Full Truck Alliance Co. Ltd. (YMM) Q1 2022 Earnings Call Transcript

Full Truck Alliance Co. Ltd. (YMM)
Q1 2022 Earnings Call
Jun 08, 2022, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good day, and welcome to Full Truck Alliance's first quarter 2022 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mao Mao, head of investor relations. Please go ahead.

Mao Mao -- Investor Relations

Thank you, operator. Please note that today's discussion will contain forward-looking statements relating to the company's future performance, which are intended to qualify for the Safe Harbor from liability as established by the U.S Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions, and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and discussion.

A general discussion of the risk factors that could affect FTA's business and financial results is included in certain filings of the company with the SEC. The company does not undertake any obligation to update these forward-looking statements, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today.

Joining us today on the call from FTA's senior management side are Mr. Hui Zhang, our founder, chairman, and CEO; and Mr. Simon Cai, our CFO. Management will begin with prepared remarks and the call will conclude with a Q&A session.

As a reminder, this conference is being recorded. In addition, a webcast replay of this call will be available on FTA's investor relations website at ir.fulltruckalliance.com. I will now turn the call over to our founder, chairman, and CEO, Mr. Zhang.

Please go ahead, sir.

Hui Zhang -- Founder and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

Thank you for joining us today on our first quarter of 2022 earnings conference call.

Hui Zhang -- Founder and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

Our growth momentum continued in the first quarter of 2022 with another quarter of solid financial and operational performance despite typically slower seasonal demand, as well as challenges arising from the industrywide transportation resources shortage and disruptive network operations in certain areas of China due to the pandemic and the dynamic zero COVID policy. Our GTV reached RMB 53.6 billion, representing year-over-year growth of 4.2% and the number of fulfilled orders grew 13.6% year over year to RMB 25.2 million. In the absence of new external user growth, we still witnessed stable user activity trends in the first quarter, mainly attributable to higher user retention rates and rising engagement levels.

Hui Zhang -- Founder and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

Our continuous improvement in this matrix was again demonstrated the solid foundation of our business and the ability to mitigate the impact of external events. As a result of this progress, we grew our total net revenue to RMB 1.33 billion in the first quarter, 53.7% higher than the prior-year period and beating the high end of our previous guidance, which was projected at RMB 1.09 billion. While we grew our top line, we also improved our profitability. Under non-GAAP measures, our adjusted net income increased by 68% to RMB 189.7 million in the first quarter.

Hui Zhang -- Founder and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

Overall, we are pleased with our first quarter financial and operational achievements. Looking forward, we believe that we will remain focused on increasing user frequency by fine-tuning our freight matching and fulfillment process and reactivate endowment users through talkative marketing activities. Propelled by these efforts, as well as the outstanding value proposition of our products and services, we are confident that our user growth will gradually resume following the successful completion of the pending security reviews.

Hui Zhang -- Founder and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

Despite the recent lockdown's short-term impact on our business and the industry at large, the overall trend in China's logistics industry remained robust in the medium to long term. The industry's movement toward utilization and the accelerated introduction of parties that support organizations are working strongly in our favor as we pioneer a digital synergized and smart logistics infrastructure across the value chain. Capitalizing on this momentum, we will cultivate our technological edge, explore new business models and strengthen our monetization system as we further unleash the great potential of our again secure and efficient nationwide logistics network and create value for all of our stakeholders.

Hui Zhang -- Founder and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

With that, I will now turn the call over to our CFO, Simon, who will go over our operational and financial results in more detail. Simon, please go ahead.

Simon Cai -- Chief Financial Officer

Thank you, Mr. Zhang, and hello, everyone. Let's take a look at our first quarter operations. The first quarter is traditionally the low season for the road transportation industry.

This in addition to the continued suspension of our new user registration and the recent COVID resurgences and lockdowns in some major cities created incremental headwinds for the entire logistics industry and brought short-term uncertainties and challenges to our business. However, in light of the NDRC decision to relax restrictions and facilitate the full resumption of logistics operations, we saw a gradual resumption of business operations and signs of recovery in transaction volume in the past month. And we believe that the current negative impact of the COVID will be short lived. We remain confident in our path to long-term growth as we broaden our efforts to enhance our logical advantages and accelerate the industry's digital transformation.

Our first quarter results are a solid testament to the strength and stability of our platform. Our average fulfillment rate reached approximately 22% in the quarter, representing only a slight year-over-year decline due to the short-term truck shortage in some regions. Furthermore, during the first quarter, both our average shipper MAUs and average trucker MAUs who fulfilled shipping orders or responded to others on our platform remained stable with about 3.5 million active truckers conceiving shipments in the past 12 months. We also witnessed an increase in the number of paying shippers as a larger number of nonpaying shippers actively involved in the shipper membership program as a result of our improved perception of the value created by FTA platform.

More importantly, we maintained our shipper and trucker retention rates, including both 12-month retention of paying shippers and next month's retention of truckers who responded to shipping orders on the platform at a high level of approximately 85%. Improving our logistics ecosystem and customer satisfaction remains our top priorities. As we move forward, we aim to offer a broader range of efficient and user-friendly products and services to streamline logistics transactions while increasing user activity and stickiness. Turning now to our entrusted shipment program.

We first introduced the program in Wuxi in June last year and has now applied this model to the entire country. Current data shows the project is run smoothly since this program largely serves direct shippers mainly consisting of SMEs and shippers of this type tend to have higher standard of service demand and user stickiness. Its fulfillment rate is significantly higher than that of negotiated and other type of transactions. We believe that penetration will continue to increase as we upgrade the program service experience.

Furthermore, the program creates additional monetization opportunities and provides growth rooms for our transaction commission while also playing a critical role in our user composition optimization strategy. That brings us to our online transaction service, which also utilizes a commission model in certain cities. Revenue from its commission model increased by 202% year over year, reaching RMB 258.2 million in the first quarter. This growth was primarily driven by our extended commission coverage of 195 cities as of March 2022, which raised the commission penetration rate by roughly 20 percentage points year over year to nearly 49%.

Operating data and user feedback from these commissioning cities reflect a high level of user adoption with truckers next month retention rate of 85%. The commission model is now shaping up to be a major growth engine for our platform as the proportion of total revenue continues to rise. Building on our previous success, we remain devoted to enhancing truckers' user experience while fostering their paying habits as we plan to prudently increase the commission rate, as well as expand commission model coverage. A stable and fast-growing user base is critical to our success to nurture the solid foundation of trust and loyalty we have built, we continuously optimize product options, improve platform governance and invest significant resources in customer experience enhancement, doing our utmost to protect users' interest.

With respect to upgrades to our platform ecosystem governance in February, we commenced implementing our shipper rating system in Changshu, Shandong, and Hubei provinces. We expect to expand it on a national scale in future quarters. The goal is to guide shippers to form good trading habits and encourage them to operate in a standardized and trustworthy manner. Shippers can increase their rating by adhering to best practice guidance and settlement payments online.

Our shipper rating system has already positively impacted the fulfillment rate in those provinces. Survey data suggests that 66.66% of shippers have taken the initiative to raise their rating scores since the system launch. Going forward, we will further refine the system based on our user feedback. Additionally, in response to the widespread COVID recurrences, we added a pandemic prevention reference function on the trucker side of the platform, enabling instant checking of pandemic prevention policies in regions where cargoes will be loaded and unloaded.

This feature allows truckers to review relevant local requirements before responding to shipping orders and ensuring smooth shipments to the extent possible. We also unveiled a function to mine shippers to factor in fuel price fluctuations when our setting freight free, allowing shippers and truckers to communicate efficiently. These features ensure efficient order matching while protecting truckers' right and interests. To further combat the pandemic, we rolled out an anti-pandemic consistent function on the platform in early May.

This new function prioritize displays and recommendations of relevant anti-pandemic products to truckers. It helps better direct more pandemic relief-related traffic to shippers and facilitate trouble-free transportation channels for daily necessities in the affected areas. At the same time, we are utilizing our platform's operating measures and subsidies to relieving pressures on shippers facing serious shortage of transportation capacity in certain areas. By reallocating and deploying surrounding trucker capacity, we help complete shipments as efficiently as possible.

Now, I'd like to provide a brief overview of our 2022 first quarter financial results. Our total revenue in the first quarter were RMB 1.3 billion, representing an increase of 53.7% year over year, primarily attributable to an increase in revenue from freight matching services. Revenues from freight matching services including service fee from freight brokerage model, membership fees from listing model, and commissions from online transaction services were RMB 1.1 billion in the first quarter, representing an increase of 16.9% year over year, primarily attributable to an increase in revenue from freight brokerage service, as well as rapid growth in transaction commissions. Revenue from freight brokerage service in the quarter were RMB 662.4 million, representing an increase of 48.4% year over year primarily driven by significant growth in transaction volume.

The revenue from freight listing service in the first quarter were RMB 198 million, up 21.2% year over year, primarily attributable to an increase in total paying members and less increased shipper demand for our services as the business continues to expand. Revenue from transaction commissions amounted to RMB 258.2 million in the first quarter, an increase of 202% year over year, primarily driven by a rapid ramp-up of commissioned GTV penetration. Revenue from value-added services in the quarter were RMB 214 million, an increase of 24.4% year over year, mainly attributable to increased revenue from credit solutions. Corporate revenues in the first quarter was RMB 683.9 million compared with RMB 412.8 million in the same period last year.

The increase was primarily attributable to an increase in same VAT-related tax surcharges and other tax costs, net of tax refunds from government authorities. These tax-related costs net of refunds totaled RMB 598.3 million, representing an increase of 65.8% from RMB 361 million in the same period last year, primarily due to an increase in transaction activities involving our trade-focused service. Sales and marketing expenses in the first quarter were RMB 192 million compared with RMB 170.4 million in the same period last year. The increase was primarily due to an increase in salary and benefit expenses driven by the increase in sales and marketing headcount, partially offset by a decrease in advertising and marketing expenses, as well as a decrease in share-based compensation expenses.

G&A expenses in the first quarter were RMB 458.4 million compared with RMB 322 million in the same period last year. The increase was primarily due to an increase in salary and benefit expenses driven by higher headcount in general and administrative personnel and an increase in share-based compensation expenses. R&D expenses in the first quarter were RMB 221 million compared with RMB 138 million in the same period last year. The increase was primarily due to an increase in salary and benefit expenses driven by higher headcount in the R&D personnel.

Loss from operations in the first quarter was RMB 252 million compared with RMB 201.9 million in the same period last year. Net loss in the first quarter was RMB 192 million compared with RMB 197 million in the same period last year. Under non-GAAP measures, our adjusted operating income in the first quarter was RMB 133.2 million, an increase of 20.3% from RMB 110.7 million in the same period last year. Our adjusted non-GAAP net income in the first quarter was RMB 189.7 million, an increase of 68% from RMB 112.9 million in the same period last year.

Basic and diluted net loss per ADS were RMB 0.18 in the first quarter compared with RMB 2.09 in the same period last year. Non-GAAP adjusted basic and diluted net income per ADS were RMB 0.17 in the first quarter compared with non-GAAP adjusted basic and diluted net loss per ADS of RMB 0.7 in the same period last year. As of March 31, 2022, the company had cash and cash equivalents, restricted cash, and short-term investments of RMB 25.3 billion in total compared with RMB 26 billion as of December last year. For the first quarter of 2022, net cash used in operating activities was RMB 96.3 million.

Looking at our business outlook for the second quarter, we expect our total revenue to be between RMB 1.56 billion and RMB 1.64 billion, representing a year-over-year growth rate of approximately 39.4% to 46.3% despite the impact of the COVID outbreaks on transaction value for the period. These forecasts reflect the company's current and preliminary view on the market, operational conditions, and uncertainties caused by the current COVID outbreaks, including the geographic scope and duration of the outbreaks, the additional restrictive measures that the governmental authorities may take and a further impact on the business of shippers, trucker, and other ecosystem participants, which are all subject to change and cannot be predicted with reasonable accuracy as of the date hereof. To summarize, we have a solid first quarter marked by steady growth across our primary operations and financial metrics. Our success can be attributed to years of devotion to building a cutting-edge digital freight platform, a highly engaged user base and improved monetization capabilities.

We have entered an exciting new era where digitalization and transformation is taking shape as we speak. Consequently, we will continue to forge ahead with our user-centric growth strategy, investment technologies; improve our top line; and focus on driving value for all of our users, investors, and shareholders. That concludes our prepared remarks. We would now like to open the call to Q&A.

Operator, please go ahead.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. The first question today is from Ronald Keung with Goldman Sachs.

Please go ahead.

Ronald Keung -- Goldman Sachs -- Analyst

[Foreign language] Congratulations on the results management. I want to ask about the platform's fulfill GTV and the number of orders maintained year-on-year growth in the first quarter, its quarter-over-quarter decline compared with the fourth quarter. So I want to hit the reasons, major factors? And also, how should we think of the second quarter fulfill GTV and order volumes into the second quarter? Thank you.

Hui Zhang -- Founder and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

In the first quarter, the platform of fulfill GTV and the number of orders both maintained year-over-year growth, mainly benefiting from the sustained increase in our shipments and stronger networks back. With the enhancement and improvement of product features and user experience, we are seeing more and more shippers relying on the FTA platform for shipments, and these users have extremely high retention rates. In the first quarter, the rolling 12-month retention of our paying shippers and next month retention rate of truckers responding to orders at around 85%. Such high levels of user stickiness while new user registration is suspended, clearly demonstrated a stable market position in the FTL industry.

Hui Zhang -- Founder and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

So in terms of the quarter-over-quarter trends, the shipment volume in the first quarter was mainly affected by the following factors. First quarter is traditionally the slow season, especially during the spring festival when shipment volume is usually at the lowest point in a given year. And secondly, the suspension of new user registration still affected business in the quarter. Third.

since mid to late March, we are seeing pandemic resurgence resulted in highway closures and traffic control in some cities, which severely impeded truckers' fulfillment capability, leading to an imbalance of supply and demand with fewer truckers available for shipments.

Hui Zhang -- Founder and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

Despite the impact of multiple external factors, we remain committed to enhancing user experience and operating efficiency. Regarding algo capability building in the first quarter, we improved our product based on various matching systems such as sorting and accurate recommendations, addressing certain mismatches between the order statements and shipment capacity, and averaging overall matching efficiencies. In terms of operations, our operational team provided guidance to users on resuming work after the spring festival, which increased the shippers' and truckers' activity level.

Hui Zhang -- Founder and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

As for the second quarter, the lingering COVID operated in various regions nationwide resulted in different levels of traffic control, significantly impacting the logistics industry. Since mid-April, we have noticed a gradual recovery of industry logistics and platform capacity, but it may take a while before returning to the pre-pandemic levels. Thank you. Next question, please.

Operator

The next question today comes from Charlie Chen with China Renaissance. Please go ahead.

Charlie Chen -- China Renaissance -- Analyst

[Foreign language] Thanks, management, for taking my questions. I have some questions regarding the commission business. So first off, how did commission business progress in the first quarter and also year to date, including commission penetration and the commission rate? And also, were commission business impacted by the pandemic situation? And what is the company's commission plan going forward? Thank you.

Simon Cai -- Chief Financial Officer

Thank you for your time here. I'll take the question in English directly. So our commission revenue in Q1 reached about RMB 258 million. This is largely owing to an increase in commission rates.

As of the end of March, we have extended our commission model to 195 cities. But as I said, due to the pandemic, the average freight matching time increased quarter over quarter, that's slightly lowering our commission penetration sequentially. Since the end of last year, we have launched tiered commissioning by matching time, which has now been fully adopted in all regions where we operate. To some extent, matching time reflects the popularity so-called popularity of the other replacement.

And truckers are more receptive to commissions charged for those more popular orders. Our user survey data indicates that overall commissioning feedback has been improving since Q1, which is also the main driver behind the continuous increase in the commission rate. In addition, we adjust our commission strategy flexibly based on the changes in supply and demand dynamics. For example, at the end of Q1, we adopted a commission-free strategy for freight that were labeled pandemic supplies to ensure the supplies of those materials to areas hit by the pandemic is sufficient.

Going forward, we plan to steadily increase the commission rate, as well as the commission penetration by improving the overall credit matching efficiencies because the commission charge essentially represents our platform's value and services, we'll remain able to providing additional value-added services and improving product functions for our truckers. We continually enhancing the user experience as we develop our commission business.

Operator

The next question comes from Brian Gong with Citi. Please go ahead.

Brian Gong -- Citi -- Analyst

[Foreign language] [Technical difficulty] program progress over this year, did programs commissioned and proceeded as expected, and what are your targets for the program this year? Thank you.

Simon Cai -- Chief Financial Officer

Yes, the line was breaking a little bit, but I'll try my best to address your question. So after nearly a year of refinement and functional improvement, as of May this year, we have achieved a nationwide coverage with our entrusted shipment program. Although there were mounting external challenges, including the COVID outbreaks, and suspension of new user registration, this all affected shipment volume, the program's average fulfillment rate is still significantly higher than other type of matching services. The advantage of the entrusted shipment program lies in its platform-led pricing, which typically results in a higher matching certainty and faster matching.

We also sort other placement by prioritizing high-quality trucking resources to ensure the service quality. In addition, we have a dedicated customer service team equipped to provide various services such as scheduling, order reviews, and manual matching when it's necessary. These value-added services also created additional commissioning opportunities. Up to now, the entrusted shipment program's commission business has achieved nationwide coverage with overall progress in line with our expectations.

The successful launch of the program enabled us to further improve our user consistent and optimize user composition. Going forward, we will continue to optimize our products and services by categorizing our transportation resources to allow more high-quality truckers to join the program, enhance service quality and user experience and increase user stickiness on the platform, eventually raising the overall matching efficiency.

Operator

The next question comes from Jiulu Li with CICC. Please go ahead.

Unknown speaker

[Foreign language] This is Jiulu Li from CICC, and thanks for taking my questions. I have two questions here. The first one, what's the progress of the new business, including LTL and intercity in first quarter. The second one, we have recently noticed that some media reported that FTA will resume new user registration.

Does this mean the cybersecurity review is coming to an end? Thank you.

Simon Cai -- Chief Financial Officer

Thank you. On the first question, first of all, because new user registration has not yet resumed. So we did not expand our intercity business to more regions in the quarter. For those pilot cities we have already entered, our intercity business remained stable over the quarter despite the impact from the pandemic, and monetization in those cities also progressed smoothly.

In Q1, the transaction commission combined with membership fees contributed to a positive gross margin in those cities, including the sustainability of our business model. Going forward, as new user registration resumes, we plan to expand steadily to lead shippers' one-stop shipping demand. On LTL, currently, we are mainly exploring in the dedicated line model. This is a franchise model that integrates off-line, dedicated line, transportation capacities where the shippers may and other online with our platform, and we dispatch the orders to franchise dedicated line responsible to fulfill those others, as well as the LTL last-mile delivery.

In Q1, the Chinese New Year and COVID outbreak, both impacted the LTL business volume. However, as we kept improving our operational efficiency and refining the economic model, the gross margin of the LTL business in those private cities is consistently improving. Regarding your second question, unfortunately, we are not able to comment on any such media post. We will update the market on any material progress through public disclosures.

We have been cooperating actively with the cybersecurity review office of CAC throughout the review process. Going forward, we will continue to work with CRO to comply with the regulatory requirements and remain committed to protecting our platform's cybersecurity by implementing effective measures.

Operator

And that concludes the question-and-answer session. I would like to turn the conference back over to management for any additional or closing comments.

Mao Mao -- Investor Relations

Thank you once again for joining us today. If you have any further questions, please feel free to contact us at Full Truck Alliance directly or TPG investor relations. Our contact information for IR in both China and U.S can be found in today's press release. Have a good day.

Operator

[Operator signoff]

Duration: 7 minutes

Call participants:

Mao Mao -- Investor Relations

Hui Zhang -- Founder and Chief Executive Officer

Simon Cai -- Chief Financial Officer

Ronald Keung -- Goldman Sachs -- Analyst

Charlie Chen -- China Renaissance -- Analyst

Brian Gong -- Citi -- Analyst

Unknown speaker

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