased by 122.7% to RMB4.9 billion from RMB2.2 billion.

Revenues in the second quarter of 2020 were RMB1.5 billion compared to RMB3.1 billion. Gross margin in the second quarter of 2020 improved to 29.1% from 22.2%. Non-GAAP net income in the second quarter of 2020 was RMB20.1 million compared with a net -- a GAAP net loss of RMB39.2 million. Such results reflect the successful execution of our new strategy described by our CEO, which is to improve the profitability in the near term and high quality growth in the long run.

Let's now take a closer look at our financials. Revenues from net sales of merchandise in the second quarter of 2020 were RMB1.3 billion compared to RMB2.73 billion and accounting for 87.4% of our total revenues in the period. This decrease was due to the transfer of business to our marketplace business model, which was in line with our continuous efforts to improve our operating efficiency. And, the operating efficiency of our merchant's revenues from our marketplace business in the second quarter of 2020 increased to RMB159.6 million from RMB53 million.

This increase was driven by an increase in the number of quality brands and merchants on our platform. It was also due to the higher take rates that we secured by strengthening our existing partnerships which brands and attracting new brands through our growing community influence. Revenues from our membership program in the second quarter of 2020 were RMB12.3 million and wholly constitute of the deferred revenue from prior paying members compared to RMB267.6 million. This decline with in line with our long-term growth plans, and due to the refinement of our membership enrollment system which allow the users to register on our Yunji app as a member and enjoy membership benefits free of charge for a year.

Gross margin in the second quarter of 2020 expanded to 29.1% from 22.2%. This expansion was primarily due to the additional sales of high margin products, development of products from emerging brands and our own private label product, and the increasing number of brands moving to our marketplace business from our merchandise sales format, which caused a shift in the proportion of sales from a gross basis to a net basis.

Let's now move to our operating expenses. Fulfillment expenses in the second quarter of 2020 decreased by 56.5% to RMB129 million. This decrease was mainly attributable to first, reduced warehousing and logistics expenses caused by lower merchandise sales and increased logistics efficiency. Second, reduced third-party payment transaction fees due to lower commission rates. And third, lower personnel costs as a result of headcount optimization.

Sales and marketing expenses in the second quarter of 2020 decreased by 32.7% to RMB228.4 million, which was attributable to the decreasing member management fees as we continue to improve the efficiency of our member management operations. Technology and the content expenses in the second quarter of 2020 decreased to RMB58.6 million from RMB91.6 million. This decrease was mainly due to our realization of better contract terms with our server providers, which helped to reduce our server costs as well as partially due to the decrease in personnel costs as a result of headcount optimizations.

General and administrative expenses in the second quarter of 2020 increased by 8.1% to RMB70.7 million or 4.8% of total revenues from RMB65.4 million. This increase was mainly due to first, increased share-based compensation expenses, resulting from new grants of share-based awards, and second, increased professional service fees, including auditor and attorney fees, which were partially offset by reduced personnel costs as a result of headcount optimization.

Overall, total operating expenses in the second quarter of 2020 decreased by 38.6% to RMB486.6 million from RMB792.9 million. This reduction was due to our ongoing improvements to logistics efficiency, increased member management efficiency as a result of enhanced service manager relationships and our ability to secure better terms with our partners.

Loss from operations in the second quarter of 2020 were RMB45.2 million including share-based compensation expenses of RMB37.6 million compared with RMB103.9 million. Net loss in the second quarter of 2020 was RMB17.5 million compared with RMB84.5 [Phonetic] million. Adjusted net income in the second quarter of 2020 was RMB20.1 million compared with an adjusted net loss of RMB39.2 million.

Basic and diluted net loss per share, attributable to ordinary shareholders in the second quarter of 2020 were both RMB0.01 compared with RMB0.28 in the same period of 2019.

Now, let's also take a look at our cash and the liquidity positions. During this quarter our ability to maintain a healthy level of working capital despite the macro headwinds and uncertainties in the period enabled us to support our operational liquidity demands. As of June 30, 2020, we had a total of RMB1.7 billion in cash and cash equivalents, restricted cash and short-term investments on our balance sheet.

Looking ahead, we plan to continue accelerating the development of both our marketplace business and the merchandise sales business. At the same time we also aim to leverage our competitive value proposition for users, service managers and quality suppliers in order to explore new initiatives, and partnerships with strong, synergistic potential.

Going forward, we believe that such efforts will enable us to not only enhance our core financials at a steady pace, but also ramp up our overall profitability, setting the stage for high quality growth in the long run. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Questions and Answers:

Operator

Thank you so much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. And your first question comes from the line of Ivy Liu from Credit Suisse. Ivy, your line is now open.

Ivy Liu -- Credit Suisse -- Analyst

[Foreign Speech]. I'll quickly translate myself. So could management share more color on the current strategies on merchandising capabilities, especially with regards to those self-owned brands and JV brands? Thanks.

Shanglue Xiao -- Chairman of the Board of Directors and Chief Executive Officer

Okay. [Foreign Speech]. [Indecipherable] Our commodity supply chain has more than contributed by the connection with B end consumers and our member consumers. So, we're going to invest our labor force and our resources in the development of the private label and the joint venture brand.

[Foreign Speech]. And also for the product high in margin and high in the repurchase rate, we are going to promote more private label in the healthcare and cosmetic and the food.

[Foreign Speech]. And as for the medium level margin and the medium level rate pressures, rate product, we are going to cooperate with some publicly traded Company to do more joint venture brands.

[Foreign Speech]. And then for one of the joint venture brands, we promoted ATM, it's called the [Indecipherable] and then it has been quite popular among the consumers and the repurchase rate has been 50%.

[Foreign Speech]. And then today, we just launched a new product that is called Yunji ID Facial Cream and GMV for today has reached RMB1 million.

[Foreign Speech]. And also, we can see such partnership model has been quite popular among our upstream partners like those JV brands and the private labels.

[Foreign Speech]. And also, it will promote the values for our members, because they are longing for those products, good in price and high in quality. And also it will generate more values for our service managers because they also want to promote such popular products in high quality and also they would like to increase their income.

[Foreign Speech]. And also, we can see the partnership within the China high-quality manufacturing companies and the mainstream consumer product companies will be the main strategy for our supply chain.

[Foreign Speech]. That's for my -- that's for your question. Thank you.

Operator

Thank you so much. [Operator Instructions]. There are no question at this time, I'll hand back to the management for closing.

Kaye Liu -- Investor Relations Director

Thank you for joining us today. Please do not hesitate to contact us if you have any further questions. And we're looking forward to talking with you next quarter. Bye.

Operator

[Operator Closing Remarks].

Duration: 30 minutes

Call participants:

Kaye Liu -- Investor Relations Director

Shanglue Xiao -- Chairman of the Board of Directors and Chief Executive Officer

Chen Chen -- Chief Financial Officer

Ivy Liu -- Credit Suisse -- Analyst

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