111, Inc. Q2 FY2024 earnings call

• Achieved operational profitability for the second consecutive quarter driven by improved operational efficiency despite macroeconomic challenges.
• Digital transformation initiatives: developed merchant bidding tools, automated OS, integrated big data-driven price index, boosting procurement conversion rate to over 32%.
• Supply chain fulfillment improvements: 11% increase in warehouse efficiency, 15% reduction in picking parts, digital logistics network cut last-mile costs by over 5%.
• AI application: doubled product matching accuracy in pharmaceuticals, medical devices, and health supplements.
• Secured 4 new patents, total now 28, including those for HR management, anti-crawler, drug retrieval, etc.
• Kunpeng logistics network expansion: added 2 JV fulfillment centers, servicing 72 external clients, reducing client costs by 15% and delivery damage by 55%.
• Strategic partnerships: direct supply with Beijing Scrianen, formation of 1Pharmacy alliance to address market challenges.
• Private label business: revenue up 35% in H1, 3 brands with 29% gross margin; plan to expand JBP platform.

Total net revenues for the second quarter of 2024 were RMB 3.4 billion. Gross segment profit was RMB 207.6 million, relatively flat year-over-year. Total operating expenses decreased 18.1% to RMB 204.3 million, accounting for 6% of net revenue, down from previous year. Income from operations was RMB 3.3 million compared to a loss of RMB 41.4 million in the same quarter of 2023. Non-GAAP income from operations was RMB 8.5 million vs. a loss of RMB 17.2 million last year. Operating cash flow remained positive for the second consecutive quarter.

• Expect OpEx ratio to continue decreasing as scale increases; target under 5% OpEx ratio with sales over RMB 20 billion.
• Confident in maintaining profitability for 2024 if market conditions remain stable; aim to sustain operational profitability.
• Plan to add 2 more JV fulfillment centers in Q3, expanding the logistics network to enhance service across regions.

• Redemption requests from investors in 1Pharmacy technology: total redemption amount of RMB 0.2 billion, ongoing negotiations with investors to firm up redemption terms.

Q: Xipeng Feng from CICC asked about OpEx ratio guidance in the long run and net profit guidance for the year.

A: Junling Liu responded that the in-house digital operating system allows real-time decision-making, and with scale, OpEx ratio could be under 5% with sales over RMB 20 billion. Drove to profitability via operational efficiency, and confident in maintaining profitability in 2024 if market conditions stay.

Q: Zoe Bian from Citi asked about penetration into pharmacy clients, focus on profit vs revenue growth, and retail price comparison policies.

A: Junling Liu said they help pharmacists overcome challenges, prioritize profitability while optimizing product selection, and low prices are the overarching strategy to win market with greatest selection and low prices.

Q: Jessie Lu from HSBC asked about key factors in positive operating cash flow and Kunpeng logistics updates.

A: Luke Chen mentioned improvements in working capital like accounts payable and inventory turnover, and supply chain finance with third parties. Junling Liu discussed Kunpeng's optimization of product allocation in fulfillment centers, serving over 70 clients with RMB 200 million scale, reducing client costs by 15%.

Q: Robert Sassoon from Water Tower Research asked about new fulfillment centers, partnerships with pharma companies, and AI in digital tech.

A: Junling Liu said 7 new fulfillment centers in pre-opening, targeting September to December, and plans to work with local partners. Discussed Telescope ecosystem for pharmaceutical companies' digital marketing. Luke Chen talked about 28 total patents, including AI applications, and private label products with 200+ SKUs, planning to accelerate private label with OTC, RX, etc.

Q: Unidentified Analyst asked about new patents and private label products.

A: Luke Chen said 4 new patents in Q2, total 28, including AI for voice services and drug retrieval. Junling Liu mentioned 200+ private label SKUs, 3 brands, and plans to expand private label in OTC, RX, medical devices, leveraging exclusive brands for small pharmacies.