Dada Nexus Ltd

NASDAQ:DADA

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by for Dada's Second Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded.

I will now turn the meeting over to your host for today's call, Ms. Caroline Dong, Head of Investor Relations for Dada. Please proceed, Caroline.

[Caroline Dong, Head, IR]

Thank you, operator. Hello, everyone, and thank you for joining our second quarter 2023 earnings conference call. On the call today from Dada, we have Mr. Jeff He, President; and Mr. Beck Chen, CFO.

Mr. He will talk about our operations and the company highlights, then Mr. Chen will discuss the financials and guidance. Please kindly note that during the Q&A session, Jeff will answer questions in Chinese and the consecutive translation will be provided. In case of any discrepancy between the original remarks and the translated version, statements in the original remarks should prevail.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements. Please refer to our latest safe harbor statement in the earnings press release on our IR website, which applies to this call.

Also during this call, we will discuss certain non-GAAP financial measures. Please also refer to our earnings press release, which contains a reconciliation of non-GAAP measures to the comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB.

It is now my pleasure to introduce our President, Mr. He. Jeff, please go ahead.

[Jeff Huijian He, President and Director]

Thank you, Caroline, and thank you all for joining us today.

During the second quarter of 2023, Dada Group continued to produce strong revenue growth while significantly enhancing our operational efficiency. Our total net revenues increased by 23% year-over-year. We also achieved an important milestone in this quarter by recording our first-ever positive adjusted net income, thanks to a more than 17 percentage points improvement in our adjusted net margin.

I will begin today's presentation by discussing our cooperation with JD.com, followed by operational highlights from our two platforms. I will then hand over to Beck who will take you through our detailed financial results. Let's start with some updates on Dada's cooperation with JD.com.

We strengthened our brand awareness among JD.com users. We recently unified the display name of our on-demand retail services across all touch points on JD app, Xiaoshida in Chinese or Shop Now. In particular, the Nearby or Fujin tab was rebranded Xiaoshida. And Xiaoshida tag has been added to search results for products offered by our merchant partners. This unified brand identity emphasized our ability to deliver products within one hour. And we believe we have significantly enhanced O2O mindshare among JD users.

At the same time, we also want to enhance JDDJ offerings by attractive prices in line with JD's low price strategy. During the quarter, we utilized the price-based star rating tool and worked with merchants to further improve the price competitiveness of Xiaoshida products. So far, we have achieved a 10 percentage point increase in the proportion of high-star products versus March.

For the Xiaoshida tab, which was previously known as Nearby or Fujin tab. GMV more than quadrupled year-on-year. This impressive growth was driven by exposure and the click-through optimization, which helped the Xiaoshida tab double its DAU as well as improvement in conversion rate and average basket value.

Let's move to the operational highlights for our two platforms. Starting with JDDJ, China's leading on-demand retail platform. In the second quarter, JDDJ made further progress in retailer and brand cooperations and technology empowerment.

We continue to broaden and deepen collaborations with retailers to enrich our product offerings during this quarter. JDDJ cooperated with more than 300,000 annual active retail stores at the end of June 2023.

In the supermarket category, based on the list of top 100 supermarket chains in China released by CCFA in June, we now have established partnerships with 92 out of the top 100 supermarket chains. In June, together with supermarket merchants, JDDJ launched a delivery fee waiver campaign in 10 key cities to improve user experience.

In the campaign, these cities saw a 34 percentage points higher user growth rate and a 2 percentage point higher 15-day repeat purchase rate than other cities. Given the encouraging result, we have now rolled out delivery fee waiver benefit to major supermarket chains across the country.

We have always focused on helping merchants achieve better efficiencies through platform tools such as our long-lasting merchant-specific membership features that allow chains to attract and manage their own members online.

The function notably increased the sales efficiency with order conversion rate of members more than 20 percentage points higher than that of nonmembers. Among merchants that have adopted their membership tool, members already contributed 60% of their total GMV in June.

In addition to large supermarket chains, we have also made inroads with major convenience store chains. We further strengthened our collaboration with JD Convenience Store while forming new partnerships with uSmile and other leading chains. Total GMV generated by convenience stores grew by nearly 3x year-on-year in the second quarter.

We've also made a good progress in consumer electronics category during the quarter. In the smartphone subcategory, driven by faster deliver on top of competitive pricing in the second quarter, the GMV of Apple products on our platform grew steadily, while Android brands such as Xiaomi continued to see GMV growth several times on a year-on-year basis. In the computer and the accessories subcategory, GMV increased by more than 70% year-on-year, and brands such as Xiaotiancai [indiscernible] all achieved significant growth.

Moving next to the home appliance and furnishing category, which is ramping up quickly. The home appliance subcategory maintained the rapid growth nearly doubled GMV year-on-year. We continue to enrich our offerings of air conditioners and other major home appliances and established partnerships with kitchen appliance brands such as [indiscernible].

The home furnishing subcategory also grew rapidly with GMV increasing more than fourfold year-on-year. In particular, we are seeing significant growth in the sales of electronic lock products, thanks to the wide range of merchants on our platform and our ability to offer high quality delivery and installation services within four hours.

In addition, we set up a new partnerships with sanitary fixture brands such as Kohler and the home textile brands such as Fuana. We also continued to expand our offerings in liquor category, onboarding more than 5,000 new stores during this quarter. As a result, GMV increased more than 4x year-on-year.

Next, let's move on to JDDJ's efforts to expand and deepen cooperation with brands. In the second quarter, we embarked on new partnerships with rice and cooking oil brands such as Shiyue Daotian and mom-and-baby brands such as [indiscernible]. We currently have O2O marketing partnerships with about 300 leading domestic and international brands.

In terms of branding campaigns, we continue to deepen collaboration with brands to promote omnichannel O2O marketing, helping brands reach users through multiple channels, both on and off JDDJ. For example, in early May, we cooperated with Gillette to launch the Brand on Campus campaign to promote its new products, which drove more than some 70% month-on-month increase in Gillette's sales on JDDJ.

In addition, through the collaboration withJD.com, we have further optimized the process by which we cooperate with brands on exchanging advertising resource. At present, we have conducted resource exchange with more than 20 brands, including [indiscernible] achieving win-win for both sides.

Next, I'd like to talk about our efforts to empower both retailers and the brands through technology innovation. As of the end of June, Haibo, our omnichannel O2O operating system for retailers, has been deployed about -- in about 11,000 stores, across more than 300 retailer chains.

In the second quarter, we launched the consumer review assistant function in the Haibo system, which enables merchants to automatically reply to consumer reviews across multiple channels and provides anonymous review tracking, store rating monitoring and other functions. These capabilities empower merchants to provide efficient customer services and improve user experience.

Merchants using this feature can generate automated replies to all positive and negative reviews, which gained 60% higher efficiency at handling less favorable ones. Haibo also began to explore collaboration with brands. We recently launched a series of brand promotion tool on the Haibo system to help brands conduct marketing and promotions on merchants' own sales channels, thereby helping brand improve exposure and conversion.

I will now turn to Dada Now, China's leading local on-demand delivery platform. In the second quarter, Dada Now continued to provide a massive amount of flexible working opportunities with quarterly active riders increased by over 30% year-on-year. In terms of business progress, let's start with our KA or chain merchants business.

In the second quarter, our revenue from on-demand delivery services to KA merchants increased by more than 20% year-on-year. Thanks to increased order density and sufficient rider supplies, our average gross profit per order improved significantly to CNY 0.50. Meanwhile, our fulfillment rate increased to 98%. Thanks to our optimized rider fleet structure and refined operations.

In the supermarket KA category, revenue increased nearly 20% year-on-year. We recently established a new partnership with Freshippo or Hema and other supermarket chains. In the beverage KA category, we continued to increase penetration in our partner merchants' store. For the 12th ] consecutive quarter, we maintained year-on-year revenue growth of more than 100%. We also recently formed new partnerships with beverage chains.

Regarding our cooperation with Douyin Local Life Service. We continue to proactively support the nationwide rollout of Douyin's food delivery business by providing cost efficiency and reliable on-demand delivery services across the nation.

Moving to our SME and C2C business. The number of SME and the C2C orders fulfilled in the second quarter increased by 50% year-on-year. This growth was driven by our continued penetration into low tier cities and our expansion into additional traffic acquisition channels and businesses scenarios. Lastly, an update on our last-mile services. In the second quarter, we maintained a steady growth in the number of fulfilled orders despite the higher base in the year ago period.

That covers our operation update for the two platforms. To wrap up, we continued to post strong financial results highlighted by our first ever positive adjusted net income. At the same time, we stay committed to driving the digitalization of retailers and brands, bringing great on-demand shopping experience to consumers and providing flexible employment opportunities to riders. We will seek to build on this momentum in the quarters ahead as we work to create sustainable value for our shareholders.

I will now pass the call to Beck to go through our financials. Thank you.

[Beck Chen, CFO]

Thanks, Jeff.

Before we go over the numbers, just a few housekeeping items in advance. We believe year-over-year comparisons are the most useful way to judge our performance. Therefore, all percentage changes I'm going to give will be on a year-over-year basis, and all figures are in renminbi unless otherwise noted.

Our total net revenue in the second quarter increased by 23% to CNY 2.8 billion. Net revenues from Dada Now increased by 20% to CNY 980 million, mainly driven by the increases in order volume of intracity delivery service to chain merchants. Net revenues from JDDJ increased by 25% to CNY 1.8 billion, mainly due to the increase in GMV. The increase in online marketing service revenue as a result of the increase in promotional activities also contributed to the revenue growth of JDDJ.

Moving over to the expenses side. Operations and support costs were CNY 1.7 billion. The increase was primarily due to an increase in rider costs as a result of increasing order volume for intracity delivery services provided to various chain merchants.

Selling and marketing expenses decreased to CNY 1.1 billion, primarily due to a decrease in advertising and marketing expenses and a decrease in incentives to JDDJ consumers. G&A expenses decreased to CNY 56 million as a result of our expense control measures and the decreased share-based compensation expenses.

R&D expenses decreased to CNY 102 million, mainly due to the lower R&D personnel costs as we enhanced operating efficiency. Our non-GAAP net income attributable to ordinary shareholders of Dada was CNY 8 million, marking the first quarter in our operating history to turn profitable. Non-GAAP net margin was 0.3%, improving by more than 17 percentage points year-over-year. As of June 30, 2023, we had CNY 3.9 billion in cash, cash equivalents, restricted cash and short-term investments.

In terms of the outlook, for the third quarter of 2023, we expect total revenue to be between CNY 2.8 billion and CNY 3.0 billion, representing a year-over-year growth rate of 18% to 26%.

And this concludes our prepared remarks. And operator, we are now ready to begin the Q&A session. Thank you.

[Operator]

[Operator Instructions] Your first question comes from Ronald Keung from Goldman Sachs. Please go ahead.

[Ronald Keung, Goldman Sachs]

[Foreign Language] Thank you, management. And congratulations on the EBIT turnaround quarter. I want to ask about two questions. One is on macro outlook and cooperation with JD. Just both of those, how do we see our third quarter growth outlook accompanied with your revenue guidance? What was the underlying GMV expectations and into just broadly second half in this current macro environment? And then secondly, we wonder if the unit economics turn around, how much of those were contributed from lower rider cost. And so can you share how rider costs have been and our views on that and the outlook as well. Thank you.

[Beck Chen, CFO]

Yes, thanks for the question, Ronald. So before Jeff, I may just review some financial numbers and Jeff can answer the macro question. So about the second question, yes, we are seeing the year-over-year rider cost decline because the number one factor is we have optimized our algorithm; number two is we have a very robust growth like for the number of orders delivered for Dada Now platform; number three is just like Jeff mentioned in the earlier prepared remarks, our -- in Q2, our quarterly active riders is growing by 30% year-over-year. So the rider supply is sufficient, and we believe which will help us to further optimize the rider cost.

And about the GMV, we believe that for the reporting GMV metrics for the second half of this year, we are expecting like more than -- still expecting more than 20% year-over-year growth in the second half. Yes, I'll leave it to Jeff for the macro question.

[Jeff Huijian He, President and Director]

[Foreign Language] Thank you, Ronald. In terms of macro, the economy and consumption was a modest recovery in the first half of this year, and we expect uncertainties and consumption recovery in the second half.

In addition, we're pleased to see the new policies and measures that are supportive of private sector growth and investment. Hopefully, the gradual restoration of private corporate confidence and the high-quality development of the private economy will lead to more job creation and sustained consumer income growth, which will contribute to the further unleash of consumption power. We will remain patient in further enriching our offerings and optimizing our user experience, which we firmly believe will bear fruits in the long run.

In terms of O2O demand, there is some imbalance in the pace of recovery between different types of consumption. The strong rebound in service consumption in the first half has affected the demand for physical growth to some extent, and O2O is no exception.

Heading into the summer, we've seen extraordinarily strong travel demand. And in an environment where the overall consumer confidence has yet to fully recover, that may take some more share from physical goods consumption. That said, consumer migration towards more convenient and efficient shopping is a secular trend. We are convinced that as consumer demand continues to evolve and more local supplies become available online, the O2O penetration rate will further trend up to double digits.

From our perspective, in Q2, JDDJ recorded over 20% GMV growth year-over-year despite a relatively high base in the year-ago period and continuous optimization in our subsidy ratio. And in terms of our collaboration with JD.com, since we depend our partnership structure, that has become our primary user acquisition channel. Currently, the penetration among JD users has steadily rose to mid- to high single digits.

We will increase our acquisition and retention efficiency through enriching the supply of attractively priced products waiving -- and waiving delivery fees. In July and so far in August, we've seen a better user retention.

[Operator]

Thank you. Your next question comes from Thomas Chong from Jefferies. Please go ahead.

[Thomas Chong, Jefferies]

[Foreign Language] Thanks management for taking my questions. And congratulations on reaching profitability in the second quarter. I have two questions. My first question is about the take rate trend as well as the direct margin outlook in second half. What are the growth drivers? And how should we think about the momentum for online advertising in the second quarter -- in the second half of the year? And my next question is about JDDJ product mix. Can management share about the product mix in Q2 as well as the trend in the coming quarters as well as the EO fee for the year? Thank you.

[Beck Chen, CFO]

Thank you, Thomas. Let me answer the financial question. So in terms of the take rate and direct margin of JDDJ in Q2, the take rate is 9.9%, and the direct margin is 1.8% as a percentage of GMV. And for the outlook for the second half of this year, we expect that the overall monetization rate will still maintain stable and grow healthily. And we are still targeting to grow our direct margin level above like 2% to 3% for the second half of this year.

And the main growth driver for the take rate will be still driven by the online marketing services provided to brand partners, while maybe some of it will be more prudent on that. But still, we will keep to grow this part as the main driver for our optimization of the direct margin level.

In terms of the product mix, so for this -- for the second quarter and our overall supermarket contribution is 45% of the GMV. And just like I just mentioned in the earlier prepared remarks, our different other silicon merchandise categories like smartphone categories, computer and accessories categories, home and home furnishing categories, home appliance categories, liquor categories, so all those categories is growing by several times on a year-over-year basis. So we expect for the second half of this year, all these new categories could contribute more to overall GMV mix.

So in terms of the average order value metric, so for the second half, let me -- the overall AOV of the platform is RMB 260. So we are still targeting to maintain the overall marketplace AOV and maybe still will grow the AOV for the second half. But in terms of the supermarket categories, it's like RMB 190. So maybe there will be some, for example, like preferential fee waiver to some of the customers. So for the second half, we expect the AOV of supermarket will be at least stable on a Q-on-Q level.

[Operator]

Thank you. Your next question comes from Alicia Yap from Citigroup. Please go ahead.

[Alicia Yap, Citigroup]

[Foreign Language] So my question is to follow up on the category demand shift. Obviously, the non-FMCG has been growing very well. Can management give a little bit more color in terms of the behavior shift, especially I think management mentioned about the big appliance seems to be one of the important driver. If you can share about the percentage of GMV coming out from the big appliance, home appliance specifically? And the second question is on the online advertising. Given the macro continue to remain weak, what are the brand willingness in terms of their ad budget spend on our platform? Thank you.

[Jeff Huijian He, President and Director]

[Foreign Language] Thank you for your question. In terms of the category mix of consumer electronics and home appliances, we believe the contribution will further go up in the second half. The growth driver for the consumer electronics category will be brands who will introduce several new models in the second half, including from Xiaomi, Huawei and Apple.

And in terms of major home appliances, the GMV for this category will remain on the fast growth trajectory, driven by further enriched product supply and the service of integrated delivery and installation. However, the mix of major home appliances and our total GMV is only in the single digits.

[Beck Chen, CFO]

Nothing to add from my side.

[Jeff Huijian He, President and Director]

[Foreign Language] And to answer the second question about the online marketing services revenue. In the second quarter, our commission and online marketing services revenue combined grew by over 30% year-over-year, mainly driven by the growth in online marketing.

You asked about brands potentially cutting their ad budgets and the macro environment. However, we are seeing that our revenue from brands are increasing since O2O has become the fastest-growing sales channel in China for more and more brands. So they are allocating more ad dollars on our platform.

And another driver for our online marketing service revenue is the increase in our advertiser base. We are now collaborating with about 300 brands in O2O online marketing. And in addition, the revenue growth driver for our online marketing services is ability to innovate our products and technology and marketing on top of sales growth. In Q3, we will launch key ad products, which will further drive our ad revenue growth. And in the testing period, we are seeing very encouraging results from the new products.

[Operator]

Thank you. Your next question comes from Lei Zhang from Bank of America Securities. Please go ahead.

[Lei Zhang, Bank of America Securities]

[Foreign Language] Thanks management for taking my questions. And congrats on the profit breakeven. And follow this, can you share with us the second half of full year margin trend? Secondly, I want to have some updates on our cooperation with JD Group. Any new initiatives you can share? And if I may follow up on the GMV contribution from JD across different channels. Thank you.

[Beck Chen, CFO]

Okay. Thank you for the question, Lei. So for the first question, so the second half of this year, we will still balance the growth rate of our -- and top line, especially the growth rate of JDDJ despite of the current macro outlook in China. So we will balance the growth rate and the improvement of the profitability of the bottom line. So -- and this is just the first quarter for us to break even.

So of course, we don't expect to grow the bottom line profitability and margin very quickly in a very short term, especially under the current macroeconomic outlook. So we still will grow stably and grow the bottom line in a healthy way, and we will also balance the top line growth because if you don't have any top line growth, your profitability in the long term will be also negatively impacted. And for the second question, so I will leave to Jeff for the cooperation with JD.

[Jeff Huijian He, President and Director]

[Foreign Language] And so we just touched a little bit upon our collaboration with JD.com just now that I'll summarize a few key initiatives now. First, we unified our brand identity under Xiaoshida, and we've seen an improvement in user conversion.

For instance, the conversion rate in Xiaoshida tab is now 20% higher after we changed the name to Xiaoshida from City names. Secondly, we improved the price competitiveness of our Xiaoshida products by leveraging our price-based star-rating system.

As of the end of Q2, the number of high-star products or the products with high competitiveness and pricing, grew eightfold sequentially. And the average exposure per item increased by more than 10%. And in terms of Dada Now, we've strengthened our partnership with different business groups across the JD Group to provide on-demand delivery services in multiple shopping scenarios in the JD ecosystem.

We recently began working with the front-end warehouse business unit and we're providing the on-demand delivery service for all of its orders. And we've seen an increase in JD's contribution in Dada Now's order volume. A stable source of orders is very beneficial to our business stability and profit as well as long-term development.

[Lei Zhang, Bank of America Securities]

Thank you for taking the question.

[Beck Chen, CFO]

The GMV contribution from JD in Q2 is 67%, and we are expecting the penetration from JD will be further enhanced in the second half.

[Operator]

Thank you. Your next question comes from Andre Chang from JPMorgan. Please go ahead.

[Andre Chang, JPMorgan]

[Foreign Language] Let me translate my question here. So with all the questions on cooperation JD Group, now I'd like to ask a question about the other customers, namely Douyin. Douyin's food delivery business seems to, so far, make limited progress. However, the Douyin Group's -- Baidu's group are trying to adjust their strategy recently according to the news. I wonder if the management can provide us with some updates about the cooperation as well as the outlook here. Thank you.

[Jeff Huijian He, President and Director]

[Foreign Language] Thank you for your question. Douyin recently launched its food delivery service in more cities, and we have actively supported its geographic expansion. However, the business is still in the early days with limited number of merchants on board. Therefore, the incremental orders is not significant yet to pay a business. To our knowledge, Douyin's contribution to our peers is similarly substantial now.

Unlike certain peers, we're pursuing profitable order volume growth on Douyin platform. Thanks to our edge in cost efficiency, service quality and network coverage, we are highly confident in gaining a meaningful market share on Douyin in the longer term.

Our Dada Now business not only fulfills store food delivery orders, but also the 1-hour delivery orders offering for its e-commerce segment. And similarly, the contribution from Douyin's e-commerce segment is not significant to our business.

[Operator]

Thank you. Your next question comes from Wei Xiong from UBS. Please go ahead.

[Wei Xiong, UBS]

[Foreign Language] Thank you management for taking my question. Just two follow-ups. First is on the longer-term margin trend. How should we think about the margin expansion pace in the next few years? And if we look at JDDJ and Dada Now separately, how should we think about the margin trend for each of the segments and their contribution to the longer-term margin improvement? And second, just very quickly, how should we think about the revenue outlook for Dada Now in the second half? Thank you.

[Beck Chen, CFO]

Okay. Thanks for the question, Wei. So for the long-term margin outlook, we -- actually, we didn't change the long-term margin outlook. So separately, JDDJ is a local version of e-commerce marketplace. So as a percentage of GMV, we believe that the long-term margin should be 3% of the GMV operating margin.

And also for the -- and in our businesses. So for example, like the supermarket chains delivery businesses in Q2, our unit economics is about RMB 0.50 after tax. So generally, the gross margin is above -- after tax is above 5%. So we still expect to grow the gross margin, at least to 10% in a three-year time frame. And we believe that as compared to other express and logistics companies, we believe it's totally achievable.

And in terms of the Dada Now's second half growth outlook, we are confident that they will keep to grow above -- at least above 20% on a year-over-year basis. Thank you.

[Wei Xiong, UBS]

Thank you, management.

[Operator]

Thank you. There are no further questions at this time. I'll now hand back to Ms. Caroline Dong for closing remarks.

[Caroline Dong, Head, IR]

Thank you, operator. In closing, on behalf of Dada's management team, we'd like to thank you for your participation in today's call. If you require any further information, please feel free to reach out to us directly. Thank you for joining us today. This concludes the call.

[Operator]

Thank you. This does conclude our conference for today. Thank you for participating. You may now disconnect.