Full Truck Alliance (YMM) Q1 2023 Earnings Call Transcript

Full Truck Alliance (YMM 4.78%)
Q1 2023 Earnings Call
May 22, 2023, 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 2023 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 included in certain filings of the company with the SEC. The company does not undertake any obligation to update this form of -- information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purpose 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 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. Now, I want to turn the call over to our founder, chairman, and CEO, Mr.

Zhang. Please go ahead.

Hui Zhang -- Founder and Chief Executive Officer

Hello, everyone, thank you for joining us today on our first quarter of 2023 earnings conference call. We are pleased to deliver another strong quarter of growth to kick off 2023, boosted by China's economic rebound as the pandemic subsided. In particular, we experienced a sizable pickup in activity following the Spring Festival in January. The improved user activity among truckers and shippers and sustainable growth across our business further accelerated our organization efficiency in the first quarter, illustrating the unique appeal of our business model while paving the way for our rapid business expansion and achievement for our long-term strategic growth.

Now a detailed look at our first-quarter performance. Our peak daily fulfilled orders and active user numbers jumped to an historical high during the quarter. The number of fulfilled orders and average MAU reached 30.3 million and 1.75 million, respectively, up by 20.5% and 23.3% year over year with an increasing contribution from high-quality direct shipments. Beyond that, both our top line and bottom line once again beat market expectations in the first quarter.

Our total net revenue grew by 27.7% year over year to RMB 1.7 billion. And on a non-GAAP measure, our adjusted net income surged by 171.4% year over year to RMB 514.8 million in the first quarter. [Inaudible] users' rights and interests are always one of the company's top priorities. We made significant efforts to further develop our user rating system and strengthen our [Inaudible] mechanism to improve user experience during the quarter.

Going forward, we will continue to accelerate the implementation of our operational strategies, which we believe will boost our order matching efficiency and create more revenue for quality truckers while simultaneously enhancing our users' business. Looking at the rest of the year, we plan to implement a more active user acquisition strategy, consistently reinforce and enrich our products and services for direct shippers and bolster the activity and stickiness of our users on platform, positioning the company to advance our long-term growth in both user sales and freight volume. At the same time, we are prioritizing the expansion of our platform's skill advantage, refining its operational process and harnessing its core competitiveness in terms of freight matching, freight capacity allocation, and freight rate management, with the goal of creating greater value for users and building a healthy and stable ecosystem for our platforms. Next, I'd like to provide an update on our share repurchase program.

Pursuant to our USD 500 million share repurchase announced earlier this year, as of May 21st, 2023, we had repurchased approximately 5.6 million ADSs in aggregate for approximately USD 37.4 million from the open market. Even in the current sluggish capital market environment, we are optimistic about the company's long-term vision and development strategy and will continue to reward our shareholders through share buyback. And then, lastly, earlier today, we announced a change to our board. Mr.

Wenjian Dai resigned from his position as a member of the company's board of directors for personal reasons. Mr. Langbo Guo, our former chief strategy officer, was appointed as a new director to fill the vacancy and was simultaneously promoted to president of the company. Mr.

Guo will assume greater responsibilities in certain of our middle and back office functions and business operations. Ms. Guizhen Ma, our current director of the board, will take over Mr. Dai's previous responsibilities as a member of our compensation committee.

We would like to express our most sincere gratitude to Mr. Dai for his invaluable contribution to FTA over the years and look forward to Mr. Guo adding greater value to this new position. Thank you, everyone.

With that, I'll turn the call over to our CFO, Simon. He will elaborate further on our progress for the quarter and 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 to all of you. I'd like to thank everyone for joining us today on our first-quarter 2023 earnings call. I will start with operational highlights and then provide a brief overview of our key financials.

Our fulfilled orders grew by 20.5% year over year in the first quarter, outpacing our expectations. Breaking down the monthly data. If we exclude the low demand during the Chinese New Year period, our platform's order volumes showed a steady upward trend month over month. It is worth mentioning that our order volume increased by more than 30% for the month of March, marking a record high.

This is -- this better-than-expected performance was mainly attributable to ongoing improvement in user skills and activity. In particular, we noted a significant rebound in truckers' engagement, which even exceeded pre-pandemic levels. Let me dig into the details. Transportation costs for truckers decreased during the quarter as the pandemic impact eased and impediments to transportation were eliminated.

On top of that, the resumption of new users registration over the past six months has largely alleviated the shortage of truckers we observed last year. Thanks to all -- thanks to our effective new initiative and product optimizations designed to enhance user experience, as well as new user acquisitions, our user retention rate and engagement level continue to improve. We have also noticed that this industry's competitive landscape has undergone some major changes due to the pandemic over the past few years. As offline models became inefficient and inaccessible for users during the pandemic, a growing number of truckers and shippers turning to online transactions and have not looked back.

As a result, our market share in the FTL transportation market has increased significantly, and the network effects of our leading market position have become more pronounced. Turning to our fulfillment rate. The robust recovery in carrier supply has made it much easier for shippers to find truckers, easily improving matching efficiency. Our average fulfillment rates for the first quarter reached 28%, a year-over-year increase of 6 percentage points and a quarter-over-quarter increase of 4 percentage points.

In March, the fulfillment rate reached 30%, another historical record for us. The reduction in our matching time also reflects matching efficiency improvements after a year of elevated levels of median rate matching time returned to single digits during the first quarter, falling to around eight minutes. Furthermore, in the first quarter, the other contribution from our nonnegotiation-based transactions such as tap and go in trusted shipping models and others switched to a record high, improving overall collection efficiency. We are very pleased to have achieved a record-breaking performance amid high macroeconomic uncertainty and a low economic recovery, further strengthening our confidence in our long-term sustainable growth prospects and the resilience of China's macro environment.

Now moving onto our users. We strategically capitalize on a strong growth momentum on the fourth quarter last year to further broaden the scale of our user base during the first quarter, driving our first-quarter average shipper MAUs to 1.78 million, up approximately 23% year over year. March average shipper MAUs reached 2 million, also an all-time high. Extension of both our 688 member and nonmember user bases since the resumption of user acquisition last year has resulted in further optimization of our user composition.

In the first quarter. the contribution from 688 members and nonpaying members by number of fulfilled orders increased by 5 percentage points year over year, reaching 45%. Notably, our 688 members' average fulfillment rate in the first quarter was close to 50%, and going forward, we expect continued improvement in our platform's overall fulfillment rate as other contributions from low to medium frequency shippers increases. On the trucker side, our average trucker MAUs responding to orders increased by more than 10% year over year in the first quarter, with 3.55 million active truckers fulfilling orders in the past 12 months.

Additionally, our 12-month rolling retention rate of -- of shipper members and next month retention of truckers who responded to orders remain high at around 85%. To further boost our leading position, we promoted our brand and increased our online exposure and recognition via various media, such as app stores and short-video platforms, while also amplifying our offline marketing efforts through our local sales team and attracted a sizable number of new high-quality users as a result. We believe China's huge SME community offers a significant opportunity to add new direct shipper users, particularly 688 members, to our platform. Accordingly, we plan to invest more resources and explore innovative ways to support our SME development, increase stickiness among our existing users and appeal to more high-quality direct shippers with the goal of optimizing -- of optimizing our user composition with a great proportion of 688 members.

Now a quick look at our trucker growth system. After a trial period of just over five months, the trucker growth program we announced last quarter now covers all truckers on our platform. As part of this program, we introduced priority rights to certain qualified truckers with early access to high-quality freight information. Our users immediately embraced the new feature, which continues to gain wider recognition from the truckers.

Last, let's turn to our online transaction services. Revenue from our commission model reached RMB 401 million last quarter, representing an increase of 55.3% year over year. This robust growth was primarily driven by our sustainable growth in the number of repeat orders combined with an increase in commission per order. We also tested different permission strategies in a small group of selected cities.

The model now covers 204 cities and nearly 59% of the transactions fulfilled through us, with an average commission per transaction of RMB 22.5. So, I'd now like to provide a brief overview of our 2023 first-quarter financial results. Our total revenue in the first quarter were RMB 1,702.3 million, representing an increase of 27.7% year over year, primarily attributable to an increase in revenues from freight matching services, revenues from freight matching services, including service fees from freight brokerage models, membership fees from listing models, and commissions from online transaction services were RMB 1,397.5 million in the first quarter, representing an increase of 24.9% year over year, primarily due to an increase in revenue from freight brokerage service, as well as continued growth in transaction commissions. Revenues from freight brokerage service in the first quarter were RMB 772.6 million, up 16.6 % year over year, primarily attributable to continuous growth in freight volume as a result of expanded user coverage.

Revenues from freight listing services in the first quarter were RMB 223.9 million, up 13.1% year over year, primarily due to an increase in total paying members. Revenues from transaction commission amounted to 401 million in the first quarter, up 55.3% year over year, primarily driven by an increase of other volumes, as well as an uptick in transaction commission for others. Revenue from value-added services from the first quarter were RMB 304.8 million, up 42.4% year over year, mainly attributable to an increase in revenues from credit solutions and other value-added services. Cost of revenues in the first quarter was RMB 849.4 million, compared with RMB 683.9 million in the same period of last year.

The increase was primarily due to an increase in VAT, related tax surcharges, and other tax costs, net of tax refunds, from government authorities. These tax-related costs, net of refunds, totaled RMB 766.4 million, representing an increase of 28.1% year over year, primarily due to a continued increase in transaction activities involving our freight brokerage service. Sales and marketing expenses in the first quarter were RMB 245.7 million, compared with RMB 192.0 million in the same period last year. The increase was primarily due to an increase in advertising and marketing expenses for user acquisitions.

General and administrative expenses in the first quarter were RMB 179.5 million, compared with RMB 458.4 million in the same period last year. The decrease was primarily due to lower share-based compensation expenses. R&D expenses in the first quarter were RMB 229.9 million, compared with RMB 221.0 million in the same period last year. The increase was primarily due to higher salary and benefit expenses.

Overall, the income from operations in the first quarter was RMB 165.8 million, compared with a loss of RMB 252.0 million in the same period last year. Net income in the first quarter was RMB 411.4 million, compared with a net loss of RMB 192 million in the same period last year. Under non-GAAP measures, our adjusted operating income in the first quarter was RMB 272.4 million, an increase of 104.4%, from RMB 133.2 million in the same period last year. Our adjusted net income for the first quarter was RMB 514.8 million, an increase of 171.4%, from RMB 189.7 million in the same period last year.

Basic and diluted net income per ADS were RMB 0.38 in the first quarter compared with basic and diluted net loss per ADS of RMB 0.18 in the same period last year. Non-GAAP adjusted basic and diluted net income per ADS were RMB 0.48 in the first quarter, compared with RMB 0.17 in the same period last year. As of March 31st, 2023, the company had cash and cash equivalents, restricted cash, short-term investments, and long-term deposits of RMB 25.8 billion in total, compared with RMB 26.3 billion as of December 31st last year. In the first quarter of this -- in the first quarter of 2023, net cash provided in operating activities was RMB 86.8 million.

Looking at our business outlook for the second quarter this year, we expect our total revenues to be between RMB 1.91 billion and RMB 2.01 billion, representing a year-over-year growth rate of approximately 14.5% to 20.5%. These forecasts reflect the company's current and preliminary views on the market and operational conditions, which are subject to change and cannot be predicted with reasonable accuracy as of the date hereof. That concludes our prepared remarks. We now like to open the call to Q&A.

Operator, please go ahead.

Questions & Answers:

Operator

Thank you. [Operator instructions] Today's first question comes from Ronald Keung with Goldman Sachs. Please go ahead.

Ronald Keung -- Goldman Sachs -- Analyst

Thank you, management. In the first quarter, we saw that fulfilled orders grew over 20% year on year. So, much faster than broader freight market and the macroeconomic recovery. So, what are the main drivers, reasons behind that? And how should we expect the fulfilled order growth to trend in the second quarter? Thank you.

Simon Cai -- Chief Financial Officer

Thank you, Ronald. I'll address all the remainder of Q&A in English directly. Overall, I think we're very pleased to see our platforms' freight orders grew much faster than the broader market in the past quarter. We believe that rapid growth mainly came from our increased market share in the FTL market as we have consolidated our market-leading position in the online trade matching services.

The strong growth of order -- order volume in the first quarter was primarily due to two factors. First, the pandemic's impact largely eased in the first quarter and truckers travel was no longer restricted. And second and perhaps more importantly, we have observed that a considerable number of users have migrated from offline to online. Through our user interviews, we have learned that, in the current market condition, truckers and shippers in the FTL transportation market both prefer to transact online.

In other words, compared with offline matching, the market share of online freight matching has significantly increased. As the market leader in the online freight matching services, we obviously benefit the most from this trend, and we expect that to continue going forward. Internally, since late last yea, our continued efforts in user acquisition have also been paid off. Our new users are mostly small to medium frequency shippers who are typically direct shippers and who contribute high-quality orders.

In the first quarter, roughly 48% of the food orders came from those low to medium-frequency shippers and this number increased from roughly 40% about a year ago. And we expect that number to keep rising. In addition, we continue to enhance our matching capabilities and the algorithm. For example, during the first quarter, we improved the platform shipment origin and destination address infrastructure and broaden the overall coverage of accurate address down to street numbers.

This boosts truckers' willingness to take orders, as well as our fulfillment capabilities, and reduce potential disputes. When we look at -- look into the second quarter, we expect the number of fulfilled orders to maintain the rapid growth momentum, and we expect the number of repeat orders to increase about 40% in the second quarter at the end of the year.

Ronald Keung -- Goldman Sachs -- Analyst

All right, thank you, management.

Operator

Thank you. And our next question today comes from Jiulu Li with CICC. Please go ahead.

Jiulu Li -- CICC -- Analyst

The 28% fulfillment rate in the first quarter marks a significant increase both year over year and quarter over quarter. What are the main reasons behind the increase? And what's your fulfillment rate target for the second quarter? Thanks.

Simon Cai -- Chief Financial Officer

Thank you. The improvement in fulfillment rates in the first quarter was mainly attributable to the change in supply and demand dynamics. Starting from -- starting this year, the impact of inefficient truckload of -- insufficient truckload supply, which is a big headache for our shipper users over the past two years, have been substantially alleviated. With more truckers available, it become easier for our shippers to find a match on top of increasing the overall fulfillment rate.

The optimization of user composition also contributes to the increase in fulfillment rate. Ever since we resumed our user acquisitions during the middle of last year, the proportion of direct shippers has continued to rise, both in terms of monthly active users and also other contributions. Most of our low and medium-frequency shippers are direct shippers with a fulfillment rate close to 50%. Therefore, it's a continuous -- continuously increased contribution from direct shippers who further drive procurement rate growth.

Looking into second quarter, we expect that the increase -- the increase and the increased proportion of direct shippers and further expansion of FTA's market share in the spot FTL transportation market. The fulfillment rate will continue to grow, building our first-quarter's momentum.

Operator

Thank you. And the next question today comes from Charlie Chen at China Renaissance. Please go ahead.

Charlie Chen -- China Renaissance Securities -- Analyst

The growth of revenue from freight brokerage business slowed compared with previous quarters. What are the main reasons for that? And also, could you please share some color on the operational strategies for your freight brokerage business? Also, have you witnessed any changes in tax refund policies recently? Thank you.

Simon Cai -- Chief Financial Officer

Thank you. The freight brokerage service we provided to shippers mainly refers to situations where the platform enters into shipping contracts with shippers and orders are fulfilled by truckers matched by the platform on an interrupted basis or truckers delegates -- designated by shippers themselves. We assume the role of freight brokerage and provides VAT invoices. Beyond that, the platform also -- also offers shippers protection against truckers' demand for fee increases and delays, as well as cargo damages to a certain extent upon the fulfillment of the orders.

The shippers pay service fees to us. The service fees we charge for free brokerage services are based on the percentage of shipping fees, which was approximately 6% for the first quarter, also one of the highest in the industry. We regard the freight brokerage as a business line that enhances user stickiness. Its strategic significance lies in increasing the dependence and frequency of shippers on the FTA platform.

Our data also shows that shippers who use freight brokerage ship -- straight brokerage service tend to ship more frequently. And currently, there's a huge demand for this service from shippers while the user penetration is relatively low, leaving plenty of room for adjustment. Going forward, we encourage freight brokerage users to post more matching orders and, thus, increasing the overall profit contribution of this business, rather simply focus on increasing the revenue scale and more where the freight business service involves a number of contractual shipping orders, which helps us again -- help us gain a full picture of shippers and fleet needs beyond just -- beyond just on demand need. Regarding the tax refund policy, we have not received any notices from regulators regarding a tax rebate rollback.

We have multiple collaborating tax sources. We are taking a flexible approach to adjust tax sources as the market evolves. If we only get partial refunds for the VAT and other taxes we pay, the central and local government keeps majority of the tax we contributed, which is consistent with national policy guidance. The future of the tax system is upgraded.

The local government will also welcome us given our strict risk control and the contribution to the local GDP. This positions us the leading player in the market, setting the bar for other online great platforms and gradually raising the industry standards. Furthermore, if there were any -- any extreme case requires, together with all other freight-focused players, to adjust or otherwise terminate the freight-focused business, the impact on our overall profit will be minimal as our profit growth contribution comes mainly from our commission business. And lastly, considering that freight brokerage requires FTA to advance VAT payment on the -- on behalf of shippers and to wait for a refund, we will carefully manage its growth rate to rein in the impact on cash flow going forward.

Charlie Chen -- China Renaissance Securities -- Analyst

Thank you very much.

Operator

Thank you. Our next question today comes from Brian Gong with Citi. Please go ahead.

Brian Gong -- Citi -- Analyst

I will translate myself. In the first quarter, revenues from transaction commissions surged over 55% year on year. May I know what are the key drivers behind that? And also, we noticed that China's Ministry of Transport recently released a workplan. They're mounting platforms to lower the standing -- excessive commissions.

Will this affect FTA's commission strategy in the future? Thank you.

Simon Cai -- Chief Financial Officer

Thank you. These are all very important questions. The growth in revenue from transaction commissions in the first quarter was primarily attributable to the robust growth in the platform's overall order volume. Our commission orders increased by roughly 38% year over year in the first quarter.

Our business team makes dynamic adjustments to commission rates and penetration based on platform's real-time order volume to strike a balance among the increase in commission revenue, user activity growth, and business skill improvement. The user base and order intensity continue to rise. We plan to further expand the coverage of commissioned orders and prudently increase the overall commission rate. Regarding the reason proposal from the Ministry of Transportation for a reduction in excessive commission for transportation platforms, we understand this is a follow-up enhancement to the operation [Inaudible] policy implemented last year.

And this proposal strives to achieve the same goal, namely, to further safeguard the rights and interests of users in a transparent and open environment. Our commission rate is at very low level and, in fact, significantly lower than other freight platforms. We do not expect the company's operations to be impacted by this proposal.

Brian Gong -- Citi -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Cherry Leung with Bernstein. Please go ahead.

Cherry Leung -- AllianceBernstein -- Analyst

I'll also say it in English. Can you please provide an update on the progress of your new user acquisition? What are the key focuses of your new user acquisition strategy on the side of shipper and trucker, respectively? Thank you very much.

Simon Cai -- Chief Financial Officer

Thank you. In the first quarter, our overall progress in user acquisition generally met our expectations. We implemented different acquisition strategies targeting shippers and also truckers. The shipper side, as previously previously mentioned, we have promoted our brands and platform through various online and offline channels, attracting more high-quality direct shippers as a result.

As you know, China has over 30 million SMEs who may require FTL shipments. All of them are potential shipper customers. Therefore, we will remain devoted to offering various transportation capacity solutions and meeting shippers' evolving logistics needs so as to consistently improve our penetration rate among those direct shippers. As for truckers, we already cover most of the heavy-duty trucker drivers in China, and we are expanding our reach to smaller trucks as pandemic supply and transportation activities resume.

On top of online new user acquisition, we also focused on reactivating dormant truck drivers, leveraging our on-call capability. We identify dormant drivers with the potential to return to our platform and offer incentives to reactivate them. In addition, we have formed cooperation with offline service areas, set up truckers' service stations and temporary service points and provided care packages for truckers during peak freight logistics period to help truckers enjoy short breaks, and supplies that increase their comfort while traveling. These amenities enhance truckers' sense of belonging on a platform while also attracting new truckers to FTA.

And looking forward, we will continue to attract more high-quality truckers and shippers, sustaining our growth in both user scale and transaction volume on a platform.

Operator

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

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 at 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: 0 minutes

Call participants:

Mao Mao -- Investor Relations

Hui Zhang -- Founder and Chief Executive Officer

Simon Cai -- Chief Financial Officer

Ronald Keung -- Goldman Sachs -- Analyst

Jiulu Li -- CICC -- Analyst

Charlie Chen -- China Renaissance Securities -- Analyst

Brian Gong -- Citi -- Analyst

Cherry Leung -- AllianceBernstein -- Analyst

More YMM analysis

All earnings call transcripts