111, Inc. Q1 FY2024 earnings call

• Turned to quarterly operational profitability for the first time, with income from operations reaching RMB 3.7 million vs. a loss of RMB 21.7 million a year ago, and non-GAAP income from operations more than tripling to RMB 8.9 million.
• Underwent digital transformation, with initiatives like digitizing business models (JBP and marketplace), joint venture and franchise warehouses, and a self-built logistics network. AI initiatives improved order conversion rate, automated data cleaning, and powered tools like 111 Health.
• Strengthened supply-side efforts with the broadband intelligent data platform introducing over 6,567 new products, reducing top product out-of-stock rate, and launching the Kunpeng Pharmaceutical Logistics Network for cost reduction and efficiency.
• Private label business saw revenues surge 89% in Q1 2024, with gross profit up 55% and a gross margin of 29%, encompassing 3 distinct brands.
• Received accolades like 2023 Shanghai Industrial Internet Demonstration Platform and 2023-2024 Shanghai E-commerce Demonstration Enterprise, and secured a new patent for the voice service enhancement system.

For the first quarter of 2024, net revenue decreased 4.6% to RMB 3.5 billion. Gross segment profit was RMB 208.5 million with a gross segment margin of 5.9%. Income from operations was RMB 3.7 million compared to a loss of RMB 21.7 million in the same quarter last year. Non-GAAP income from operations was RMB 8.9 million, up from RMB 2.5 million in the same quarter last year. Total operating expenses for the quarter decreased 20.6% to RMB 204.8 million, accounting for 5.8% of net revenue, down from 7% the previous year.

• Confident in continued operational efficiency improvement as scale grows, expecting to operate at a lower percentage of net revenue as scale increases.
• Plan to expand the JV warehouse model in 2024, with ongoing efforts in Xinjiang and other provinces.
• Continue optimizing operating costs through initiatives like onboarding more merchants onto the new delivery and transit model, and adopting AI sales representatives to automate and optimize sales processes.

Q: What is the potential for further reduction in operating expenses?

A: Junling Liu stated that with scale growth, they are confident of continuing to scale operations, aiming for an operating range in the 45% range when revenue crosses RMB 20 billion, and currently operating at 5.7% with RMB 3.5 billion in revenue, and expect gross margin to improve with market position.

Q: Has the company initiated any new attempts in IT technology such as AI-related projects? Could you elaborate on any critical application?

A: Yang Chen mentioned that the company has made progress in platform business with total GMV over 70%, used large language models for traffic allocation and conversion improvement, launched supply chain finance services with optimal matching, and the Bo Guan data platform using internal and external data to introduce over 6,000 new products with higher margin and sales rate enabled by IT and AI technology.

Q: How does the company plan to capitalize on China's anti-corruption healthcare campaign to increase market share? And what specific competitive strengths does the company possess?

A: Junling Liu said the company will leverage its operational efficiency, offering the widest selection at competitive prices, and its 100% digital operating system provides a competitive advantage in operational efficiency, which will help gain market share as the nation pushes digitization.

Q: Do you envision the private label business becoming one of the primary growth drivers? What strategies are in place?

A: Yang Chen said private label products grew 89% in Q1 2024, with products like [1 Drug] meaning care, Huangjia yongyou zhe, etc., being well-received. Plans include continuing investment in private label products across categories like OTCs, medical devices, battery supplements to drive sustainable profit and long-term customer relationships.

Q: How will the joint venture warehouse model support the company's growth? Are there plans to establish additional warehouses in 2024?

A: Yang Chen explained that the joint venture warehouse model uses local partners with existing capabilities in remote provinces, enabling faster delivery, lower damage rates, and growth in those areas. Plans include expanding the model, with Xinjiang joint venture already in setup process.

Q: Do you believe the operational expenses figure of just below 6% of revenues is the lowest in the industry? Any opportunities to further enhance efficiency?

A: Junling Liu stated that based on internal research, the company is the most efficient in the industry currently, but there is still room to continue optimizing, with the goal of maintaining and improving operational efficiency as a competitive advantage.