Full Truck Alliance Q3 2023 Earnings Call Transcript

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November 20, 2023

There are 5 speakers on the call.

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.

Speaker 1

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 Form 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.

Speaker 1

Some of these risks are beyond the company's control and could cause actual results to to differ materially from those mentioned in today's press release and discussion. A general discussion of the risk factors that could affect FDA's business and Financial results is included in certain filings of the company with the SEC. The company does not undertake any obligation to update these forward 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.

Speaker 1

Joining us today on the call from FDA's Synagis Management are Mr. Hui Zhang, our Founder, Chairman and CEO and Mr. Simon Tai, our CFO. Management will begin with prepared remarks and the call will conclude with a Q and A session. As a reminder, this This conference is being recorded.

Speaker 1

In addition, a webcast replay of this call will be available on FDA's Investor Relations website at ir.foldrupalliance.com. I will now turn the call over to our Founder, Chairman and CEO, Mr. Zhang. Please go ahead, sir. Hello, everyone.

Speaker 1

Thank you for joining us today on our Q3 2023 earnings conference call. Entering the second half of twenty twenty three, the Yunman app has ushered in the 10th anniversary of its of 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 intelligent Gaining trust among our shippers and truckers. We started from scratch and now covers over 3 and over 200 types of cargo from industrials and consumer categories.

Speaker 1

This has gradually formed a robust nationwide network effect and a highly competitive mode, Centered around our core user value proposition of plentiful, fast, quality and value for money, we will Let me provide an update on our Progress in the Q3. During the quarter, we have steadily improved in 5 key areas: user scale, product reached 2,130,000 monthly active shippers, a 15% year over year increase, which drove a 27% There will be an increase in the number of field 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 Turning to product operation, our intrested shipment model, a niche product for direct shippers, has Attracted new users by addressing their needs through refined pricing algos and improved fulfillment services. We are also working on the launch of an enterprise edition targeting professional shippers. Moving on to the Truckers supply, we have further enhanced our tiered trucker rating system, enabling truckers to improve their fulfillment capability and strengthen support eventually leading to an expanded trucker supply and ownership gain.

Speaker 1

Adequate transportation capacity supply and optimized Matching strategies have significantly enhanced fulfillment efficiency. For instance, the pre price transaction allows truckers to respond directly to order postings without price negotiation and the order volume for pre price transactions, including Tap and Go and entrusted shipments, continued to grow faster than the overall order volume in the Q3. Looking at our platform ecosystem, with goal of establishing a one stop logistics 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 higher user stickiness for both shippers and trucker members. Lastly, in addition to product functionality upgrades, we highly value the user experience. This quarter, we service center to provide 20 fourseven services, promptly addressing user queries.

Speaker 1

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 Moving on to our financial highlights, we delivered Our 3rd quarter revenues grew by 25.2 percent year over year to RMB2.26 billion and non GAAP Adjusted net income reached RMB827 million, up 67.6 percent 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 Looking ahead to the Q4, the government has introduced a series of has gained increasing importance and policy support within the process of strengthening, supplementing and extending the industry chain. With the ongoing macro tailwind, 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.

Speaker 1

Thank you, everyone. Let me pass the call over to our CFO, Simon, who will provide an update on our Q3 business progress and the financial results.

Speaker 2

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 Q3 of 2023 and then provide a brief overview of our financial results before the Q and 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 Q3.

Speaker 2

On a monthly basis, the average daily for field orders from 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 due end users increased engagement, Our ability to continuously deliver both top line growth and margin expansion in the past 3 years in a highly volatile macro environment Our average fulfillment rate for the quarter reached 29%, an improvement of more than 4 and non member shippers rose to roughly 50%, respectively. With the order contribution from these two Types of low and medium frequency shippers continue 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 Q3, the truckers' status can be identified based on data collected from trucker punch ins and Trajectories.

Speaker 2

When a shipper tries to cancel an order that was dispatched, a reminder window will pop On the app, reducing the chance of 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 Melissa's order cancellations and reinforce the consciousness and behavior of closed loop transactions for due end users through a series of incentives and control policies. By user type, the order contribution from 6 88 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.

Speaker 2

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 miles reached another record high of 2,130,000, up 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.

Speaker 2

In parallel, we are pleased to see that trucker Activities has also remained high since the Q3 with the number of active truckers fulfilling orders through FTA Over the past 12 months, climbing to 3,790,000 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's 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 3rd quarter with revenues amounting RMB602.1 million, up 54.3% year over year, mainly due to the solid growth in the number of field orders and the increase in commissions per order. Our commission model covered approximately 58% of field orders and generated an average 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.

Speaker 2

From August 23 to November 17, we repurchased approximately 3,300,000 ADS shares, totaling approximately US23 $1,000,000 Since we announced the program, we have repurchased a total around 22,800,000 ADS shares from the open market with a total value of approximately 147,000,000 Looking ahead, we will continue to reward our shareholders through buybacks. Now I'd like to provide a brief overview of our 2023 Q3 financial results. Our total net revenues in the 3rd quarter were RMB2263.9 billion, 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 Automotive and commissions from Online Transactions Services were RMB1.904.4 billion in the 3rd quarter, representing an increase of 25.8 percent year over year, primarily due to an increase in revenues from freight brokerage service as well as continued growth in transaction commissions.

Speaker 2

Revenue from freight brokerage service in the 3rd quarter were RMB Continued growth in transaction volume as a result of strong user demand. Revenues from freight listing Year over year, primarily due to an increased number of total paying members. Revenues from transaction commissions amounted to RMB600 2,100,000 in the 3rd quarter, up 64.3% year over year, primarily driven by an increased order volume as well as higher transaction commission per order. Revenues from value added services in the quarter were RMB300 to an increase in revenues from credit solutions and other value added services. Our cost of revenues in the 3rd quarter RMB1142.1 million compared with RMB953 1,000,000 in the same period last year.

Speaker 2

The increase was primarily due to an increase These tax related costs, net of refunds, totaled RMB1.32 an increase of 19.1% year over year, primarily due to continued increase in transaction activities involving our Our sales and marketing expenses in the 3rd quarter were RMB290.8 million compared with RMB $232,900,000 in the same period of 2022. The increase was primarily due to an increase in advertising and marketing General and administrative expenses in the 3rd quarter were RMB RMB290,400,000 compared with RMB206,600,000 in the same period last year. The increase was primarily due to higher share based compensation expenses and the settlement of the U. S. Securities class action, which was disclosed and the Form 6 ks filed on September 18, 2023.

Speaker 2

R and D expenses in the 3rd quarter were RMB 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 RMB RMB247,100,000, an increase of 74.4 percent from RMB 100 and 41,700,000 in the same period last year. Net income in the Q3 was RMB618.4 million, an increase of 56.4 percent from RMB395.5 million in the same period last year. Under non GAAP measures, our adjusted operating income in the 3rd quarter was RMB458.5 an increase of 88.8 percent from RMB242.8 of $8,000,000 in the same period last year.

Speaker 2

Our adjusted net income in the 3rd quarter was RMB826.6 million, an increase of 67.6 percent from RMB493 1,000,000 in the same period last year. Basic and diluted net income per ADS were RMB0.58 in the 3rd 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 3rd 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 deposit and wealth management products of RMB27.4 2022. In the Q3 this year, net cash provided by operating activities was RMB 717.1 For our business outlook for the coming quarter, in the Q1 of 2023, we expect Our total net revenues to be between RMB2.27 billion and RMB2.32 billion, RMB2.32 billion, representing a year over year growth rate of approximately 18.2% to 20.6%.

Speaker 2

This forecast reflects the company's current and preliminary views on the market and operational conditions, which are Subject to change cannot be predicted with reasonable accuracy as of the date hereof. That concludes our prepared remarks. We would now like to open the call up to Q and A. Operator, please go ahead.

Operator

And Answer For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, Please immediately repeat your question in English. The first question comes from Ronald Keung with Goldman Sachs. Please go ahead.

Speaker 3

Thank you, Dong Wei, Zhong and Simon. In the Q3, 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 4th quarter? Thank you.

Speaker 2

Thank you, Ronald. In the Q3, we We witnessed sustained growth in other volumes within the food truckload long haul sector. And this growth can be Primarily attributable to 2 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 stands from the nationwide 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.

Speaker 2

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 For field orders for this group of users increased by about 15% year over year in the Q3. 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 rate industry. The Nationwide coverage and robust defensive mechanism of our platform created an irreplaceable advantage in the market. Looking forward to the Q4, we anticipate that in line with the continued expansion of our user base, the steady improvement in our user engagement And then stickiness coupled with the rise of the peak freight season and the volume of fuel dollars will continue to grow.

Operator

Thank you, Tom. The next question comes from Eddie Huang with Morgan Stanley. Please go ahead.

Speaker 4

Thank you, management, for taking my question. My question is regarding the Sherpa MAU. In the Q3, the average Sherpa MAU reached 2 point $1,300,000 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?

Speaker 4

What's the expected growth rate for the Q4? Thank you.

Speaker 2

Thank you, Eddie. In the Q3, we witnessed continued rapid growth in the average shipper Monthly active user base. This growth can be attributed to 2 primary factors. First, Our effective user acquisition strategy played a very important role. 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.

Speaker 2

For online, we have primarily employed methods such as app store promotions, sponsored content in information feeds and search engine marketing to reach out to potential users. Offline, our field marketing teams has And the vehicle sticker has played a substantial role in acquiring new users, especially direct shippers. Secondly, we have continued continually refined our product features and services, including the introduction of Simplified shipping processes and optimization in our Lesson Truckload services. These measures have significantly improved the conversation From a user structure perspective, there has been a sustained increase in the proportion of direct shippers. The average shipper miles of direct shippers has experienced nearly 17% year over year growth.

Speaker 2

As we look ahead to the Q4, we will continue to closely monitor changes and user activities and user structural changes. We will strive to execute proactive user acquisition strategies and

Speaker 4

Thank you, Samantha.

Operator

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

Speaker 2

In the Q3, revenue from the freight brokerage service grew by 18.4% year on year, Maintain a very strong growth record, how should we understand the current competitive landscape of this freight brokerage industry and the Food Truck Alliance position in this field. Thank you. Thank you, Charlie. In recent years, the freight industry has faced 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.

Speaker 2

The major players in the industries are now predominantly medium to large sized nation national freight platforms. However, these large platforms often provide relatively singular product offering, which users who are highly price sensitive and Exhibiting low brand loyalty. 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 a nationwide network to And maintain relatively high gross margin compared to competitors.

Speaker 2

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 enabled the vision of high quality Thank you, Simon.

Operator

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

Speaker 4

I will translate myself. In the Q3, membership fee revenue increased by 5.6% year on year, Which was lower than the other segments. Could management please provide an update on the growth of shipper members in the Q3? And what operational strategies and the measures will be taken in the future to drive the growth of membership fee revenue?

Speaker 2

Thank you. Thank you, Brian. Since 2018, We have been monetizing the Freight Yellow Page service through the introduction of membership system. Members enjoy more privileges than non paying users, including the ability to post orders. Currently, there are 2 membership The 1st tier members paying an annual fee of RMB688 allowing them to post up to 100 orders The platform occasionally introduces membership benefits to ensure that members receive Additional order posting rights.

Speaker 2

From an operational synergy perspective for high frequency shippers, FDA has achieved A high level of user penetration compared to the traditional models where shippers had to pay at least RMB10 1,000 for logistic park Rental fee. FDA has gradually replaced logistics parks and the cost per Fees are significantly cheaper compared to traditional logistic park booth rental fees. And for this user segment, FTA mainly monetizes through cross selling, value added services and commissions, increasing the revenue scale of our business. For mid to low frequency direct shippers, new shipper users entering the platform are mostly direct shippers. Hence, the number of 688 members has been steadily growing over the past few quarters.

Speaker 2

Looking at the market size of millions of small and medium sized business owners in China, there's still considerable growth potential. However, we observed that the number of orders corresponding to 688 numbers exceed the usage needs of Some low frequency users and based on this, our operation team are actively devising product strategies in attempt to develop Shipper members appears relatively low. Their freight rates are higher and they exhibit better fulfillment rates, offering greater monetization potential through commissions and cross selling value added services. In the long term, direct Shippers are not only the main driving force for future membership fee growth, but also present opportunities for growth in other business lines.

Speaker 4

Thank you.

Operator

The next question comes from Ji Woo Lee with CICC. Please go ahead.

Speaker 1

We noticed that the penetration rate of the commission model in the

Speaker 2

Thanks. Thank you. That's a good question. In the past quarter, revenues from commission model reached RMB600 1,000,000, increasing by over 54% year over year. This strong growth was primarily due to the overall increase in other volume and continued improvement in commission rates.

Speaker 2

Operationally, we have been primarily focused on scaling the platform as a whole with no additional city expansion or significant adjustment to our Nevertheless, we have conducted stress tests with higher commission rates in certain cities to prepare for potential Future increase in commission rates and penetration rates. The penetration rate of a particular transaction type is defined as the number of commission orders for the transaction divided by the number of total order volume. At the time of our IPO back in 2021, our short haul transaction commission business was very small. Hence, It was classified under the value added services line of our revenue. The transaction commission revenue line does not include So when calculating penetration rate, the numerator excludes fulfilled Short haul orders, while the denominator include both long haul and short haul orders.

Speaker 2

In the past quarter, the penetration rate was approximately 58%, showing a slight compared to the previous quarter, primarily due to the fast increase of short haul fulfilled orders Under our Sheng Sheng brand, the commission penetration rate for long haul orders remained stable quarter over quarter. Looking ahead, our focus will remain on increasing the penetration rate of our commission

Operator

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Speaker 1

Thank you once again for joining us today. If you have any further questions, please feel free to contact us at Fortruck Alliance for GPG Investor Relations. Our contact information for II in both China and the U. S. Can be found in today's press release.

Speaker 1

Have a good day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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