Q4 2023 Full Truck Alliance Co Ltd Earnings Call

Participants

Mao Mao; IR; Full Truck Alliance Co. Ltd.

Hui Zhang; Founder, Chairman & CEO; Full Truck Alliance Co. Ltd.

Simon Cai; CFO; Full Truck Alliance Co. Ltd.

Ronald Keung; Analyst; Goldman Sachs (Asia) L.L.C.

Eddy Wang; Analyst; Morgan Stanley

Charlie Chen; Analyst; China Renaissance Securities (HK) Ltd

Jiulu Li; Analyst; CICC

Presentation

Operator

Ladies and gentlemen, good day, and welcome to Full Truck Alliance's fourth-quarter and fiscal-year 2023 earnings conference call. At this time, I would like to turn the conference over to Mao Mao, Head of Investor Relations. Please go ahead.

Mao Mao

Thank you, operator. Please note that today's discussion will contain forward-looking statements relating to the company's future performance, which are intended to qualify for the Safe Harbor from liability, as established by the US Private Securities Litigation Reform Act.Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and discussion.A general discussion of the risk factors that could affect FTA's business and financial results is included in certain filings of the company with the SEC. The company does not undertake any obligation to update this forward-looking information, except as required by law.During today's call, management will also discuss certain non-GAAP financial measures, for comparison purposes only. For a definition of non-GAAP financial measures, and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today.Joining us today on the call from FTA's senior management are Mr. Hui Zhang, our Founder, Chairman and CEO; and Mr. Simon Cai, our CFO. Management will begin with prepared remarks, and the call will conclude with a Q&A session. As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will be available on FTA's investor relations website at ir.fulltruckalliance.com.
I will now turn the call over to our Founder, Chairman, and CEO, Mr. Zhang. Please go ahead, sir.

Hui Zhang

(spoken in foreign language)
(interpreted) Hello, everyone. Thank you for joining us today on our fourth quarter and fiscal year of 2023 earnings conference call. We are thrilled to report another quarter of data results for the fourth quarter of 2023, closing out the year on a strong note. Despite the challenges and opportunities present in the external environment, we have adeptly navigated the prevailing trend of efficiency enhancement and cost reduction in the freight industry.
Embracing the digital transformation of China's road freight sector, we have positioned ourselves as the leader in online, digital, and intelligent logistics solutions, effectively replacing traditional offline logistics with our core cost saving advantage. Through continuous enhancements to our product features and operating efficiency, we successfully deepened among direct shippers. We are committed to becoming the preferred shipping gateway for tens of millions of small- and medium-sized shippers, empowering and prices with greater logistics competitiveness and improved profitability.
(spoken in foreign language)
(interpreted) In the fourth quarter, we witnessed steady improvements across key operational metrics, sending you the base product operation, transportation capacity supply and one-stop services. Our average shipper MAU reached an all-time high of 2.24 million, representing nearly 19% year-over-year growth. Notably, the scale of direct shippers continue to increase during the fourth quarter, with the proportion of fulfilled orders surpassing 45% for the first half, reflecting a significant shift towards more efficient and cost-effective online channels.
For product operations, we further refine and streamline the shipping and efficient fulfillment product features for new direct shippers, facilitating the onboarding and the driving robust growth. With respect to trucker supply, we upgraded our tiered trucker rating system, consistently optimizing transaction efficiency= through an incentive-driven offering and precise matching, while continuously expanding the supply of truckers and [aggravating] user stickiness.
Additionally, for our one-stop service, our value-added services such as freight brokerage service, credit solutions and insurance, energy services and etc. saw continued penetration, synergizing with our transportation business to enhance user satisfaction and stickiness. These achievements further boosted our network effect growth momentum, catalyzing the road freight market shift from traditional offline model to an innovative, efficient and a digitalized future.
(spoken in foreign language)
(interpreted) Our strong business growth translated into exception financial performance, with revenue growing by 25.3% year over year to RMB2.41 billion in the fourth quarter. Non-GAAP adjusted net income increased by 64.4% year over year to RMB733 million. Going forward, we remain committed to optimizing our revenue mix and enhancing monetization efficiency to create a greater value for our shareholders.
In February 2024, the fourth meeting of the central commission for our financial and economic affairs emphasized the importance of effectively reducing logistics costs throughout society. As logistics serves as the backbone of the real economy, it continues to garner, increased attention and support within the strategic landscape. By leveraging digitalized logistics offerings, we are confident in leveraging digital logistics to further enhance logistics efficiency and the reduce costs, creating greater value for both industry and our users.
(spoken in foreign language)
(interpreted) Thank you. Let me pass the call over to our CFO, Simon, who will provide an update on our fourth-quarter business progress and the financial results.

Simon Cai

Thank you, Mr. Zhang, and thanks, everyone, for making time to join our earnings conference call today. I will now provide an overview of our operational highlights and financial performance for the fourth quarter of 2023.
We concluded the year with strong operational and financial results in 2024. Our fulfilled orders experienced a remarkable 40.4% year-over-year growth, driving quarterly average daily fulfilled orders to an all-time high. Despite the impact of the adverse weather conditions, fourth-quarter order growth again outpaced the overall freight market, propelled by sustained scale expansion and increased activity of both shipper and trucker users. We set a new record in fulfillment rate at approximately 32% in the fourth quarter, an increase of more than eight percentage points year over year and more than three percentage points quarter over quarter.
From a supply-demand perspective, the quarters increased supply of truckers, improved matching efficiency across various transaction types, including negotiated orders, tap-and-go orders entrusted shipment and including long haul, full truckload, lessened truckload and short haul by distance range.
Operationally, we continue to make progress with our tier trucker operations strategy during the quarter. Initiatives, such as our Saving Package 2.0 and truckers deposits helped strengthened our tiered truck rating management and income, fulfillment quality of truckers, thereby boosting retention among high-frequency active truckers.
In terms of all our structure, we sustained the growth momentum of direct shippers from the third quarter, with direct shippers contributing more than 45% of total fulfilled orders in the fourth quarter. We expect direct shippers order contribution will continue to grow as their penetration increases leading to an additional improvements in our platforms, overall order fulfillment efficiency.
Regarding our user base, our average shipper MAUs reached a historic high of 2.24 million in the fourth quarter, up 18.7% year over year and 4.9% sequentially. This increase was primarily driven by rapid growth of our non-member low-frequency direct shippers. Meanwhile, our RMB1688 and RMB688 members shippers activity levels remained essentially stable year over year, given all types of shippers, whether it's professional shipper or direct shipper, have incentives looking for efficient shipping channels to lower their logistics cost.
We expect this trend to continue with robust growth in our shipper user base through the year of 2024, primary from low and medium frequency direct shippers. Our platform, strong and growing network effect, drove parallel growth in both our trucker base and activity during the quarter. For example, the number of active truckers fulfilling orders through our platform over the past 12 months rose to 3.88 million.
In addition, we've maintained our ship member 12-months rolling retention rate as well as our next month's retention of truckers who responded to orders on a sequential basis. In the fourth quarter of 2023, revenues from our online transaction commission amounted to RMB644.9 million, up 44% year over year.
This growth was fueled by a solid expansion in a number of fulfilled orders and the heightened commission penetration. Our commission model currently covered more than 59% of fulfilled orders and generated an average commission per transaction of RMB23.7 during the quarter. It is important to note that historically, we did not include revenues from our interest-ready commission model in online transaction commission revenues. Therefore, interest of these transactions were also included when calculating our commission penetration, resulting in an underestimation of overall commission model coverage.
Moving forward, starting from 2024, we will rename our transaction commission revenue stream to transaction services, which consists of all monetization from truckers relating to freight matching services, including the revenue generated from our interest study business that was previously classified under the freight listing and value-added services in order to better reflect the company's latest development status and the businesses nature of our revenues.
Next, a brief update on our share repurchase program. From November of 2023 to March 6, 2024, we repurchased approximately 7.9 million ADS shares totaling approximately USD52.7 million. Since we announced the program, we have repurchased a total of around 30.7 million ADS shares from the open market with a total value of approximately USD200 million.
Now our 2023 fourth-quarter and year-end financial results. In interest of time, I'll be presenting some abbreviated highlights only. We encourage you to refer to our press release issued earlier today for complete details.
So the revenues for full-year 2023 RMB8.4 billion, representing a 25.3% increase year over year. Net revenues for the fourth quarter were RMB2.4 billion, representing a 25.3% increase year over year. Net revenues from freight matching services, including service fees from freight brokerage models, membership fees from listing models and commissions from allied transaction services for RMB7,048.8 million for the full year of 2023, up 24.6% from 2022, primarily due to the rapid growth in transaction commissions as well as growing revenues from our freight brokerage service.
Revenues from freight brokerage service reached RMB3.9 billion for 2023, up up 16.5% year over year. For the fourth quarter, net revenue increased by 19.2% to RMB1.1 billion, primarily driven by an increase in transaction volume due to robust user demand. Revenue from freight listing service were RMB929.4 million for the full year, up 9% year over year and rose 10.4% year over year in the fourth quarter to reach RMB246.2 million, primarily due to a growing number of total paying members. Revenues from transaction commissions among the RMB2.2 billion in 2023, representing a 52.6% increase year over year.
For the fourth quarter last year, net revenues amounted to RMB644.8 million, representing a 44% increase year over year, primarily driven by a strong order volume growth as well as higher per order transaction commission. Revenues from value-added services were RMB1.4 billion in 2023, representing a 28.8% increase year over year. For the fourth quarter, net revenues increased to RMB392,2 million, representing a 27.3% increase year over year, mainly attributable to an increase in revenues from credit solutions and other value-added services.
Fourth quarter cost of revenues was RMB1,152.3 million compared with RMB951.8 million in the prior year period. This increase was primarily due to an increase in the VAT-related tax surcharges and other tax costs and net of tax refunds from government authorities. These tax-related costs, net of refunds totaled RMB1,015.3 million, representing an increase of 18.4% from RMB857.4 million in the same period of 2022, primarily due to the increase -- due to the continued growth in transaction activities involving our freight brokerage service.
Our sales and marketing expenses in the fourth quarter were RMB421 million compared with RMB281.1 million in the prior year period. The increase was primarily due to an increase in advertising and marketing expenses for user acquisitions. General and administrative expenses in the fourth quarter were RMB266 million compared with RMB408.2 million in the prior year period. The decrease was primarily due to lower share-based compensation expenses and professional service fees. R&D expenses in the fourth quarter were RMB255.3 million compared with RMB250.2 million in the prior year period.
The increase was primarily due to higher share-based compensation expenses and increased investment in technology infrastructure, partially offset by a decrease in salary and benefit expenses. Income from operations in the fourth quarter were RMB250.8 million compared with a loss from operation of RMB5.3 million in the same period of 2022. Net income in the fourth quarter was RMB588.3 million, an increase of 200.6% from RMB195.7 million in the same period of 2022.
Under non-GAAP measures, our adjusted operating income in the fourth quarter was RMB398.8 million, an increase of 60.6% from RMB248.4 million in the same period of 2022. Our adjusted net income in the fourth quarter was RMB733 million, an increase of 64.4% from RMB445.8 million in the same period of 2022. Basic and diluted net income per ADS were RMB0.58 in the fourth quarter compared with RMB0.18 in the same period of 2022. Non-GAAP adjusted basic net income per ADS were RMB0.7 in the fourth quarter compared with RMB0.42 in the same period of 2022.
Non-GAAP adjusted diluted net income per ADS were RMB0.69 in the fourth quarter compared with RMB0.42 in the same period of 2022. As of December 31, 2023, our cash and cash equivalents, restricted cash, short-term investments, long-term time deposits and wealth management products totaled RMB27.6 billion compared with RMB26.3 billion as of December 31, 2022.
For our first-quarter 2024 business outlook, we expect our total net revenues to be between RMB2.11 billion and RMB2.16 billion, representing a year-over-year growth rate of approximately 23.9% to 27.1%. And this forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change and cannot be predicted with reasonable accuracy as of the date hereof.
That concludes our prepared remarks. We will now like to open the call to Q&A. Operator, please go ahead.

Question and Answer Session

Operator

(Operator Instructions)
Ronald Keung, Goldman Sachs.

Ronald Keung

(spoken in foreign language) Thank you, management and -- for the sharing. I want to ask about fulfillment rate, that we've seen that record fulfillment rate of 32% in the fourth quarter. What are the key drivers behind and what's the year-on-year increase and the sequential increase as well? And what is your expectation for fulfillment rate for 2024? Thank you.

Simon Cai

Thank you, Ronald. In this quarter, we have seen a substantial improvement in the freight matching efficiency, which can be attributed to the rapid expansion of our user base on both ends and the scale effects generated as a result. So with more active shippers on the platform, we attract new trucker registration, ensuring a sufficient supply of transportation capacity to meet the diverse needs of shippers quickly.
This dynamic cycle, again, lead to an influx of newly registered small and medium business owners, specifically the significant improvements in fulfillment rates in fourth quarter was driven by a number of positive factors. Firstly, the average trucker daily active user who are responding to others, increased by approximately 13% year over year in the quarter, resulting in an increase in effective supply on the trucker side, further balancing supply and demand and therefore increasing the probability of successful matches.
And secondly, ongoing optimization of the shipper structure also led to an improvement in matching capability. The contribution of fulfilled orders from direct shippers increased by three percentage points year over year to over 45%. In housing, the overall quality of order listing and the certainty of order fulfillment.
Another key factor is the continued improvement of the platform's pricing capabilities. For big database and measurement, the platform can set reasonable recommended prices that are better aligned with the current market conditions and further increasing the likelihood of transaction completion. And additionally, we have continued to create remarkable value adds to our users during the fulfillment process, such as disputes resolution and user rating, all of which have also contributed to the increase in fulfillment rates.
Looking to the coming year, we will continue to attract more shippers and truckers by utilizing a multilateral market approach to create and match more supply and demand, thereby maintaining a better balance between users on both sides.
We also continue to encourage shippers to utilize transaction types such as entrusted shipment and tap and go, which more truckers are willing to respond to, while consistently optimizing the product function and improving data efficiency to drive even higher fulfillment rates. Also, as the user structure continuously shift towards direct shippers, we also anticipated further improvement in the fulfillment rate. Thank you.

Operator

Eddy Wang, Morgan Stanley.

Eddy Wang

(spoken in foreign language) Thank you, management for taking my question. My question is regarding the fulfilled orders. We noticed that there is a 40% year over year of the fulfillment orders -- fulfilled orders in the fourth quarter. And for the full year last year, it is around 33% year over year. So this is significantly higher than the growth of the broad logistic market. So what's the major driver behind the strong growth and what's your expectation for the auto growth -- value growth in 2024? Thank you.

Simon Cai

Yes. Thank you, Eddy. Things -- since last year, the online penetration of the freight matching industry has shown very consistent growth. Our platform has maintained strong order volume growth over the past year and mainly benefiting from the continued increase of new shippers, improved activity level of existing users and continued the improvement in matching efficiency as a result of operational strategy optimization.
In the fourth quarter, we sustained our holistic user acquisition efforts across various channels, including app store, information streams and SCM, among others. Additionally, our leading network effect brought us a large number of user -- new user registration through natural traffic. As of the end of December, we had an average of around 20,000 new shippers and 10,000 new truckers registering on our platform every day.
Looking ahead to the coming year, we will continue to invest in branding and improve user acquisitions, user -- improve user acquisition efficiency by further exploring innovative user acquisition channels such as increasing offline truck stickers, advertisement and promoting alignment program. At the same time, we'll optimize the conversion of registered users to active users through a series of effective operational tools.
Also, this quarter brought more than just the growth of long-haul business, with our ongoing product functionality and operational efficiency optimizations, the less-than-truckload orders matched through our platform also grew rapidly in the past quarter. We believe that the online penetration rate of LTL remains considerably low at the moment, indicating there's still huge market opportunity to be unlocked.
As we look out into 2024, we will see new opportunities for growth as the trend toward direct shippers and LTL transactions continue to intensify. We anticipate continued high growth in our total fulfillment orders, not solely confined to the FTL market. Additionally, we anticipate making significant strides in new markets such as LTL and capitalizing on emerging opportunities. Thank you.

Eddy Wang

Thank you.

Operator

Charlie Chen, China Renaissance.

Charlie Chen

(spoken in foreign language) Could you please provide me with an update on site listing services, specifically the trend in the number of subscribing shippers, not members during the fourth quarter? It seems that the revenue growth of freight lifting has been slower compared to the fast growth of monthly active shippers. Could you please explain the main reason behind the growth rate discrepancy and provide us with an estimate of the expected membership growth for 2024? Thank you.

Simon Cai

Thank you. The number of shipper members remain largely stable in the fourth quarter with approximately 790,000 existing subscribing members as of December, a steady increase from last quarter end. Our shipper members have demonstrated strong retention and engagement with a 12-month rolling retention rate of over 80% since 2023.
The reason membership growth has been primarily driven by two factors. Firstly, we have already achieved a high penetration rate among professional shippers, and we expect a number of shipper members from this segment to remain relatively stable in the future.
Secondly, we have observed majority of the new shippers are low and medium frequency users and the number of orders included in our RMB688 memberships exceeded their needs. In response, our operation teams is actively formulating product strategies and exploring the development of packages that are more suitable for low frequency direct shippers.
In addition, although direct shipper members contributes less revenue from our proof perspective, there are specific characters such as willing to accept higher freight rate and demonstrate a better fulfillment rate, provide us with a greater potential for cross-selling with online transaction services and value-added products.
So in the long run, direct shippers will not only serve as the primary catalyst for future freight listing revenue growth, but will also present growth opportunities across other segments of our business.

Operator

Jiulu Li, CICC.

Jiulu Li

(spoken in foreign language) My first question is about the commission strategy. So what are the overall commission strategy for 2024? And in particular, what is your plan for commission rate and the commission coverage improvement in 2024?

Simon Cai

Thank you, Jiulu. The substantial increase in our commission revenue in the past quarter was fueled by the rapid growth rate of the platform's overall orders. The number of commission orders rose by 41% year over year and nearly 10% from the third quarter. From an operational level this quarter, we will continue to prioritize growth in users now the volume rather than just expanding to additional cities under the commission model. By the end of 2023, our commission model had been successfully rolled out in 204 cities.
In the meantime, we have also stressed test higher commission parameters in randomly selected cities and verify its viability. So enter into 2024, we will remain -- we will maintain our prudent approach business for our transactions service business. In addition, we will continue to enhance our value of our transaction services to users through ongoing product functionality improvement. For instance, we recently launched our (inaudible) RD&E Saving Package 2.0 product for truckers, which includes various privileges and protection features for those who subscribed.
And truckers who purchased the Saving Package 2.0 will also receive discounts on future commissions as well as a bonus order points, which they can redeem for additional benefits such as expedited deposit refund.
From a long-term perspective, we believe that our current commission rates are very conservative and there is still ample room to boost our commission revenues in the future. And looking ahead into 2024, as the platform's network effects strengthens and users' reliance on our platform deepens, we expect that year-over-year commission revenue growth will remain strong and potentially surpassing the growth rate that we achieved in the past year.

Jiulu Li

(spoken in foreign language) My second question is that non-GAAP sales and marketing expenses increased by 50.6% year over year in the fourth quarter, outpacing revenue growth for the same period. What are the main reasons for the high growth in sales and marketing expenses in the quarter? How do you expect the sales and marketing expenses to trend in 2024? Thanks.

Simon Cai

Thank you. The high growth rate of non-GAAP sales and marketing expenses in fourth quarter was primarily due to the increase of investment in marketing to acquire new users, both through online and offline channels, as well as our brand promotion to increase our brand awareness. Online, we mainly advertised through app source, information streams and search engine marketing, among other values. And offline, we primarily acquire users to truck stickers and advertising and our field marketing teams.
Moving into the coming year, we will continue to employ a very active user acquisition strategy to grow our user base and optimize our use of structure. Our overall user acquisition strategy will continue to attract shippers and truckers to our platform via a combination of online and offline channels driving (technical difficulty) here. In the longer run, we anticipate a continued increase in sales and marketing expenses aligned with the expansion of new business ventures.
However, as our revenue quickly scale up and especially as we optimize commission penetration and improve -- further improved operating leverage, sales and marketing expenses will gradually decline as a percentage of total net revenues.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Mao Mao

Again, thank you once again for joining us today. If you have any further questions, please feel free to contact us at Full Truck Alliance directly or TPG Investor Relations. Our contact information for IR in both China and the US can be found in today's press release. Have a good day. Bye-bye

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.