Dada Nexus, Inc. (NASDAQ:DADA) Q3 2022 Earnings Conference Call November 17, 2022 8:30 PM ET

Company Participants

Caroline Dong - Head, IR

Jeff Huijian - President & Director

Beck Chen - CFO

Conference Call Participants

Ronald Keung - Goldman Sachs

Thomas Chong - Jefferies

Alicia Yap - Citi

Ashley Xu - Crédit Suisse

Andre Chang - JPMorgan Chase & Co.

Operator

Good morning, ladies and gentlemen, and thank you for standing by for Dada's Third Quarter 2022 Earnings Conference Call. [Operator Instructions].

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

Thank you, operator. Hello, everyone, and thank you for joining our third quarter 2022 earnings conference call. On the call today from Dada, we have Mr. Jeff Jeff Huijian, President; Mr. Beck Chen, CFO; and Mr. Jun Yang, Co-Founder and CTO. Mr. He will talk about our operations and the company highlights, then Mr. Chen will discuss the financials and guidance. They will all be available to answer your questions during the Q&A session that follows.

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

Thank you, Caroline, and thank you all for joining us. This is my first earnings call as President of Dada Group, and I'd like to have the opportunity to announce the strong quarter after we have just delivered.

Now on to our results. During the quarter of 2022, Dada Group maintained our -- just -- our rapid revenue growth and continuously improved operating efficiency. Our total net revenues increased by 41%, and adjusted net loss margin narrowed by 15 percentage points year-over-year.

I will start with a brief discussion of the overall industry environment before moving on to update on the 2 platforms. Beck then will walk you through our financial results in detail.

In terms of industry and regulatory environment, our key message from 20th CPC National Congress is that high-quality development is China's top priority in building a modern socialist country in all respects. China will pursue high-quality development by increasing the expansion of domestic demand with intensified supply-side structural form.

As a leading digital platform, Dada Group will fully leverage the advantages of digital technology to sell the real economy in which we are deeply embedded and the empowered regulatory industry. We believe our business is well positioned to promote high-quality development and helps domestic economy.

In September, we showcased the sale, our contributions to high-quality development at 2022 China International Sale and Trading Services, highlighting the progress we have made in promoting the transformation and upgrade our off-line retail with our digital employment and the fulfillment committees.

Next, I'd like to provide some updates on our dependent cooperation with JD.com. During the quarter, GMV of Shop Now or Xiaoshigou, the unified brand for all on-demand retail services within the JD ecosystem increased by more than 160 year-over-year, driven by the robust performance of connection through both search results and Nearby tab. For search result optimization, we upgrade our supply-demand tool to accurately match incremental Meituan and the product supplies with city-specific user demand at JD.com, leveraging the refined tool, Shop Now exposure link among search results at JD.com pilot test [indiscernible] more than doubled. In fourth quarter, we will continue to optimize the demand and assets down to a great level as to further improve our search exposure rate.

For the Nearby or Fujin tab is now available to users who are working on near-term locations which bring incremental exposure. Furthermore, during the quarter, we have fully rolled out the display and upgraded the Nearby tab, replacing the original Nearby with relevant city names, which further improved the click-through rate. In addition, we continue to enhance our user operation capability with Nearby tab, resulting in higher conversion rate. These improvements led to the strong growth of GMV generated for Nearby tab.

Before discussing our quarterly performance for our 2 platforms, I would like to provide some highlights of the -- this and Double 11 shopping festival. With our 200,000 stores participating, GMV of JDDJ on peak day is a historic high. And for Dada Now, number of average daily orders during the promotion period exceed 10 million.

Now let me walk you through the operational highlights of our 2 platforms, JDDJ and Dada Now. I will talk first about the JDDJ, the leading local on-demand retail platform in China. JDDJ [indiscernible] GMV growth significantly outpaced the inflation. In addition, mainly driven by improved subset the efficiency, direct margin continued to improve after during the second quarter, with 1% in the third quarter.

Let me take you through the 3 key focus of JDDJ, the retail empowerment, brand cooperation and the technology innovation.

Let's start out with our efforts in empowering retailers. Beginning with the supermarket category, we recently partnered with more top supermarket chains such as Hubei and now have established a partnership with 88 out of the top 100 supermarket chains in China. We also onboarded more regional campaigns like Jiangxi [indiscernible]. We also continued to make progress in the consumer electronics and home appliance category.

In the smartphone subcategory, JDDJ became the only third-party platform were presales was available for newly launched Apple products in September. More than 2,600 Apple-authorized stores on JDDJ offered the iPhone 14 series. On the first day of iPhone 14 series launched, the GMV of fulfilled orders more than tripled compared with the iPhone 13 debut.

In the mom and baby category, JDDJ is capturing strong consumer market share. The GMV of mom and the baby chains on JDDJ in the third quarter more than tripled year-over-year. In the apparel category, we expanded our offerings from sportswear to daily wear. During the quarter, we worked more closely with the existing partners, such as Canon, and also formed new partnerships with [indiscernible] and others. The GMV of apparel merchants on JDDJ increased by 8x year-over-year.

Turning to JDDJ's efforts to . In the third quarter, the year-on-year revenue growth of online market services exceed 70%, demonstrating such JDDJ continue to gain market share. Our brands partner that keeps expanding. We continue to penetrate the FMCG category. And this quarter, we established partnerships with emerging key value brands such as [indiscernible] penetrates the consumer electronics and the home appliance category, brands such as Lenovo and Super.

Turning to our innovative brand-marketed campaigns. In August, JDDJ teamed up with wholesale products [indiscernible] and food brand [indiscernible] to launch a joint marketing campaign, and that helping the brand reach across capital users, GMV of the 2 brands on JDDJ even more than tripled year-over-year.

In September, we worked together with 9 major brands, including [indiscernible] to promote the mid-autumn festival gift sales. During the demand, we had more tech testing events to help blend distribute the 3 samples. Total GMV of participating brands grew more than 50 year-over-year.

Next, I will touch on our initiatives for importing the tailors and the brands with technology innovation. Beginning with the high-growth system, our omnichannel operating system for retailers at the end of September has been deployed in all 8,300 retailer channel stores. In addition, we expanded high growth services to in apparel capital such as [indiscernible], further demonstrating the system's functional scalability.

We continued to upgrade high-vol features in the third quarter, including the introduction of product management function for nonstandard items. By creating [indiscernible] labels that will enable the retailers to more efficiently manage the -- pinpoint these products. The chance to have tested this upgraded product management feature. So our 20% efficiency gains inbound and outbound warehouse operations. The inventory count on nonstandard products.

We also made progress in consumer, our system. For example, we introduced a new approach of working with brands which entails more automations, enable brands to manage China inventories during -- down to the store level more efficiently. Since August, brands adopting the upgraded [indiscernible] system has significantly improved their product set availability in local grids reached in a increase in exposure and the incremental sales of 17 percentage points.

Regarding our digitized in-store picking services, Dada Picking. Leveraging our flexible labor management model and digital picking process, we enable the stores to handle high level of O2O orders, which manages fulfillment costs and customer experience. In the third quarter, we worked together with Meituan to further improve the pricing model of Dada Picking. With the pilot tried price model, we reduced the unit picking costs by 12%, which meant maintaining a stable fulfillment rate.

We also continue to expand the store coverage and the increased penetration of Dada Picking in partner stores. As a result, the total number of orders fulfilled by Dada Picking increased by more than 160 year-over-year in the third quarter. And our number of monthly active pickers steadily grew to more than 10,000, majority of whom are female. In this way, we have not only helped retailers to improve picking efficiency and the fulfillment needs, but also provide a meaningful platform of employment opportunities for a wide range of workers.

Now let's move on to Dada Now, the leading local on-demand delivery platform in China. In the third quarter, Dada Now's O2O volume and [indiscernible] to both maintain the rapid growth whilst operating efficiency continued to improve. Our steady growth and the improved efficiency were underpinned by our technology.

In September, we participated in 2020 Worldwide Artificial Intelligence Conference, showcasing the progress we have made in using AI technologies to improve order matching, efficiency and the location accuracy as well as to enable our promise delivery. As a technology-driven company, we will continue to promote the robust and efficiency development of business through investments and innovations in technology.

Now let's turn to the performance highlights of Dada Now's 3 major business lines. In terms of KA or chain merchants' business, in the third quarter, revenue on-demand delivery services to KA merchants increased by more than 40 year-over-year, while gross profit for other continued to improve sequentially.

In the supermarket KA category, we continued to consolidate our leading position with [indiscernible] increased by more than 40 year-on-year. In addition, [indiscernible] continues to grow significantly, increased by more than 140 year-over-year. In our SME and C2C business, orders fulfilled increased by more than 50 year-over-year, where we continue to greatly optimize unit economics. In particular, driven by our continued penetration into low-tier city and expansion of rider network. Our SME orders increased by more than 60 year-over-year.

For last-mile services, orders fulfilled increased by more than 60 year-over-year. The steady increase of our penetration led in JD logistics for last-mile delivery. Meanwhile, we maintained the rapid growth in picking up business with a number of orders grew more than 200 year-over-year.

Finally, Dada autonomous deliver open platform expanded the collaboration with more autonomous vehicle manufacturers and continued to explore more flexible ways to provide autonomous delivery services to retailers. As of the end of September, our platform has fulfilled dozens of thousand customer orders through autonomous delivery.

To wrap up, we are pleased with the performance of the business this quarter. We continue to be challenged by macro environment. Our new leadership team is committed to build on these results and executing our strategy to deliver sustained returns for our shareholders.

With that, I will pass the call to Beck to go over financial results for this quarter. Thank you.

Beck Chen

Thanks, Jeff. And 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 that basis. And all figures are in Renminbi, unless otherwise noted.

Total net revenues in the third quarter increased by 41% to CNY 2.4 billion. Net revenues from Dada Now increased by 36% to CNY 836 million, mainly driven by the increase in order volume of intra-city delivery service to chain merchants. Net revenues from JDDJ increased by 44% to CNY 1.5 billion, mainly due to the increase in GMV, which was driven by increases in the number of active consumers and average order size. The increase in online marketing services results as a result -- revenue as a result of the increasing promotional activities also contributed to the revenue growth of JDDJ.

Moving over to the expense side. Operating and supporting costs were CNY 1.5 billion. The increase was primarily due to an increase in rider costs as a result of increasing order volume for intra-city delivery services provided to various chain merchants on the Dada Now platform and the retailers on the JDDJ platform.

Selling and marketing expenses were CNY 1.1 billion. The increase was primarily due to the growing absolute dollar amount of incentives to JDDJ consumers, an increase in advertising and marketing expenses to attract new consumers to JDDJ platform and the amortization of the business cooperation agreement arising from share subscription transaction with JD.com in February this year.

G&A expenses slightly rose to CNY 107 million, mainly attributable to increases in professional services fees. R&D expenses rose to CNY 181 million, mainly attributable to the increase in research and development personnel cost as the company continues to strengthen its technology capabilities.

Non-GAAP net loss attributable to ordinary shareholders of Dada was CNY 270 million. Non-GAAP net loss margin was 11.4%, improving by more than 15 percentage points year-over-year and 6 percentage points quarter-over-quarter. As of September 30, 2022, the company had CNY 5.2 billion in cash, cash equivalents, restricted cash and short-term investments. Pursuant to our USD 70 million share repurchase program announced in March 2022, as of September 30, 2022, we had repurchased approximately USD 57 million of ADSs under this repurchase program.

In terms of outlook, for the fourth quarter of 2022, we expect the total revenue to be between CNY 2.65 billion and CNY 2.75 billion, representing a year-over-year growth rate of 30% to 35%. In addition, we expect net loss margin in the fourth quarter of 2022 to continue to significantly narrow year-over-year and achieve sequential improvement for the seventh consecutive quarter.

This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from Ronald Keung with Goldman Sachs.

Ronald Keung

First, I just want to hear about the COVID impact to your business recently across Guangzhou -- Zhengzhou and Guangzhou, a few cities have significant cases. Has that impacted our business? Or has it actually boosted demand? And how should we think about the outlook for next year, assuming a further reopening trend?

Second is about the JDDJ side with the revenue guidance, how are we thinking on the GMV growth in the December quarter? And any timing expectations for economics or EBIT turnaround from the business?

Jeff Huijian

Thank you for your question. I will answer the question about the pandemic and then Beck will take the question about Q4 guidance. So in most cities where pandemic control measures are imposed, the mobility is restricted. Most retailers can still do business online. The riders are available for delivery. Therefore, the direct impact on our business is limited. That said, over the past year or so, some consumers have to cope with pay cuts or has a more conservative outlook due to the pandemic. So the overall consumer confidence has weakened which poses challenges to our business. However, the impact on our platform is not as significant as on other platforms since our largest category is supermarkets, which sells consumer staples, so we can maintain faster growth and other platforms.

Beck Chen

Okay. So yes, Ronald, let me address your second question about the Q4 and next year's guidance or the forecast. So basically, in Q4, based on the revenue guidance we have given, and we expect our GMV could be grow by -- of JDDJ GMV could be grow by 30% to 40% on a year-over-year basis. During which, we will continue to improve our subsidy efficiency and operational efficiency.

So in Q4, we will continue to see the overall operation efficiency enhancements. And for the bottom line, as we have guided in the prepared remarks, that it will continue to improve as percentage points improve, both on a year-over-year basis or a Q-on-Q basis. So for next year, generally, we will still like aim at breakeven for the first half of next year. And based on that, we will just would like to grow still very fast and healthier on a year-over-year basis for both platforms. So everything is still on track, and we keep up with the reason, and we have previously set up.

Operator

Your next question comes from with Bank of America Securities.

Unidentified Analyst

My first question is regarding our cooperation with JD. Can you give us some update? And how should we see the trend in the future? Secondly, can you give us some updates on JDDJ's GMV category mix and the growth trend?

Jeff Huijian

Thank you for your question. With Mr. Xin joining us as our Chairman, our collaboration with JD.com has become even closer, and I'll go over that in more details. In terms of the business result, during the quarter, we further deepened our collaboration with JD.com The GMV off-shop now increased by more than 160% year-over-year.

In terms of the progress of the two major entry points of Shop Now, on the search front, we upgraded our supply development tool to accurately match the incremental merchant and product supplies with city-specific user demand at JD.com. With the refined tool, Shop Now's exposure rate among search results at JD.com in pilot categories more than doubled. And in the fourth quarter, we will continue to optimize the granularity of demand analysis down to the grid level so as to further improve our search exposure rate.

In terms of the Nearby or Fujin tab, we also made significant progress. First, on the technology front, we made an upgrade to make it available to users who are not turning on the real-time locations which brings incremental exposure. Second, we have fully rolled out the display name upgrade of the Nearby tab, replacing the original Nearby with relevant city names which further improved the click-through rate.

In addition, we continued to enhance our user operation capability within the Nearby tab, resulting in a sequential improvement in conversion rate of more than 1 percentage point. Now these 3 measures all led to the strong growth of GMV generated from the Nearby tab.

And in terms of category performance, while we maintained improvement, the supermarket category maintained solid growth during the quarter. And boosted by the launch of new iPhones, the consumer electronics categories also performed well during the quarter. In addition, we made further progress in new categories such as apparel and recorded triple-digit growth in GMV.

In terms of the category mix, in the third quarter, supermarkets accounted for 55% of JDDJ's GMV, while nonsupermarket categories contributed 45%. And specifically, GMV from the electronics or 3C category was about 35% of the total.

Operator

Your next question comes from Thomas Chong with Jefferies.

Thomas Chong

[Foreign Language]

Jeff Huijian

[Foreign Language]

Caroline Dong

Thank you, Thomas. So I will take the first and third question, and Beck will help answer the second question. So about the industry. We think a big change next year, we'll be on the pandemic front. In the long run, we remain very confident and optimistic about the future of on-demand retail. The penetration rate is still low at only single digit now. And the pandemic will help educate our consumers and boost consumer demand for on-demand shopping.

Jeff Huijian

[Foreign Language]

Caroline Dong

And in terms of the competitive landscape, we have not observed aggressive investment in subsidies in the current macro environment. I think everyone is being cautious about subsidies, whether it's on the part of new entrants in the business, for example, short-form video platforms, or on the part of our existing peers, such as Meituan. So the competitive environment is not very intense on the consumer incentive side.

Beck Chen

Okay. Yes. So I'll answer the second question from Thomas. So the answer -- the short answer is yes. So the advertising and marketing revenues is very important for us to further grow our direct margin. Just like Jeff mentioned in the prepared remarks, our overall direct margin of JDDJ platform is growing from 0.4% last quarter to 1% this quarter. So definitely, the marketing orders and the take rate increase contribute to the growth of the direct margin, and we expect that for the fourth quarter and also for the next year and the overall marketing revenues still will be growing faster and will contribute to the direct margin and the bottom line improvement a lot.

And also about the third question you mentioned. So generally, right now, actually, our -- Dada Now, the logistics arm of our platform, is starting to cooperate with those leading short-form video platform. So -- which is also good because we are not a food delivery platform, and we are very happy to fulfill all those orders from those short-form video platforms orders. Thank you.

Operator

Your next question comes from Alicia Yap with Citigroup.

Alicia Yap

So my question is related to the new user profile, purchasing behavior and also the retention rate. So specifically for those newly acquired user through the JD Shop Now, is it the supermarket category that attracted them to join Dada JDDJ? Or is it the non-supermarket category to attract them for the first time? And then what are the purchase frequency that come from this user? Are they having a higher purchase frequency? Or it's about the similar?

And then on user retention and consumption pattern, under these current challenging macro environment, have you noticed the retention rate is actually lower and consumer are more sensitive to price discount and rebate? So when you scale back the subsidy, have you seen higher churn rate? Or are the user purchasing frequency actually cut down?

Caroline Dong

Thank you for your question. So about the first question on the user. The customers we acquired through the JD Shop Now channel, so they are mainly the buyers of the same category that are used to shopping on JD.com, for example, the users who buy supermarket categories in Shop Now are existing JD supermarket shoppers, and the consumers who buy consumer electronics products on Shop Now, they are existing shoppers of JD's consumer electronics products. And that's because most of our traffic from JD Shop Now is from the search result entry point. So as you all know that search is a highly intention-based shopping channel. So we are seeing that users are continuing their pre-existing shopping preference in category in the JD Shop Now channel.

And then about your second question, so as we scaled back our subsidies, there is naturally some customer churn. But the good thing is the customers that have left our platform are actually very price sensitive, they are very subsidy-driven shoppers. So it's not bad. And in terms of the shopping frequency, we do have observed an increase in shopping frequency.

For Shop Now consumers, their shopping frequency is a bit lower than those who shop on our JDDJ independent app, which is not full because there are other services on the JD app. So the consumers of JD Shop Now can shop for other categories and services on the JD app. And the good thing we -- the good thing we are observing now is that for the users who have tried the Shop Now service on JD, we're seeing an increase in their shopping frequency. Thank you.

Operator

Your next question comes from Ashley Xu with Credit Suisse.

Ashley Xu

Just also want to check about the KA business on the Dada app. What's our current strategy? And what's the expectation of future growth and also UE?

Caroline Dong

Thank you for your question. Our KA business saw a very impressive growth and the continuous improvement in service quality over the past 2 years. We have gained market share and high customer satisfaction. In Q3, our KA revenue grew by over 40% year-over-year, and we expect growth to be around 50% in Q4.

On the profitability front, unit gross profit for KA orders continued to improve in Q3 after turning profitable in Q2. We expect a sequentially stable unit gross profit for Q4, leading to -- due to pandemic resurgence in multiple regions since early October, which led to a higher rider cost for Q4.

Operator

Your next question comes from Andre Chang with JPMorgan.

Andre Chang

Let me quickly translate my question. My question is about the long-term profitability and the path toward that. With all these changes over the recent quarters, the cooperation with JD, weakening macro environment, et cetera, are we seeing our long-term profitability target change toward higher or lower or unchanged? Also, the trajectory toward that, is it going to be faster or slower, considering that JD, our parent group, are talking about more focus on the profitability. So the margin ramp-up may be faster than the originally expected.

Beck Chen

Okay. So Andre, this is Beck. Let me address this question. So the short answer is we will still balance the growth rate and the bottom line optimization or improvement. So because the intra-city on-demand retail market is still a lower penetrated market. So we believe that for the next few years, at least, the growth rate of this category is still very high potential, encouraging, compared to the other sector of the e-commerce area. So there is a huge potential for the on-demand retail market. So we will still target a higher growth rate of top line compared to the other tier companies.

And at the same time -- and for the bottom line, we will also keep to optimize on a year-over-year basis. So we still, like we have talked before, we still have great confidence to further -- first of all, further to increase our marketing revenues cost. We have a few masses to improve our marketing dollars, just like we talked in the previous quarters. For example, like we are further monetized on the LBS [indiscernible] home system within the [indiscernible] system to provide a lot of exposures for our brands and the retailers to those consumers nearby. So for next year, we believe this marketing tool will be a major marketing revenue-driven tool for us. And at the same time, for this year, we have dramatically increased our subsidy or incentive efficiency. So we believe that for the next 2 or 3 years, we still have great room to further improve our incentives given to the consumers.

And at the same time, while our overall on-demand delivery platform orders is growing very fast for Q4 and also for the second half of this year, we expect the total on-demand delivery orders, it's growing very fast. And we expect for next year, we will keep to grow at a faster growth rate compared to our peer company.

So overall rider cost and the delivery cost could be further optimized and improved as well. So this is the path that we grow our top line particularly while we continue to optimize either by some additional tools and methods provided all by further efficiency optimization way to improve our bottom line next year. It's just -- it's not improve the bottom line, it's just like growth of the bottom line profit.

So the on-demand retail platform is very typical, just like the localized JD Mall or localized Tmall. So we believe the overall long-term profitability in terms of the revenues should be very encouraging, just like other traditional e-commerce platform as well.

Operator

Thank you. That's all the time we have for our question-and-answer session today. I'll now hand back to Caroline for closing remarks.

Caroline Dong

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, feel free to reach out to us directly. Thank you for joining us today. This concludes the call.

Operator

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