TuanChe Limited (TC) Q1 2019 Earnings Call Transcript

TuanChe Limited (NASDAQ: TC) Q1 2019 Earnings Call May 17, 2019, 8:00 a.m. ET

Prepared Remarks:

Operator

Good morning, and good evening, everyone. Thank you for standing by. Welcome to TuanChe Limited First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. After today's presentation, there will be an opportunity to ask questions.

Now, I will turn the call over to your speaker host today, Ms. Cynthia Tan, the company's Investor Relations Director. Please, go ahead, Cynthia

Cynthia Tan -- Investor Relations Director

Thank you, Operator. Hello, everyone, and thank you all for joining us on today's call. TuanChe has announced its quarterly financial results today. An earnings release is now available on the company's IR website.

Today you will hear from TuanChe's CEO, Mr. Wei Wen, who will start off the call with a review of recent company developments and strategies. He will be followed by the company's CFO, Mr. Zhihai Mao, who will address the financial results in more details. After the management's prepared remarks, we will open up the call for questions.

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Before we proceed, please note that this call may contain forward-looking statements made pursuant to the Safe Harbor provision for the Private Security Litigation Reform Act of 1995. These forward-looking statements are based on managements current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control which may cause actual results, performance, or achievements of the company to be materially different from the results, performance, or expectations implied by these forward-looking statements.

All forward-looking statements are expressly qualified by the cautionary statements and risk factors and details of the company's filing with the SEC. The company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise except as required by law. Please, also note that the company will discuss non-GAAP measures today which are most thoroughly explained and reconciled to the most comparable measure reported under the generally accepted accounting principles in the company's earnings release and filings with the SEC. You are reminded that such non-GAAP measures should not be viewed in isolation or as an alternative to the equivalent GAAP measure and that non-GAAP measures are not uniformly defined by all companies including those in the same industry.

With that said, I'm pleased to present Mr. Wei Wen, CEO of TuanChe. Please, go ahead, sir.

Wei Wen -- Chief Executive Officer

Hello, and thank you, everyone, for joining us on our first quarter earnings call today. In the first quarter of 2019, car sales in China continue to underwhelm due to uncertainty in the macroeconomic environment. In fact, passenger car sales fell in March for the 10th straight month according to industry reports, ending the first quarter with a 13.7% year over year decline in sales.

Despite this historic industry slump and an unseasonably slow quarter, we maintained our strong growth momentum. Importantly, quarterly and net revenues increased by 40.6% year over year to RMB122.9 million, exceeding our previous guidance range. This solid financial performance will allow our continuous improvements to our car auto show business. In addition, our new growth initiative and special promotional events and the motor dealership also yielded promising financial and operating results in the first quarter of 2019.

First, private car auto show business, we proactively adjusted our geographic extensions in light of the seasonally weak start to the quarter and unprecedented industry downturn. During the first quarter, we successfully organized 178 auto shows across 137 cities compared to 96 auto shows in 71 cities in the prior year period. In China, the auto markets in the third-tier cities and below are still underdeveloped with strong growth potential. Importantly, residents of these cities enjoying rising possible income with low living cost compared to higher-tier cities and are highly aspirational when making confronting divisions.

As such, these residents see buying a car as both within their means and a worthwhile goal. The demand for a quality car dealership and the related services in this area has grown exponentially while those capable of filling the gap are being slow to move, leaving them unserved and underpenetrated. It is important to note that car ownership rates in the first and second tier city markets are well ahead of those in lower-tier city markets. This means that there is room for expansion, and we have increased the frequency of our auto shows and the geographic coverage in these areas during the first quarter. Based on our progress to date and the future growth outlook, we are confident that our efforts will result in both sustainable growth and profitable business.

Also, auto markets in lower-tier cities are different from first and second-tier markets and we have adjusted our operations to account for this. Lower resident income levels in lower-tier cities are growing. They still prefer less expensive product than those in first and second-tier cities. Based on this direct statistic, we have consciously adapted our auto show. Moreover, due to the decrease in costs needed to run auto shows in lower-tier cities, we have been able to expand our geographic coverage with minimal costs.

Moving forward, we plan to focus our expansion efforts in cities with higher potential ROIs to ensure both sustainable growth and gross margin improvement. In addition to our flagship auto shows, we also accelerated the development of special promotion events in the first quarter to cater to the needs of auto dealers. Under current market conditions, dealers are experiencing increasing pressure on their inventory with dealer inventory high at 55% in March, which exceeded the warning line for 15 consecutive months.

To help them better monetize their customer bases, we customized our special promotion events for each auto dealer. This customization has ensured optimal customer experience and sales conversion rate. We also helped our industrial customers improve their sales efforts by leveraging our in-depth, automotive demand expertise and capabilities in transaction facilitation. As a result, the service fees that we generated through our special promotion events in the first quarter exceeded our previous expectations.

Now, moving on to our growth initiative in virtual dealerships and online market services. As auto sales continue to decline throughout the industry, Chinese OEMs are under significant pressure to reduce their marketing budget while still increasing sales. As a result, we have started to focus more on opportunities in lower-tier cities to increase their sales. However, most major auto makers make the necessary resources and understanding of market dynamics and lower-tier cities. In light of this real marketplace need, we have developed our virtual dealership network through the past two quarters. This network is very suited for lower-tier markets in China and they help our industry customers expand into these markets efficiently.

During the first quarter, our virtual dealership services continued to gain traction among Chinese OEM, and we are currently in negotiations with several major OEMs regarding future collaborations.

Lastly, let me share an update on our recently announced partnership with Easyhome. Currently, it operates are related to home improvement supply and furniture sales in Chime. Together, we will jointly establish an innovative, well-covered retail experience that combines home decoration products and automotive services to throw a border wrench of Chinese consumers. As a part of the partnership with Easyhome, we are also shopping more retail spaces free of charge as new venues for us to organize auto show events. We are planning to bring our auto show events to Easyhome's retail locations in over 200 Chinese cities as we aim to unlock the monetization potential of Easyhome's customer base. This mutually beneficial partnership with Easyhome will further expand our business scale and spread recognition.

Furthermore, we are confident that we can replicate this formula to establish more close collaborations going forward. In summary, our strategies to prioritize expansion in our expansions and to target additional growth engines during the first quarter have yielded us encouraging results in the first quarter. We are confident that our expanded service offerings and network will sustain our growth momentum and help us weather adverse market conditions.

Cynthia Tan -- Investor Relations Director

Thank you, Wei. Now, let's turn the call to our CFO, Mr. Zhihai Mao for first quarter financial results.

Zhihai Mao -- Chief Financial Officer

Thank you, Wei. Hello, everyone. Before I start, I need to note that we have changed our revenue classification in the first quarter. Previously we reported net revenues as a classification of auto shows, virtual dealership, and others. As we mentioned earlier, we have started organizing special promotion events for industry customers to better serve their offline marketing needs. In addition, we have also updated the platform into comprehensive online marketing services to better utilize our big data capabilities.

In order to provide more transparency going forward, we have decided to report net revenues under new classifications. The first one will be offline marketing services auto shows. The second one will be offline marketing services special promotion events. The third one, virtual dealership online marketing services, and others beginning January 1, 2019.

Now, before I move on to our first quarter financial results, please also note that all numbers stated here are in RMB terms and all percentage comparisons are on a year over year basis unless otherwise noted.

Despite recent stagnation of the automotive industry in China, our total revenues in the first quarter increased by 40.6% to RMB122.9 million from RMB87.4 million in the same period last year. This growth was mainly driven by the strong performance of our core, offline marketing services and other growth initiatives including our virtual dealership and online marketing services.

Offline marketing services revenues generated from auto shows in the first quarter increased by 35.9$to RMB 118.8 million from RMB87.4 million in the same period last year. The growth was mainly achieved by an increase in the number of auto shows that we organized, cities that we offered in, and the services that we provided to our industry customers. Offline marketing services revenues generated from special promotion events reached 0.8 million in the first quarter. So far, we are confident in the growth prospect of our special promotion events business and we expect it will continue as a strong growth trajectory in the coming quarters.

Auto new car sales in China continue to decline. The total gross merchandise volume of new automobile sales transactions facilitated by us in the first quarter increased by 16.7% to RMB8.4 billion but RMB7.2 billion in the same period last year. Meanwhile, the number of automobile sales transactions facilitated during the first quarter increased by 31.1% to approximately RMB65,000 from approximately RMB49,000 in the same period last year.

In addition to our offline marketing business services, we also continue to ramp up our renewed growth initiatives during the first quarter. Revenues from virtual dealership online marketing services and others increased to RMB3.3 million.

Our gross profit in the first quarter increased by 40.8 % to RMB 80.9 million from RMB 63.1 million. Our gross margin further extended to 72.4 percent from 72.2% in the same period last year. This margin improvement was driven by the increasing revenue contribution from our virtual dealership, online marketing services, and other services, which produced relatively higher gross margins.

In the first quarter, planning and marketing expenses increased to RMB86.1 million from RMB58.1 million in the same shirt last year, primarily due to an increase in staff compensation expenses as well as our other promotional activities incurred during the first quarter.

Planning and marketing expenses for the first quarter included staff compensation expenses of RMB31.5 million compared to RMB12.3 million in the same period last year. General and administrative expenses increased to RMB22.9 million from RMB8.7 million in the same period last year which was due to an increase as a result of our business expansion during the first quarter.

In addition, we also incurred higher professional fees and ongoing expenses as a public company during the first quarter. General administrative expenses included share-based compensation expenses of RMB7.2 million in the first quarter compared to RMB0.2 million in the same period last yeast. Research and development expenses increased to RMB7.5 million from RMB4.0 million in the same period last year, mainly driven by an increase in had comps as a result of our business expansion.

Consequently, our loss from continuing operations was RMB27.6 million in the first quarter compared to RMB7.7 million in the same period last year. Excluding the effect of share-based compensation expenses, impairment of investment, and the fair value loss of worth, adjusted net loss attributable to the company's shareholders was RMB15.5 million in the first quarter compared to RMB12.8 million in the same period last year.

Adjusted, basic, and diluted loss per ordinary share reduced to RMB0.05 in the first quarter from RMB0.14 in the same period last year. Adjusted EBITDA was a loss of RMB17.7 million in the first quarter compared to RMB11.1 million in the same period last year.

Now turning to our balance sheet. At the end of March 2019, we had an RMB505.6 million in cash and cash equivalence. For the second quarter of 2019, we expect net revenues to be between approximately RMB240 million and RMB250 million representing approximate year over year gross between 31.9% and 37.4%. These forecasts reflect our current and preliminary views on the market and operational conditions, which are subject to change.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Questions and Answers:

Operator

We will now begin the question and answer session. If you wish to ask a question, please press * 1 on the telephone and wait for your name to be announced. If you wish to cancel your request, please press the #. Once again, it is * 1 for questions.

Our first question comes from

Unidentified Analyst

Yes, hello. Could you talk a little about your long-term vision and how you see some of the virtual strategy and smaller-tier cities and enabling yourself to continue to grow despite the overall Chinese auto market declining? Thank you.

Cynthia Tan -- Investor Relations Director

Thank you. Let me translate to Mr. Wei.

Wei Wen -- Chief Executive Officer

Our long-term vision is to become a Chinese leader in companies in auto transactions and services. Yeah. We are expecting to gain about new potential car consumers in million size. And we aim to facilitate millions of car transactions in the market. We aim to cover Chinese lower-tier city markets in most regions through our virtual dealership system. And expand our service into the aftermarket services and build service throughout the lifecycle of a consumer's car purchase. This is our vision.

To answer your second question as to how to expand our market share under current market headwinds, our strategy is to penetrate into lower-tier cities where the consumers are underserved and underpenetrated under the current dealership system. Actually, we are cooperating with many OEMs to expand our virtual dealership network in lower-tier cities. Under current market headwinds, OEMs are actually shifting attitudes toward new channels because they have suffered from a decline in sales in the overall market and they lack coverage in lower-tier cities through their current dealership system. So, actually, this is an opportunity for TuanChe to build more coverage in OEMs and to build a bigger market presence in lower-tier cities.

Does that answer your question? [Translated]

Unidentified Analyst

Yes. Thank you. Another question is, can you discuss how you differentiate yourselves compared to your main competitors?

Wei Wen -- Chief Executive Officer

We understand that by competitors you mean auto, home, and auto, right? [Translated]

Unidentified Analyst

Correct.

Wei Wen -- Chief Executive Officer

Yes. Actually, we are quite different from them. They are mostly a light existence and we have a much better presence in transactions combining both online and offline resources. And we are much closer to transactions than them because they don't actually have transaction numbers. They don't actually get reach of the consumers. We have much more cost-effective models for OEMs and dealers for auto homes and big autos, their take rates are already sky high for dealers to bear it. You can refer to the news last year. So, we are a much more cost-effective way to provide similar services to our OEM centers. Does that answer your question? [Translated]

Unidentified Analyst

Yes. My view is at this point early in your life cycle and the big opportunity out there, it makes sense to take a strategy of trying to gain as much market share as possible. So, I like that. My question is, what is, assuming you accomplish this, the advantages that will then create you in a couple of years?

Cynthia Tan -- Investor Relations Director

I'm not sure the last part. Can you repeat that?

Unidentified Analyst

What competitive advantages in terms of profitability can you gain longer-term from a shorter to the intermediary strategy of pursuing market share growth?

Cynthia Tan -- Investor Relations Director

Let Zhihai answer your question.

Zhihai Mao -- Chief Financial Officer

Let me answer your question. As you can see from our product and service offerings, we have been able to maintain really healthy gross margins. We believe as we execute our strategy to expand our market share in lower-tier cities, we're still able to maintain our same revenue and previous service models, which we believe will continue to maintain very healthy margins. So, going forward as we expand our business while taking more and more market shares, we will improve our already efficiencies and our probabilities over time.

Unidentified Analyst

Okay. My last question was you talked about your new partnership with, I think it was, Easyhome.

Cynthia Tan -- Investor Relations Director

Yes.

Unidentified Analyst

Could you just explain again the number? I missed the number of stores of theirs that you think that you can have events at. How do you think about what this can mean as an opportunity for you financially? Thank you.

Wei Wen -- Chief Executive Officer

Easyhome has currently 300 stores in over 200 cities. And in 2022, they will expand to open over 600 stores and aim to get a GMV of over RMB100 billion. TuanChe is expected to bring its auto show events and virtual dealerships to all of these 300 home furnishing malls in almost 250 in China without venue costs. And this mutually beneficial partnership will also allow Easyhome to enhance its brand influence and expand its customer traffic flow while TuanChe's established reputation and expertise in organizing auto shows. [Translated]

Cynthia Tan -- Investor Relations Director

Does that answer your question, or do you need more color on the synergies between TuanChe and Easyhome?

Unidentified Analyst

No. That was great. Actually, could I ask one last question? Do you have thoughts of the opportunity of the number of cities, or the number of auto shows that you could potentially do in a year?

Wei Wen -- Chief Executive Officer

We have done market research that over 338 cities in China and over 3,000 regions in China can actually have the market to bear our auto shows. [Translated]

Unidentified Analyst

Thank you so much.

Cynthia Tan -- Investor Relations Director

Thanks for your questions. We can take the next question.

Operator

Once again, if you wish to ask a question, please press * followed by 1 on your telephone keypad and wait for your name to be announced. Once again, if you wish to ask a question, please press * 1.

Our next question comes from the line Laura Liu from Stone Street. Please ask your question.

Laura Liu -- Stone Street -- Analyst

This is Laura. I know you kind of explained how many stores Easyhome would open in China and the cooperation between the two companies. I'm more interested in more synergies between the two companies. Can you please just tell us more on that?

Wei Wen -- Chief Executive Officer

Auto and home furnishing industries are two major household consumption areas in China with trillion market. The consumers in both industries share a lot in common. There are two typical groups of consumers. The first group is newlyweds who need to purchase and decorate a new home together with the purchase of a new car. It is also well known as demand from mother-in-law in China. The other group is consumers with newborns or increasing disposable income who seek housing and car improvement to better their need for a higher-quality life.

Auto and home furnishing business share highly identical consumer base. Most home furnishing malls and auto dealers are located in different suburban areas. So, it is very time costly and inefficient for household consumers to purchase both car and home furnishing goods. On the other hand, both car purchase and home furnishing are both low-frequency purchase with high consumption price. It is very hard to reach targeted consumers. That's both auto dealers and home furnishing have very expensive consumer acquisition costs. As such, the actual market demand has driven the strategic partnership of TuanChe and Easyhome to join and establish and in the wake of one retail experience that combines home furnishing products and auto service to serve a broader range of consumers in China.

Does that and your question, Laura? [Translated]

Laura Liu -- Stone Street -- Analyst

Yes. That was great. My second question would be, can you tell us more about the new business initiative of the actual promotion event?

Wei Wen -- Chief Executive Officer

The special promotion event is our new business initiative to cater to the needs of our auto dealer customers under current market headwind. As we mentioned in our previous remark, car sales in the first quarter continue to decline by putting the dealer in the high at 55% for 15 consecutive months. Auto dealers are facing high inventory as those pressures, which may not be fully satisfied by our auto shows due to a limited frequency.

On the other hand, auto dealers cannot fully monetize their own consumer database because their sales team is lacking experience with consumers and transactions. This results in low consumer traffic and unsatisfying transaction conversion rate. Thus, we launch our special promotion event product to fully utilize our expertise in consumer intelligence and transaction facilitation for our dealer customers. We will deploy our experienced sales consultant to train the dealer sales team and guide them to organize a customized special promotion event based on their own consumer database. These events have delivered very promising consumer traffic, optimal customer experience, and effective sales conversion rate.

The revenue size from each special promotion event is relatively small. Similar to our booth revenue in an auto show. But we are expecting fast growth in the numbers of these events considering huge market demands in this service. And the profit margin of the business line is sufficiently higher than our auto show business as we do not bear any consumer acquisition costs, revenue costs, and event organization costs.

In conclusion, we expect huge growth potential for our special promotion events as it ties in our relationship with auto dealers and the market headwind and effectively supplements our auto show business. [Translated]

Cynthia Tan -- Investor Relations Director

Does that answer your question, Laura?

Laura Liu -- Stone Street -- Analyst

Yes, that was great. That's it. Thank you very much.

Cynthia Tan -- Investor Relations Director

Thank you, Laura.

Operator

Thank you. Once again, if you wish to ask a question, please press * followed by 1 on your telephone keypad and wait for your name to be announced. Once again, if you wish to ask a question, please press * 1.

We have no further questions at this time. I will now hand the call back to today's presenter. Please, continue.

Cynthia Tan -- Investor Relations Director

Thank you all for joining us today on today's call. We look forward to speaking to next quarter. Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

Duration: 40 minutes

Call participants:

Cynthia Tan -- Investor Relations Director

Wei Wen -- Chief Executive Officer

Zhihai Mao -- Chief Financial Officer

Unidentified Analyst

Laura Liu -- Stone Street -- Analyst

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Contents:

Prepared Remarks:

Questions and Answers:

Call participants: