Dingdong (Cayman) Limited (NYSE:DDL) Q3 2022 Earnings Conference Call November 11, 2022 8:00 AM ET
Company Participants
Changlin Liang – Founder and Chief Executive Officer
Le Yu – Chief Scientific Officer
Conference Call Participants
Ashley Xu – Credit Suisse
Thomas Chong – Jefferies
Robin Leung – Daiwa
Operator
Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to the Dingdong Limited Third Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. Please note that this event is being recorded. I will now turn the conference over to the first speaker today, Mickey Zing [ph], Director of Investor Relations. Please go ahead, sir.
Unidentified Company Representative
Thank you. Hello, everyone, and welcome to Dingdong third quarter 2022 earnings call. With us today are Mr. Changlin Liang, our Founder and CEO; and Ms. Le Yu, our CSO. You can refer to our third quarter 2022 financial results on our IR website at ir.100.me. You can also access a replay of this call on our website when it becomes available a few hours after its conclusion. For today’s call, management will provide their prepared remarks first, and then we will be hosting a question-and-answer session.
Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call. As we will be making forward-looking statements, please note that our numbers stated in this following management’s prepared remarks are in RMB terms. And we will discuss non-GAAP measures today, which are more solidly explained and reconciled to the most comparable measures reported in our earnings release and filings with the SEC.
I will now turn the call to your first speaker today, the Founder and the CEO of Dingdong, Mr. Liang. Mr. Liang, please go ahead.
Changlin Liang
[Foreign Language] Thank you and welcome to Dingdong’s Q3 Earnings Call in 2022. Today, I would like to discuss our Q3 operational performance, some thoughts on product development capabilities and our next steps. [Foreign Language] First, let’s dive in our Q3 performance. As we expected, revenue in Q3 was RMB5.94 billion with a non-GAAP net loss margin of 4.8%. [Foreign language] We quickly adapted to the changing business environment in the third quarter last year and began our strategy of efficiency first with due consideration to scale.
Consequently, our non-GAAP net loss margin narrowed substantially to 4.8% from 31.9% from a year ago. With such momentum, we’re confident of approaching non-GAAP breakeven in the fourth quarter this year, which would soon – which would be sooner than expected during our IPO. By then Dingdong will have evolved from a start-up that needed external financing to a self-sustaining company with strong survival capabilities. [Foreign Language] The key drivers of our achievements are our commitments to product development, service upgrades and supply chain efficiency, all of which contribute to our profitability and competitive moat.
[Foreign Language] Next, I would like to share our thoughts on product development. On previous calls, I introduced our strategies and practices for enhancing product development capabilities. Today, I’ll focus on the rationale behind this. [Foreign Language] First, we have a conviction in the pursuit of a better life. For the longest time, traffic was the only thing that mattered in China’s e-commerce industry. Low pricing was an obvious and straightforward way to acquire users. As a result, consumption downgrade became a trend. However, Dingdong was founded to address the mother’s concerns over their children’s food safety. Since day one, we have been dedicated to producing safer, healthier and better quality food products. We have unwavering faith in pursuing a better life and will strive towards the goal.
[Foreign Language] Second, we aim to create value for the consumer and society. Most startups are trapped in a competitive zero-sum dilemma, which is limiting. Dingdong has escaped from such a mindset and emphasize value creation instead, which is unlimited and liberating. As our consumers constantly evolve with emerging pursuit for a better life, we have infinite market opportunities to capture and demands to fulfill. [Foreign Language] As you know, Dingdong has advocated the clean label of no additives unless necessary. The ingredients on the packaging of certain food products in a market outlined various chemicals, flavorings, colorings and preservatives, sometimes written densely all over. The clean label we advocate for and implement enables more consumers to assess healthy and safe through products. It also forces the entire industry to strive towards creating value for society.
[Foreign Language]
Today, an increasing number of people around us are obese and even suffer from diabetes, due to excessive carbon hydrate and sugar intake. This is why Dingdong has put tremendous effort and resources into developing delicious but low carb, low GI food products. Over time, we expect to generate more products in this category to align with our current health and nutrition concept.
[Foreign Language]
We rarely pay attention to the competition, but rather focus on value. We embrace infinite value creation and are unrestricted by the competitive landscape. This is the principle that drives our product development and also our proposition and phase.
[Foreign Language]
Third, we do not just sell food products, we provide solutions that help you improve your life. Dingdong is in the food industry, a business that provides satisfaction and creates value for people. Eating is not only a basic physical need but also brings psychological pleasure. Moreover, you are what you eat. Eating is changing and shaping us, our families and the entire society nation.
[Foreign Language]
Oftentimes, the consumer comes to us for more than just a meal. If you ask the mother, how she wants to feed her child, she does not specify. All she wants is something that a child likes that helps them grow taller, healthier, smarter and even become a better person. That’s why we curated Mom’s Choice, with traceability, scientific nutrition and minimum additives. This curation meets mothers’ needs and eases their concerns over food safety.
[Foreign Language]
Therefore, when we develop a product, we aim to provide not only quality food for quality of life, but also solutions embedded with expertise and deep consumer insights.
[Foreign Language]
Lastly, I would like to discuss the next steps. Our loss ratio narrowed remarkably over the past year, giving me full confidence in nearing non-GAAP breakeven in Q4. When it happens, Dingdong will become a fully self-sustaining company.
[Foreign Language]
Dingdong will keep investing in product development to generate more product quality products, building a stronger supply chain and upgrading services. These capabilities will form our competitive moat. Moreover, quality products naturally gain traction because consumers can trust and rely on them, bringing continuous growth in scale, while the supply chain and service capabilities are instrumental to profitability. All the above will allow Dingdong great potential and room for growth.
[Foreign Language]
A company striving to achieve a better life and create value for the consumer has unbeatable value. In the long term, such value will translate into premium pricing. So thank you all for your continuous support. Let’s generate long-term value together.
[Foreign Language]
Thank you, everyone. With that, I’ll hand the call over to Ms. Yu, our CSO, to go over the financials.
Le Yu
Thank you, Mr. Liang, and hello, everyone. Before I walk you through our detailed financial results, please note that all numbers stated in the following remarks are in RMB terms.
Revenue in Q3 2022 was RMB5.94 billion, down slightly by 4% year-over-year. However, in the first three quarters of this year, we achieved a 23.1% revenue growth while narrowing the net gross margin by 31.7 percentage points. Our higher revenue in Q3 last year was driven by extensive subsidies and concessions granted to our users. In contrast, in Q3 this year, we were committed to enhancing product quality and order fulfillment efficiency while reducing operational costs on the strategy of efficiency first with due consideration to scale.
As a result, we achieved a significant growth in gross profit growing by 58.2% year-over-year, a testimony to our product development capabilities and operational efficiency. We expect to roughly breakeven on a non-GAAP basis in Q4 this year with GMV returning to our year-over-year growth trajectory.
Let’s take a detailed look at the Q3 performance. The GMV to revenue conversion rate was 91.3%, up 3.1 percentage points from a year ago. Gross margin for the third quarter was 30%, up 11.8 percentage points from a year ago. The improvement in gross margin has been significant over the past year, but we still anticipate more room for growth in both the short and the long-term.
Our fulfillment costs might be higher than those of the traditional submarket model because we are more deeply engaged in the supply chain. However, such a commitment also generates higher gross margin. For example, in our supply chain, we standardize and digitalize the management of fresh growth rate in city clusters by introducing different storage temperatures in our regional processing centers. In contrast, most of our peers from traditional supermarkets are using online models also such processes to suppliers. As a result, our expense ratio of the regional processing centers in Q3 was 7.3%.
In addition, we conducted a higher proportion of direct sourcing and order base funding and capital raising standards and the quality control of our products. Our extensive and the far-reaching participation in the supply chain has yet to be fully reflected in our current gross margins. We expect it to translate into higher profitability as we mentioned. The fulfillment expense ratio for Q3 was 26.8%, down 10 points, 5 percentage points year-over-year, primarily owing to improve average order value and optimization of front-line worker efficiency.
We also recorded a 25% improvement year-over-year in AOV this quarter, driven by better product development capabilities and Dingdong’s [indiscernible] in consumer mind share. Our front-line fulfillment stations delivery efficiency increased by 15.8%. And in-warehouse staff efficiency improved by 29.6% year-over-year. The marketing expense ratio for the third quarter was 2.1%, down 4.8 percentage points from a year ago.
In addition, the customer acquisition cost per new gen acting users dropped significantly by 32.6% year-over-year driven by better product development capabilities and brand image. The G&A expense ratio declined to 2% from 2.5% a year ago. The R&D expense ratio grew slightly below to 4.3% from 4.2% a year ago.
Going forward, we will continue our investment in food R&D and with culture technology and technical data algorithms while minimizing wasteful expenses at headquarters to cut costs. We believe infrastructure investment in the above three areas will strengthen our competitive advantage and create long-term value for investors.
In Q3, GAAP net loss margin was 5.8%, narrowed by 26.7 percentage points from a year ago. The non-GAAP net loss margin was 4.8%, narrowed by 27.1 percentage points compared to Q3 last year and 3 percentage points compared to Q1 this year before the COVID lockdown. Excluding a onetime expense of RMB52.7 million, our adjusted non-GAAP net gross margin was 3.9%. In Q3, we reduced our operating cash outflow from RMB407 million to RMB244 million by introducing supply chain finance. At the end of Q3, we had RMB5.9 billion in cash, cash equivalents, restricted cash and short-term investment.
In summary, since we emerged from the lockdown in Q2 and our product development capabilities gained traction, we observed a solid upward trend in our online penetration, AOV, gross margin and operational efficiency.
At the same time, we offered a higher product quality to meet consumers’ growing demand for a better life. As a result, Dingdong’s member or our loyal users were highly sticky with a net month retention rate of 84.2% and a net month GMV contribution of over 400 on average. The longer this member stayed with us, the more their monthly GMV increased. We believe Dingdong is becoming an integral part of more users’ lives.
Going into Q4, we expect to return to our year-over-year growth trajectory and be close to non-GAAP breakeven. When we achieve that, we will have lower our non-GAAP net gross margin by over 30 percentage points from 31.9% when we began the efficiency first strategy in Q3 last year. Such a notable optimization in less than 1.5 years would’ve demonstrated as the vitality and the profitability of our business model.
This concludes our prepared remarks for today. Operator, we are now ready to take questions.
Question-and-Answer Session
Operator
Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Ashley Xu with Credit Suisse. Please go ahead.
Ashley Xu
[Foreign Language] Thank you management for taking my question. Just wanted to check given the overall weak macro environment have recent any change in the consumers’ behavior. And what’s the key changes we have seen? Thank you.
Changlin Liang
[Foreign Language] Thank you for your question. We all know that consumers are constantly changing, and so are our consumption habits. This is the fascinating part of our industry. Change is the only constant, and so are our efforts to serve the users.
[Foreign Language] Here are some consumption trends observed from the recent user behaviors. So one, young consumers are paying more attention to health and wellness. That’s why Dingdong developed a prune enzyme drink with over 20 kinds of fruits and vegetable enzymes and four kinds of probiotics. It is perfect for your GI tract, and became a big hit as soon as it was launched, with basically all five-star reviews.
Following this trend, we subsequently developed more products such as lime compound juice without added white sugar and lightly-fermented mango juice, which are all very popular. Later, we curated the Xinyan Planet page to meet the needs of youngsters pursuing health and wellness. Another trend is meal for one, but it’s nothing perfunctory. Instead, it’s a dish with balanced nutrition. That’s why we have been developing certain prepared meals emphasizing nutritional balance at a smaller portion, which truly cares to this trend.
[Foreign Language] In addition, from their search results and purchasing behaviors, we noticed young consumers expect to diversify their meals with changes and surprises. We also noticed that categories such as bakeries and coffee are trending up. Lastly, the ratio of processed food, including prepared meals and packaged foods has been increasing in our product category mix.
[Foreign Language] While it’s important to identify changes, our core focus remains to address the constant demand in consumer consumption. First, it’s a common hope for all to enjoy better quality, taste and nutrition and food. Second, it’s desirable to have varied innovative categories. In addition, fast delivery is expected. People want instant gratification. Finally, consumers expect a reasonable pricing.
To sum up, people expect quality, diversity, speed and affordability. To meet the ever-changing needs of users, we need to have better product development, supply chain and service capabilities. All of these are the core competitiveness that Dingdong has always been focused on.
Ashley Xu
[Foreign Language] Thank you.
Operator
Thank you. And our next question today comes from Thomas Chong at Jefferies. Please go ahead.
Thomas Chong
[Foreign Language] Thanks management for taking my questions. We have been talking about [indiscernible] since last quarter. I just wanted to ask management about the strategy in this area. And how is the operation so far? Thank you.
Changlin Liang
[Foreign Language] Thank you for your question. Mother’s needs have always been important to us, offering nutritious and tasting meal solutions to children of various age groups based on our understanding of modest needs really aligns with our founding motivation, which is to provide healthy food products to children and ease families concerns over food safety.
[Foreign Language] We saw more than 88 million average monthly GMV of Mom’s Choice products nationwide. Half of it actually came from Shanghai, where we kicked off this program. And also, Mom’s Choice – on the operational level, Mom’s Choice GMV on average is higher than the GMV gross profit margin across the country in terms of the national average.
Regarding our product offering, we have best-selling SKUs that exceeded millions in sales each such as Salmon for kids and Twisty Rolls with Ming’s pork. Our exclusive orange bun and banana bun are customized to appeal to children are also very popular among the mothers. At the same time, we enhanced the readability of our ingredient list to highlight high protein, low fat, low sugar and other key nutritional facts that are important to mothers.
[Foreign Language] Going forward, we’ll develop scientific and nutritious food solutions for children based on our understanding of different families’ needs. Our goal is to cultivate children’s love for food so that they grow up healthy and strong and their mothers have peace of mind. Thank you.
Operator
Thank you ladies and gentlemen. Our next question today comes from Robin Leung with Daiwa. Please go ahead.
Robin Leung
Hi, thanks management for taking my question. Could management provide some updates on the competitive landscape, especially in competition with comment [ph] repurchase or other on-demand players? [Foreign Language]
Changlin Liang
[Foreign Language] Thank you, Robin, for your question. Dingdong does not focus on competition. Rather we prioritize value creation. We’re not limited by the competitive landscape. We embrace the infinite opportunities in the space.
[Foreign Language] From an industry perspective, fresh groceries and food products are a $10 trillion market in China. Any business model that is valuable to users can stay. Business models that align with user consumption trends and create more benefits for users will have a brighter future and survive economic cycles. Although the online penetration rate of the fresh grocery category remains low, it is going up fast and strong. At the same time, industry competition has become more benign and rational.
[Foreign Language] Our long-term strategies are to enhance our product development, supply chain, and service capabilities. We’re not doing it for a competition purposes, but consequently, these efforts allow us to gain competitive advantages.
[Foreign Language] First regarding building product development capabilities. Since the suppliers of fresh groceries and most foods are scattered and technologically backward, we’re determined to go deep into the source of the supply chain, improving our in-house product R&D actively developing differentiated products that aligned with consumption trends and expanding our product and process capabilities. Such heavy liftings will pay off over time with a strong first mover advantage in long-term value. We are in the era of surplus, and our supplies have been extremely enriched. That’s why customized differentiated SKUs that meet the needs of consumers and provide a better product experience, which can greatly improve our user stickiness. Dingdong’s long supply chain involvement can also bring higher gross profit margins, stronger profitability and self sustainability.
[Foreign Language] In terms of developing services as the Chinese saying goes, a craftsman must sharpen its tool to do his job. We iteratively optimize the layout of the frontline fulfillment stations and manage inventory stocking with a granularity and transparency. So that each frontline fulfillment station can accommodate more SKUs and items. This brings abundance on in our product diversity and enhances the upper limit of daily GMV. At the same time, the frontline fulfillment stations are distributed across the country, which takes work to manage. We adopt dual standardization in our management leveraging corporate values and our granular SOP. We will keep strengthening training and make data transparent to each action in the SOP, so the SOP can be effectively implemented.
[Foreign Language] To sum up, although we do not focus on competition, our long-term strategies build competitiveness and create high value, allowing us to gain an advantage in the future. Thank you.
Operator
Thank you. And our next question comes from Amy Chang [ph] at Delta Investments. Please go ahead.
Unidentified Analyst
[Foreign Language] I’m going to translate my questions myself. Thank you for answering my question. I want to know you can is the frontline fulfillment station business model would really make profit? And if yes, when will then Dingdong achieve profit? Thank you.
Le Yu
[Foreign Language] All right. Our CSO, Mr. Yu Le will take this question. Thank you for your question. We expect to roughly achieve non-GAAP breakeven in Q4. We believe that whether a business model is profitable or not, it depends on whether it creates value for users. We have built our supply chain capabilities to customize research and produce differentiated products based on user demand. We operate in high consumption frequency categories that are difficult to manage and we deliver these products quickly to user doorstep, all of which are valuable.
[Foreign Language] Secondly, whether a business model can be profitable depends on the profit margins of the industry. The price markup of fresh grocery from the origin to the user is significant, but the dispersion and inefficiency of the supply side lead to low gross margins for the industry. After gradually breaking through the bottleneck of the supply chain, we managed to raise the gross profit margin of Dingdong very rapidly.
[Foreign Language] Third, where a business model can make money depends on their engagement in the supply chain. The width and depth of our expansion in the supply chain are done in the industry.
[Foreign Language] Firstly, let’s look at the upstream. In the fresh food category, we have a high proportion of direct sourcing from the starting point of the supply chain. And we are gradually increasing the share of order base production directly signed with large and medium-sized farmers. We choose to carry out the standardization and informatization of fresh food in the regional processing centers while establishing our in-house production and processing capabilities in the non-fresh food category. Regarding the downstream, the user only needs to place an order on a mobile phone before we deliver the goods to their doorsteps in about half an hour, which is extremely convenient.
[Foreign Language] Thank you. Dingdong do not only create value for its users but also operates in an industry with great profit margin potential. In addition, it has been more deeply involved in the supply chain than its peers still. All of the above will naturally translate into stronger financial performance. Since we adopted the efficiency first strategy in Q3 last year, our gross margin has gone up over 11 percentage points from a year ago. Fulfillment expenses down 10 percentage points and the loss ratio narrowed by over 26 percentage points. Such a rapid reduction of losses is not only unique in the industry, but also rare in other industries. There is no doubt that Dingdong can achieve profitability. Thank you.
Operator
Thank you. And as there are no further questions at this time, I’d like to hand the conference back to our management for closing remarks.
Changlin Liang
Thank you again for joining our call today. If you have further questions, please feel free to contact us a request through our website. We look forward to speaking with everyone in our next earnings call. Have a good day.
Operator
Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.
Be the first to comment