Meituan conference call: The growth rate of Q4 food delivery revenue will be slightly lower than Q3, and the growth of new businesses will also face challenges.

On November 28th, MEITUAN-W released its third-quarter earnings report, with revenue increasing by 22% YoY, exceeding expectations, and net profit declining by 23.4% QoQ, while core local business operating profit increased by 8% YoY.

According to the financial report, MEITUAN-W achieved revenue of 76.47 billion yuan in the third quarter, compared to 62.62 billion yuan in the same period last year, a YoY growth of 22.1%, surpassing market expectations of 76.09 billion yuan. The net profit for the third quarter was 3.59 billion yuan, a YoY growth of 195.3%, surpassing the estimated 2.92 billion yuan, but a QoQ decline of 23.4%. The adjusted net profit was 5.727 billion yuan, a YoY growth of 62.4%.

Among them, the core local business remained robust, while the high subsidy rate led to a decline in operating profit margin. The revenue from new businesses fell short of expectations, with a slight narrowing of losses. Sales and marketing costs increased, while research and development expenses decreased. As of the end of the third quarter, the number of annual active trading users, annual active merchants, and user purchase frequency reached new highs. The total number of instant delivery orders reached 6.2 billion, a YoY increase of 23%, with the peak daily order volume of food delivery exceeding 78 million.

During the subsequent earnings conference call, looking ahead to the fourth quarter, MEITUAN-W management stated that due to the high base of AOV in Q4 last year caused by the epidemic, the growth rate of instant delivery revenue in Q4 this year will be slightly lower than that of Q3, but they are confident about the order volume.

The following is a transcript of the Q&A session:

Q1: Considering the current macro environment and consumer sentiment, how is the volume of food delivery orders? In the medium to long term, will the food delivery business be affected? What impact will it have on flash purchase?

A: The instant delivery business of the company maintained high growth in Q3, with a YoY increase of 23% in total order volume. The volume of food delivery orders further increased during the summer, with a peak daily order volume of 78 million.

Currently, users are more cautious and pursue cost-effective products, which has had some impact on the growth of the food delivery business. However, we are actively making adjustments to cope with this situation. We focus on cost-effective product selection, strengthen the "good meal" strategy, and meet consumers' demand for delivery efficiency. For high-quality products, we provide "hot-selling" products and cooperate with high-quality restaurants to stimulate user demand through live streaming and increase their consumption frequency. At the same time, we iterate our membership program and provide different types of membership coupon packages to increase transaction frequency.

Meanwhile, we are exploring other ways to respond to the ever-changing consumer trends. In Q3, MEITUAN-W's flash purchase achieved 50% growth in the past three quarters. Flash purchase is a natural extension of food delivery and has great potential for development across categories and consumer scenarios in the future.

Flash purchase users of MEITUAN-W use other delivery services more frequently. They represent our high-quality user group and have stronger purchasing power and loyalty to our platform. We expect these core users to have significant room for growth in usage frequency and ARPU (average revenue per user). As the Chinese economy continues to recover, we have strong confidence in the food delivery business, and our long-term growth goals remain unchanged. Q2: How will the development of food delivery and flash purchase be in Q4?

A: Q4 may be similar to the first six months and the first nine months of this year. There are several factors that affect the growth of order volume: Firstly, macro factors have affected the growth of transaction volume. Secondly, the warm weather in November did not contribute to the growth of winter delivery demand. Lastly, many consumers have returned to offline consumption during the summer and autumn seasons, which also had an impact on delivery demand. However, we will make every effort to expand supply, optimize operations, and improve efficiency. We will further provide diverse product choices, strengthen user awareness, and further enhance demand.

Last year, due to the pandemic, the base of average order value (AOV) in Q4 was relatively high. Many SME (small and medium-sized) merchants suspended their operations last year. This year, the full recovery of SMB merchants and changes in consumer behavior, as well as a decrease in the purchase of high-priced daily necessities and medicines by users, have led to a decline in AOV.

In terms of financial prospects, we believe that the year-on-year growth of revenue from food delivery in Q4 will be slightly lower than Q3, but we are confident in the order volume. In addition, due to strong demand, our spending on marketing and subsidies decreased last year. In the current consumption environment, we will increase marketing efforts to stimulate demand. Higher subsidies will also offset the income from profits, and cost savings from economies of scale will offset the decline in AOV.

Q3: How do you view the future development of the hotel and travel business categories in the face of macroeconomic headwinds?

A: In the first three quarters, China's service retail increased by 18.9% year-on-year, far exceeding traditional consumer goods retail, indicating that the demand for service retail is still very strong.

In the third quarter, the development of hotels and travel had a high base, and consumers paid more attention to cost-effectiveness and made purchasing decisions through multiple channels. MEITUAN-W will strengthen in-store discounts to better meet consumer trends and introduce flexible policies to help merchants optimize packages and match consumer needs.

MEITUAN-W will exit traffic strategies to help merchants attract consumers. Active merchants on MEITUAN-W reached a historical high in the past quarter, and there is still a large online penetration space. Now, merchants and consumers are more concerned about the value provided by online platforms.

MEITUAN-W will focus on consumer trends and ensure that products meet consumer needs. Self-service tea houses and self-service billiards have become popular among young people, and joint brands and concept dining are also becoming more popular. We keep up with the latest consumer trends, innovate products and services to meet consumer needs. We not only integrate existing models but also enhance the special offers section to promote affordability.

In the past quarter, live streaming contributed to the growth of GTV (gross transaction value), and the launched online live streaming had high cost-effectiveness, providing consumers with more shopping vouchers. MEITUAN-W will launch new initiatives to capture market demand, strengthen market positioning, ensure business growth in the future, and accelerate penetration.

Q4: How was the business situation for in-store hotel and travel services during the Mid-Autumn Festival and National Day? How do you view the overall growth for the year? What are the competition trends?

A: In the past two quarters, we have strengthened our live streaming capabilities to meet consumer demand for live streaming services. The average daily live streaming volume in September increased by over 300% compared to June, and GTV increased by 40%. We also launched various holiday-themed promotional activities, and travel grew by 150% year-on-year. For the hotel business, there has been an increase in overnight room bookings in some niche and special tourist cities.

We have further strengthened internal traffic distribution and expanded external marketing channels. These measures help increase the share of consumer spending on the platform to gain more brands. During the holiday season, the volume of orders exceeded 120% compared to non-holidays. This summer, especially during the National Day period, we have provided a large number of marketing tools to empower merchants.

Double Eleven has launched many year-end sales activities and achieved high growth. The market is still in a high-growth stage, especially in lower-tier cities and many new categories, where there is great potential for online penetration. We hope to further increase the share of existing users and penetrate deeper into the lower-tier market.

MEITUAN-W aims to strengthen consumer awareness and there are still many opportunities in the sinking market. In Q4, we will make more targeted investments, adjust our marketing strategy to drive growth, strengthen local team coverage in the sinking market, and seize future opportunities in the sinking market. We believe that offline stores and hotels will continue to improve.

We will continue to benefit consumers and merchants, strive for innovation, bring more positive development to society, and further enhance our capabilities in content operation, consumer insights, and merchant awareness optimization. We are confident in the long-term growth and profitability of the hotel and tourism business.

Q5: Considering that the losses from new businesses mainly come from MEITUAN-W Selected, will there be further optimization and strategic adjustments for the selected business in the future? Profit margin guidance? When can it achieve breakeven? How do you view the long-term returns of other new businesses?

A: There are many new businesses, consisting of hundreds of different business units, and there may be different revenue recognition methods, which may affect revenue growth. The slowdown in new businesses in Q2-Q3 this year was due to differences in revenue composition and changes. The business composition in Q3 and Q4 is similar, and the growth of new business revenue in Q4 will also face some challenges.

Due to recent macro headwinds and the recovery of offline consumption, we need time to further optimize operations. MEITUAN-W Buy and MEITUAN-W Selected are both important parts of our retail business. For MEITUAN-W Selected, we need time to build the network. We have made many attempts in the past few years. MEITUAN-W Selected can help further increase user frequency. The data for MEITUAN-W Selected is growing, but the growth has slowed slightly. We have identified the reasons for the slowdown and have formulated a new, revised strategy to improve operations. We will further optimize this business. The losses are narrowing, and we will continue to focus on high-quality growth, further optimize operational efficiency, and accelerate investment. We believe that profitability will further improve.

Kuaishou has become a leader, strengthening the stickiness between merchants and the platform. The financial and shared bicycle businesses have also achieved high growth for two quarters. The electric vehicle business has achieved positive cash flow, and the power bank business has been profitable since last year and will further optimize efficiency this year. So we are confident in improving profitability in new businesses. If we find that new businesses cannot be converted into valuable assets, we will adjust our strategy.

Q6: How is the allocation of funds considered? Are share repurchases considered?

A: Currently, most of the companies conducting share repurchases are mature companies with sufficient cash flow. If the stock price is lower than the actual value of the company, repurchasing shares can also reward shareholders. We still need to ensure that we have enough cash on hand. Currently, there are many new businesses in the investment stage and we are also exploring overseas opportunities. Therefore, it is necessary to maintain sufficient cash flow for the development of our business.

At the same time, from a longer-term perspective, I believe that our company is undervalued at the current stock price. We have full confidence in the long-term growth and scale of our company. Therefore, the board of directors has had a very serious discussion on the stock performance, and the board has discussed a stock buyback of up to $1 billion.