Full Truck Alliance Co. Ltd. (NYSE:YMM) Q3 2023 Earnings Call Transcript

Full Truck Alliance Co. Ltd. (NYSE:YMM) Q3 2023 Earnings Call Transcript November 20, 2023

Operator: Ladies and gentlemen, good day and welcome to Full Truck Alliance’s Third 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: 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 US 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 this forward-looking information, 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 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 conference 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: [Foreign Language] [Interpreted] Hello everyone. Thank you for joining us today on our third quarter of 2023 earnings conference call. Entering the second half of 2023, the YMM app has ushered in the 10th anniversary of its launch. This decade has witnessed the digital transformation of China’s road transportation industry, and as a leader in the industry, we have continuously improved our products and services through offline to online migration, digitalization, and intelligentization, gaining trust among our shippers and truckers. We started from scratch and now cover over 300 cities across the country, with more than 100 thousand shipping routes, tens of millions of shipping and receiving locations and over 200 types of cargo from industries and consumer categories.

This has gradually formed a robust national network effect and a highly competitive moat. Centered around our core user value proposition of plentiful, fast, quality and value-for-money, we will strive to empower enterprises with greater logistics competitiveness through the building of a one-stop logistics platform for 30 million small and medium-sized enterprises in China. Let me provide an update on our progress in the third quarter. During the quarter, we have steadily improved in five key areas user scale, product operations, supply of truckers, platform ecosystem and user experience. First, regarding user scale, we have reached 2.13 million monthly active shippers, a 15% year-over-year increase, which drove a 27% year-over-year increase in the number of fulfilled orders.

Notably, the scale of direct shippers continued to increase, with order volume from 688 members and non-member shippers growing by 32% year-over-year and accounting for 45% of total order volume. Turning to product operation, our entrusted shipment model, a niche product for direct shippers, has effectively attracted new users by addressing their needs through refined pricing algorithms and improved fulfillment services. We are also working on the launch of an enterprise edition targeting professional shippers. Moving onto the truckers’ supply, we have further enhanced our tiered trucker rating system, enabling truckers to improve their fulfillment capability and strengthen transportation support, eventually leading to an expanded truckers’ supply and wallet share gain.

Adequate transportation capacity supply and optimized matching strategies have significantly enhanced fulfillment efficiency. For instance, the pre-priced transactions allowed truckers to respond directly to order postings without price negotiation, and the order volume for pre-priced transactions including tap-and-go and entrusted shipments, continued to grow faster than the overall order volume in the third quarter. Looking at our platform ecosystem, with the goal of establishing a one-stop logistics platform, we have witnessed an increased user penetration of our value-added services, such as insurance and credit solutions as well as freight brokerage services, which in turn contributed to a high user stickiness for both shipper and trucker members.

Lastly, in addition to product functionality upgrades, we highly value the user experience. This quarter, we upgraded our customer service center to provide 24/7 service, promptly addressing user queries. Through simplified user access, we have streamlined the process of collecting user feedback, providing efficient end-to-end service, genuinely helping shippers and truckers solve problems, and therefore improving user satisfaction. Moving onto our financial highlights. We delivered another record-setting quarter in both our topline and bottom line, driven by our further expanded business footprint. Our third quarter revenues grew by 25.2% year-over-year to RMB2.26 billion, and non-GAAP adjusted net income reached RMB827 million, up 67.6% year-over-year, both surpassing market expectations.

As we expand our revenue scale going forward, we will continue to optimize our revenue mix and elevate monetization efficiency, creating more value for our shareholders. Looking ahead to the fourth quarter, the government has introduced a series of policies supporting the development of the private economy, where logistics, as a backbone of the real economy, has gained increasing importance and policy support within the process of strengthening, supplementing, and extending the industrial chain. With the ongoing macro tailwinds, we are confident in achieving sustained growth in order volume and revenue scale. We will continue to invest in technological innovation and user experience, dedicated to providing more efficient, intelligent, and convenient logistics solutions to create greater value for our users as we make logistics hassle-free.

We are determined to drive progress across the wider industry in collaboration with our partners, fostering an open ecosystem that benefits all. Thank you, everyone. Let me pass the call over to our CFO, Simon, who will provide an update on our third quarter’s business progress and financial results.

Simon Cai: Thank you, Mr. Zhang, and thanks, everyone, for making time to join our earnings call today. I will start with our operational highlights for the third quarter of 2023 and then provide a brief overview of our financial results before the Q&A session. We delivered another record-setting quarter with many operational and financial improvements. Our fulfilled orders increased by 27% year-over-year during the third quarter. On a monthly basis, the average daily fulfilled orders of July to September showed a sustained upward trend, hitting historical highs almost each month. The main drivers of this growth were the ongoing expansion of user scale and dual-end users’ increased engagement. Our ability to continuously deliver both topline growth and margin expansion in the past three years in a highly volatile macro environment demonstrates an irreversible trend of online digitalization of the road transportation industry in China.

Our average fulfillment rate for the quarter reached 29%, an improvement of more than four percentage points year-over-year. Among them, the average quarterly fulfillment rate of both 688 member and non-member shippers rose to roughly 50%, respectively. With the order contribution from these two types of low and medium- frequency shippers continuing to grow, the overall fulfillment rate of our platform will further increase. Furthermore, we continue to manage and educate users on their order cancellation behavior. For example, as of the third quarter, the trucker’s status can be identified based on data collected from trucker punch-ins and trajectories. When a shipper tries to cancel an order that was dispatched, a reminder window will pop up on the app, reducing the chance of the shipper canceling the order by mistake.

At the same time, we emphasize the importance of online fulfillment for shippers to accumulate credit, providing reminders when they show the tendency to transact offline and gradually cultivate their fulfillment habits. Looking ahead, we will continue to mitigate malicious order cancellations and reinforce the consciousness and behavior of closed-loop transactions for dual-end users through a series of incentives and control policies. By user type, the order contribution from 688 member and non-member shippers has increased alongside the number of direct shippers, reaching 45% during the quarter. More importantly, the contribution of pre-priced orders, such as tap-and-go and entrusted shipment models, mainly used by direct shippers, has also improved, while the proportion of negotiated orders fell further this quarter.

In addition, we have further streamlined the transaction process and improved the user experience. For example, for users of our entrusted shipment model, we have greatly improved their shipping and fulfillment experience by creating real-time order trajectory visuals, which in turn is driving the rapid order growth for that service segment. We believe that the order contribution from direct shippers will further rise as we continue to optimize the accessibility of our apps. Moving on to our users. Our average shipper MAUs reached another record high of 2.13 million, up 15% from the same period last year and 6.7% from the previous quarter. The increase mainly came from the continued growth of 688 member and non-member shippers, the vast majority of which are direct shippers.

During the quarter, we continued to provide more user-friendly products and services based on our core value proposition of plentiful, fast, quality and value for money, comprehensively tackling users’ pain points and meeting various shippers’ diverse freight needs to bolster our shipper penetration rate in the long-haul transportation market. In parallel, we are pleased to see that trucker activities has also remained high since the third quarter, with the number of active truckers fulfilling orders through FTA over the past 12 months climbing to 3.79 million and the trucker user base growing steadily quarter-over-quarter. On top of that, our 12-month rolling retention rate of shipper members and next-month retention of truckers who responded to orders remained stable quarter-over-quarter, demonstrating that we continue to boost user engagement and stickiness.

Lastly, our online transaction service sustained strong growth momentum in the third quarter, with revenues amounting to RMB602.1 million, up 54.3% year-over-year, mainly due to the solid growth in the number of fulfilled orders and the increase in commissions per order. Our commission model covered approximately 58% of fulfilled orders and generated an average commission per order of RMB24.3 during the quarter. Going forward, we will continue to optimize the commission rate and extend our commission model coverage while providing more value-added services to our users. Before going over to this quarter’s financials, I will quickly review the progress of our share repurchase program. From August 23rd to November 17th, we repurchased approximately 3.3 million ADS shares totaling approximately US$23 million.

Since we announced the program, we have repurchased a total of around 22.8 million ADS shares from the open market, with a total value of approximately US$147 million. Looking ahead, we will continue to reward our shareholders through buybacks. Now, I would like to provide a brief overview of our 2023 third quarter financial results. Our total net revenues in the third quarter were RMB2,263.9 million, representing an increase of 25.2% year-over-year. The increase in revenue was 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 RMB1,904.4 million in the third quarter, representing an increase of 25.8% year-over-year, primarily due to an increase in revenues from freight brokerage service as well as continued growth in transaction commissions.

Revenues from freight brokerage service in the third quarter were RMB1,070.2 million, up 18.4% year-over-year, primarily attributable to the continued growth in transaction volume as a result of strong user demand. Revenues from freight listing service in the third quarter were RMB232.1 million, up 5.6% year-over-year, primarily due to an increased number of total paying members. Revenues from transaction commissions amounted to RMB602.1 million in the third quarter, up 54.3% year-over-year, primarily driven by an increased order volume as well as a higher transaction commission per order. Revenues from value-added services in the third quarter were RMB359.5 million, up 22.1% year-over-year, mainly attributable to an increase in revenues from credit solutions and other value-added services.

Our cost of revenues in the third quarter were RMB1,142.1 million, compared with RMB953 million in the same period 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 RMB1,032.5 million, representing an increase of 19.1% year-over-year, primarily due to a continued increase in transaction activities involving our freight brokerage service. Our sales and marketing expenses in the third quarter were RMB290.8 million, compared with RMB232.9 million in the same period of 2022. The increase was primarily due to an increase in advertising and marketing expenses for user acquisitions. General and administrative expenses in the third quarter were RMB290.4 million, compared with RMB206.6 million in the same period last year.

The increase was primarily due to higher share-based compensation expenses and the settlement of the US securities class action, which was disclosed in the Form 6-K filed on September 18th, 2023. R&D expenses in the third quarter were RMB237.7 million, compared with RMB226.6 million in the same period last year. The increase was primarily due to higher share-based compensation expenses. Our income from operations in the quarter was RMB247.1 million, an increase of 74.4% from RMB141.7 million in the same period last year. Net income in the third quarter was RMB618.4 million, an increase of 56.4% from RMB395.5 million in the same period last year. Under non-GAAP measures, our adjusted operating income in the third quarter was RMB458.5 million, an increase of 88.8% from RMB242.8 million in the same period last year.

Our adjusted net income in the third quarter was RMB826.6 million, an increase of 67.6% from RMB493 million in the same period last year. Basic and diluted net income per ADS were RMB0.58 in the third quarter, compared with basic and diluted net income per ADS of RMB0.37 in the same period last year. Non-GAAP adjusted basic and diluted net income per ADS were RMB0.78 in the third quarter, compared with RMB0.46 in the same period last year. As of September 30, 2023, the Company had cash and cash equivalents, restricted cash, short-term investments, long-term time deposits and wealth management products of RMB27.4 billion in total, compared with RMB26.3 billion as of December 31st, 2022. In the third quarter this year, net cash provided by operating activities was RMB717.1 million.

For our business outlook for the coming quarter, in the first quarter of 2023, we expect our total net revenues to be between RMB2.27 billion and RMB2.32 billion, representing a year-over-year growth rate of approximately 18.2% to 20.6%. This forecast reflects 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 would now like to open the call to Q&A. Operator, please go ahead.

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Q&A Session

Operator: We will now begin the question-and-answer session [Operator Instructions] The first question comes from Ronald Keung with Goldman Sachs. Please go ahead.

Ronald Keung: [Foreign Language] Thank you, Hui Zhang and Simon. In the third quarter, we’ve seen that the number of fulfilled orders increased quite healthily, 27% year-on-year. What were the key drivers of the growth in fulfilled order? And what do you expect for the trend in the fourth quarter? Thank you.

Simon Cai: Thank you, Ronald. In the third quarter, we witnessed sustained growth in order volumes within the full truckload long-haul sector. And this growth can be primarily attributable to two key drivers. First, our growing shipper base and our further optimized product features have led to an increase in usage by our existing users. And this trend stems from the nation-wide shift towards more efficient matching and platform-based solutions and gradually replacing traditional offline models, and users naturally choose to use platform that offer competitive advantages. Additionally, our unique business model and exceptional network effects have also significantly contributed to our order growth. We selected a group — a sample group of shippers who are active since 2021 and we found that the volume of fulfilled orders for this group of users increased by about 15% year-over-year in the third quarter.

This illustrates our platform’s resilience and stickiness as well as our strong network effect and extremely high entry barriers we have established in the long-haul growth trade industry. Nation-wide coverage and robust defensive mechanism of our platform created an irreplaceable advantage in the market. Looking forward to the fourth quarter, we anticipate that in line with the continued expansion of our user base, the steady improvement in our user engagement and stickiness coupled with the arrival of the peak freight season and the volume of fulfilled dollars will continue to grow.

Ronald Keung: Thank you, Simon.

Operator: The next question comes from Eddy Wang with Morgan Stanley. Please go ahead.

Eddy Wang: [Foreign Language] Thank you, management for taking my question. My question is regarding the shipper MAU. In the third quarter, the average shipper MAU reached 2.13 million, which implies a 15% year-over-year growth and 6.7% quarter-over-quarter growth. What were the primary reason behind this growth? And how can you describe the user structure? What’s the expected growth rate for the fourth quarter? Thank you.

Simon Cai: Thank you, Eddy. In the third quarter, we witnessed continued rapid growth in the average shipper monthly active user base. And this growth can be attributed to two primary factors. First, our effective user acquisition strategy played a very important role. And through a combination of online promotions and offline on-the-ground field marketing, we have expanded the platform’s brand exposure and recognition, effectively attracting more users to join the platform. For online, we have primarily employed methods such as app, store promotions, sponsored content and information feeds and search engine marketing to reach out to potential users. Offline, our field marketing teams and the vehicle sticker have played a substantial role in acquiring new users, especially direct shippers.

Secondly, we have continually refined our product features and services, including the introduction of simplified shipping processes and optimization in our lessened truckload services. These measures have significantly improved the conversion rate of new users and increased engagement and loyalty of existing users, making them more inclined to use our platform for shipping. From a user structure perspective, there has been a sustained increase in the proportion of direct shippers. The average shipper miles of direct shippers have experienced nearly 17% year-over-year growth. As we look ahead to the fourth quarter, we will continue to closely monitor changes in user activities and user structural changes. We will strive to execute proactive user acquisition strategies and explore new business and product models to attract more high quality direct shippers.

Eddy Wang: Thank you, Simon.

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

Charlie Chen: [Foreign Language] In the third quarter, revenue from the freight brokerage service grew by 18.4% year-on-year, maintaining a very strong growth record. How should we understand the current competitive landscape of this freight brokerage industry and the Full Truck Alliance position in this field? Thank you.

Simon Cai: Thank you, Charlie. In recent years, the freight industry has faced a series of challenges, particularly the impact of the pandemic. This led to the closure of several small freight brokerage platforms due to insufficient cash flow resulting in a gradual reduction of players in the market. The major players in the industries are now predominantly medium to large-sized national freight platforms. However, these large platforms often provide relatively singular product offering, which users who are highly price sensitive and expect low brand loyalty. And furthermore, such platforms typically have relatively weak freight matching capabilities and suffer from a lack of available orders, making it difficult to attract a large number of truckers.

As a result, they primarily rely on invoicing or other services to generate profit. In contrast, FTA leverages its leading position in the industry and the nation-wide network to establish itself as a prominent brand, enhanced freight matching efficiency and lower user acquisition costs and maintain relatively high gross margin compared to competitors. Currently in our freight brokerage service, nearly 50% of orders are completed through platform-assisted freight matching, meaning that shippers who use our freight brokerage service has genuine needs to get a match for stranger truckers. Through cross-selling services such as closed-loop commission and value-added services, FTA has created a diverse and comprehensive product mix and monetization model.

This comprehensive advantage has allowed FTA to stand out in a highly competitive market and maintain higher service fees, solidifying its market position. The company’s capabilities and business model enables position of high quality freight services to meet user demand and generate sustainable profit.

Charlie Chen: Thank you, Simon.

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

Brian Gong: [Foreign Language] I will translate myself. In the third quarter, membership fee revenue increased by 5.6% year-on-year, which was slower than the other segments. Could management please provide an update on the growth of shipper members in the third quarter? And what operational strategies and measures will be taken in the future to drive the growth of membership fee revenue? Thank you.