Q3 2021 111 Inc Earnings Call
Good day and thank you for standing by welcome to the 111, Inc. Third quarter two earnings conference call. At this time all participants are in a listen only mode. After the Speakers' prepared remarks, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Mr. Stephen Kilmer. Please go ahead.
Uh huh.
Thank you operator, Hello, everyone and thank you for joining us today for 111 third quarter 2021 conference call.
On the call today from 111 are Dr. Gong Yu co founder and Chief Chief Executive Officer, and Executive Chairman, Mr. Lu Co founder Chairman and CEO, Mr. Luke Chen CFO of our major subsidiary Mitch.
Mr. Harvey one C O O.
Tiffany could you.
Yes.
<unk> of Investor Relations and business development card or a home finance director and Monica Mu Investor Relations director.
As a reminder, today's conference call is being broadcast live via webcast.
And a replay will be available on our website. Following the call. The company's earnings press release was distributed earlier today.
With our earnings presentation are available on the company's IR website at IR Dot one dot com that's yet.
Before we get started let me remind you that this call may contain forward looking statements under the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
Such statements statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks uncertainties and other factors all of which could cause actual results to differ materially.
More information about these risks please refer to the company's filings with the SEC.
111 does not undertake any obligation to update any forward looking statements as a result of new information future events or otherwise, except as required under applicable law.
Please note that all numbers are in RMB and all comparisons refer to year over year comparisons unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year over year basis.
With that I'll now turn the call over to our CEO.
Certainly.
Yes.
Good morning, and good evening, everyone. Thank you for joining us on <unk> third quarter earnings call.
Before delving into performance I would like to talk briefly about the regulatory environment.
Next I will give a short summary of our business for those who are new to our story I'll then cover our recent operational performance before handing the call over to Luke to discuss the financials.
We will conclude our prepared remarks with guidance for Q4, 2021 absolutely we will open up the call for Q&A.
Sure.
We believe that current policies will continue to provide a tailwind to the health care industry and to our company.
In 2016, and President Chi announced the healthy China 2030 initiatives that emphasized public health as a <unk>.
Precondition to future economic and social development.
This initiative is based on four core principles.
First put health care at the forefront of National development strategy.
Encourage innovation.
Third develop new methods of cat to focus on both prevention and cure and the combined Chinese and Western medicine.
And fourth and ensure that rural areas of the country are given equal access to health care.
In the latest five year E Commerce development plan and administrative Thomas has once again reinforced the importance of health care as a national priority and provided a blueprint for the future of China's health care industry, including Telehealth services, such as virtual registration all.
Line consultation and patient and care management.
In addition, the government is encouraging the integration of online and offline channels as well as the development of <unk> platforms with solutions that help solve the pinpoints of the health care industry.
We're well positioned in the healthcare industry as our platforms and the <unk>.
Alignment with the blueprint for the future of China's health care system.
In addition, recently proposed policies aimed at curbing monopolistic and anti competitive practices will hinder efforts by large companies to form close to look ecosystems that blockhouse competition.
Large platforms will become more open leveling the playing field for all players, including one by one.
New policies could also unlock new opportunities for more months.
For example, a key challenge that new policies seek to tackle is a lack of information symmetry within the healthcare industry, which can lead to health care decisions being made when only a portion of the patient information is available.
This push to integrate data between online and offline healthcare businesses as well as new compliance requirements for this certification of doctors and patients virtual platforms will require innovative solutions avoid that we are well positioned to fail.
While no one has been on a mission to transform and advanced the healthcare services industry in China by leveraging technology and the power over the internet to connect patients with the medicines and healthcare services.
Our ecosystem seamlessly integrates the supply demand and data to provide products and services to patients when and where they need the most.
Our value proposition solves a key problem for the healthcare industry, where decisions are made with incomplete patient data.
Our patient centric CAD platform directly connect patients with product and a service providers and is enabled by three unique technology platforms.
One pharmacy, which is currently one of the largest online retail pharmacies in China and it was also one of the first thing to tease to receive an online pharmacy license.
One clinic, which provides consumers with a myriad of cost effective healthcare services, including E consultations and adapt to patient management services over the web.
And the one medicine.
One stop shop for pharmacies.
While my one also uniquely delivers a holistic health care platform that integrates medicine with house passed services benefits to all parties within the broader healthcare ecosystem of pharmacies pharmaceutical companies doctors health care providers and patients.
We are a differentiated company because we offer cohesive online and offline solutions.
Unlike traditional <unk> players that only distributed products across their service area are as to B to C model provides tools that enable businesses to achieve their goals.
For pharmacies, we can help them operate more efficiently training employees expand into online channels attract and retain customers and integrate data and the service across the online and offline channels.
For pharmaceutical companies, where a commercialization partner that can help sell their products outside of the hospital system.
Ill, providing services such as data analytics digital education and patient feedback.
For doctors and patients would provide a telehealth platform that improves the patient experience.
Our competitive advantage as demonstrated by a vast network of health care players.
Connect pharmaceutical companies to over 65% of China's retail pharmacists nationwide and connect patients to over 20000 adopters with expertise in chronic diseases, such as diabetes neurology dermatology, etc.
Yes.
Moving on to recent performance.
We had another strong quarter with net revenue, increasing 42% year over year to $3 3 billion RMB, marking the 13th consecutive quarter of year over year growth since our IPO.
The <unk> segment remains the core part of our revenue and continues to deliver impressive results accounting for $3 2 billion RMB of total revenue up 46% year over year.
The market continues to show strong demand for our diverse portfolio of service offerings.
On overall service revenue grew 106% year over year with B to B service revenues totaling $16 1 million RMB.
Presenting a 336% year over year increase.
Non-GAAP net loss as a percentage of net revenues decreased from four 1% in the third quarter of 2022 of three 8% in this quarter.
Net loss for Q3, 2021 was primarily attributed to an increase in R&D and technology expenses and expenses attributed to the expansion of our fulfillment center capacity.
We expect these expenses to grow at a slower pace going forward.
Revenue for the <unk> segment totaled 124 million RMB or.
<unk>, 3% a decrease from Q3 2020.
The <unk> segment remains an important pillar of our patient centric mission.
We are pivoting the PUC towards profitable and positive margin contribution.
So that and we saw a manage the revenue slowdown in the last few quarters.
We will continue to invest in new initiatives and our <unk> business segment and will report on this further going forward.
Yes.
In addition to strong topline growth our gross margins grew twice as fast as our revenue in the third quarter.
Gross margins grew by 85% year over year and as a percentage of revenue our gross margins improved to 5%.
We're especially pleased with the margin improvement for our core business, which grew 145% from Q3 2020.
As a percentage of revenue gross margins for the <unk> segment grew from three 6% in Q1 to three 8% in Q2 to four 4% in Q3.
As mentioned in our Q2 call we are laser focused on margin improvement and the.
This is just the beginning.
Yes.
As our business continues to grow we will realize further benefit from the economies of scale, such as steeper discounts and cross selling our technology and service offerings.
We'll also continue to optimize product categories improve supply chain and increase efficiency.
For example, using our proprietary technology, we'll have identified areas of pricing inefficiency and make the appropriate adjustments.
<unk> also improved our product selection as compared to last quarter.
With almost tripled the number of skus for products with higher margin profiles.
We will strive to double that number over the next 12 months.
In addition, the expansion of our service offerings will generate margin accretive revenue.
Our efforts should allow us to double our margins, putting us on a clear path to profitability.
As the healthcare industry in China and maintains its path towards Digitization. It is important that we continue to invest in our robust technology infrastructure for all of them on one platform.
To support this requirement our technology expenses in Q3 totaled 56 million RMB.
155% increase year over year.
On a quarter over quarter basis technology expenses increased at a much more modest pace of 6%.
We'll continue to improve upon our smart supply chain infrastructure and in order to meet the growing demand for our products and our services will have more than doubled our fulfillment capacity since the beginning with it yet.
The additional capacity will position us for future growth by increasing the number of businesses selling products through our platform and growing the number of partnerships with businesses looking to commercialize in China.
In the third quarter, we expanded the number of direct sourcing partnerships with domestic and global pharmaceutical companies to over 400 up 33% from a year prior.
Today, there are over 5000 pharmaceutical companies globally, and we will look to form partnerships with at least 20% of these companies.
While my mind as an attractive partner for pharmaceutical companies, because we can help them establish and manage in out of hospital channel that connect them with the majority of the retail pharmacies.
Our value as a commercialization partner will continue to increase as we grow and enabling us to offer even more services to companies commercializing their products in China.
We launched our one health membership program in Q2.
And I'm pleased to report that that continues to gain strong momentum with our customers.
The one health membership program allows members pay an annual fee to unlock exclusive benefits.
And in the third quarter, we have over 11000 participating stores.
Exceeding our internal target of 10000.
With this program. We have also seen the increase in purchases amongst participating stores will not only attracting to our vast selection and competitive prices, but also in having access.
So the valuable tools that we offer to help them better manage their businesses.
Currently over 2000 stores are using our proprietary systems to help them manage inventory optimize their procurement and product selection and improve customer experience through our CRM system and the probiotic product education to their customers and employees.
Going forward, we will build upon the early momentum this program has achieved.
<unk> to offer new products and technology solutions to help pharmacies improve their operations and to build more robust businesses.
Yeah.
Before I conclude I want to spend a moment and touch on our ESG assets.
To date, we have provided approximately 400000 free online consultations, including to patients and Hunan province faced with severe flooding conditions.
And we have partnered with local hospitals.
Medical services for underserved populations.
We have also continued to support areas experiencing COVID-19 outbreaks through PPE donations.
As a company committed to helping people living healthier lives ESG is very much embedded in our core values and going forward, we will continue to support our community.
Help realize our collective goal of a healthy China.
Beyond these highlights will continue to strengthen our team developed a new technology and improve our capabilities as our business grows.
We are confident.
Going into the balance of the year that our leading position in the healthcare services sector, along with industry tailwind positioned <unk> well for continued growth as we transform medical services in China.
And ultimately deliver excellent value to our shareholders.
Finally, I would like to thank our shareholders for their continuing support.
With that I'll hand, the call to look to walk through our financial results. Thanks.
Thank you Jamie moving.
Moving to the financial section on Slide 18.
You can see the details of the third quarter of 2021 results from slide 19% to 21 of our presentation.
I would like to highlight a few key business and financial matrix.
And I'll focus on a year over year comparisons.
All numbers are in RMB, unless otherwise stated.
Total net revenues for the quarter grew 41, 6% to $3 35 billion.
Which was within the range of our guidance.
We already had two consecutive quarters with quarterly net revenues exceeding 3 billion Mark.
Which will place us into 10 billion revenue club this year.
Our <unk> segment revenue grew 46, 3% to $3 2 billion, reaching a new record high for segment revenue in a quarter.
<unk> segment revenue was down 22, 9% to $124 million year over year.
We expect this downward trend will be reversed.
As we launched several initiatives to accelerate the growth of this segment.
Our <unk> gross margin was four 4% up from two 6%.
<unk> gross margin remained stable at around 20%.
The improvement in gross margin of our <unk> segment.
Reflects our ability to continuously improve the margin while maintaining substantial top line growth.
Overall, our gross profit grew by 84, 6% to $166 1 million and the combined gross margin was 5% upfront three 8% a year ago.
Total operating expenses for the quarter were up 61% to $341 4 million.
<unk> of net revenue total operating expenses for Q3, 2021 accounted for 10, 2% compared to 9% in the same quarter last year.
Fulfillment expenses as a percentage of net revenue for the quarter was 3% up from two 5% in the same quarter last year.
This was mainly attributable to costs associated with upgrading and expanding our existing facilities to support our growth.
As this expanded facility reached full capacity, we expect the fulfillment expenses to decrease.
Sales and marketing incentives as a percentage of net revenue for Q3 2021 was three 9%.
Down from four 4% in the same quarter last year.
Excluding the share based compensation expenses G&A expenses as a percentage of net revenue were 1% as compared to <unk>, 9% in the same quarter last year.
Technology expenses accounted for one 7% of net revenue upfront, 0.9% in the same quarter of last year. This was primarily driven by an increase in the number of personnel in India and it teams.
We believe that continuing to invest in our team and technology and our service offerings in the area of digital health Big data and smart supply chain will strengthen our market leading position.
As a result.
Non-GAAP net loss in Q3, 2021 was $136 3 million.
<unk> to 19 7 million in the same quarter last year.
Which accounted for three 8% of net revenue down from four 1% a year ago.
Non-GAAP net loss attributable to ordinary shareholders was RMB $213 4 million.
Compared to $94 4 million in the same quarter of last year.
As a percentage of net revenue and non-GAAP net loss attributable to ordinary shareholders increased to six 4% in the quarter from 4% in the same quarter last year.
The increase was mainly caused by accretion for profitable redemption of redeemable non controlling interest in the future.
A quick note our cash position as of September 32021, we had cash and cash equivalents restricted cash and short term investments up $1 1 billion RMB.
<unk>.
As to the guidance for the fourth quarter 2021 on slide 23.
The company expect total net revenue to be between 344 billion and $3 7 billion, representing a year over year growth.
Approximately 30% to 40%.
In addition to grow our top line, we are laser focused on growing our margins.
We expect the trend of margin growth outpacing revenue growth to continue.
We keeping making strides towards becoming profitable.
It should be noted that this outlook is based on current market conditions.
And reflect the company's current and preliminary estimates of market and operating conditions.
As well as consumer demand, which are subject to change.
Please refer to slide 25 to 27 of the appendix sections of our selected financial statements.
Operator, we are now ready to begin the Q&A session.
Certainly as a reminder to ask a question you will need to press star one on your telephone to withdraw your question perhaps.
Once again to ask a question at Star and the number one on your telephone keypad.
Your first question comes from the line of <unk> Tong of TICC. Please ask your question.
Okay.
Yes.
Hi, This is Brian.
And thank you for taking my question and congratulations on the company programs.
As Japan, where voice.
They're very low we cannot hear you clearly.
Oh, I'm, sorry for that kind of hear me now.
Now it's much much better.
Yes, okay.
That's fine okay.
Two questions actually and my first question is about the policy.
You may notice the National Health Commission of China has just released a draft document detailing the regulations for online medical services. So could you. Please share some more color colors on the impact of this policy or document both to the industry or to the company and my second question.
<unk> is well I see <unk> Zechman has delivered strong growth in the process several quarters, but what's the reason behind it and while the <unk> segment maintained the growth momentum in the future. Thank you.
Thank you Shannon for the question.
I'll take on the first question about the policy.
I spent a little time in my speech talking about policy I had some keywords like.
Healthy China 2030.
Health has become a national priority and.
Other key words include online plus offline and the recent.
MOFCOM.
Policy.
Clearly stated supporting piece will be internet players and integration of Digitization.
Finance of logistics warehouses et cetera.
I think overall those policies all tailwind and it's all very good for the industry and also very good for 111.
I noticed you were referring to the latest consultation paper, it's not our policy yet and.
Our interpretation.
It's not a final policy, it's at the moment, we're still guessing how.
The final document is going to be but as.
As a first read.
And obviously it is going to be very clear that.
Digitization is the future and Internet is going to play a key role in the overall health care industry.
However.
There has to be a <unk>.
Strict compliance and that kind of sealed the position of <unk>.
Digitization in the industry and.
We absolutely embrace.
That policy change and.
I think.
The.
Much more strict.
Compliance there are costs fall.
Innovative solutions and we're more money is very well positioned in that space not to even talk about we have always had very high standard when it comes to compliance.
Yes, she thought I would take the question regarding <unk>.
<unk> revenue has reached $3 2 billion in Q3 of 2021.
Furthermore, we should even more importantly flat Peter.
Between margin growth rate is much faster than our revenue growth rate.
Which is the margin growth rate is 3.15 times.
Our revenue growth rates.
So we are very excited to see our core business. This is the <unk> business is getting more and more healthy.
We will continue to strengthen our competence all now as to B to C model.
Especially on the S side.
We are creating value for our upstream and downstream partners and customers.
We are offering more services to these customers.
Partner.
So we are getting more services revenue from this customer and partners, which you can see in our financial report.
So our as to B to C model.
It's getting robust we are confident that we will maintain a fast revenue growth rate and Meanwhile, with margin growth rate, even faster than our revenue growth.
Thank you.
Okay, that's a favorite player and congratulations again on the company program.
Thanks.
Okay.
Your next question comes from the line of Bryan Bryan of Citi. Please ask your question.
Even the management of this is Joey.
And congrats on the strong growth.
Oh, Oklahoma, along again this quarter and thank you.
Thank you my question, perhaps my question the first thing.
For the cooperation with pharmaceutical company.
Any updates on a number of pharma, who will work with any new forms of cooperation could you give us a few examples of digital marketing and a lot of commitment.
Thank goodness.
Share more updates all the wrong number.
Hum.
Okay.
Members versus other pharmacies.
And the third one is when do you expect to breakeven. Thank you.
Let me take the first question.
You might notice that we.
Uh huh.
Increase our direct sourcing relationship with pharmaceutical companies.
To over 400. This is a very important to us it's very remarkable.
It's worth it.
The upgrade of our 42.
The Oregon.
You have with your exports from the good companies, you'll reduce the what would be the layers.
No.
Reduce our procurement costs.
Also improved.
<unk> upfront.
We're also <unk>.
We call specialized hospitals.
Comparable to the company.
We have one.
100 ships with Eli Lilly and.
Nobody's.
Or how would you maybe.
We started this initiative.
I know for last March and now we have going on.
Alright specialized hospitals, let's.
Let's take the recent announcements were made.
For the partnership with <unk>.
Frankly, the company Jay pharma.
In Japan.
Okay.
Walmart is the first E Commerce company in China.
The channel.
This relationship which could be pharma.
This partnership with <unk>.
Allow.
Cardiovascular patients who community access education materials.
Regarding there.
These.
Options effective disease many matures.
You will also improve patient quality of life Cos provide vouchers.
Decent matures.
These better health for patients.
So one for Mary.
Obviously with a different pump companies aside.
From a direct sourcing relationships.
Yes.
Okay.
Yes.
Okay.
I'll address.
One health program is really.
Appreciate that question.
Before I answer that one health program.
Let's look at the marketplace.
Today in the pharmacy space will have about.
580000 stores across the country.
There are a few very big players and if we look at others.
Big chains, they are all there.
Very centralized.
In terms of the.
Organization I E.
Have some control of all those pharmacies.
Their own chains et cetera.
One of my money is trying to build a new model.
Our Federation model.
So with.
Our model, we're going to have a lot more stores joining our platform.
With digital franchising the smaller guys can enjoy the same benefits like the big guys in terms of procurement in terms of access to good assortment in terms of.
Access to systems to digital technology et cetera.
Now.
If you.
Look at.
The progress we have made today, we have already covered more than 28 provinces and.
More than 300.
Medium to small change joining us and we'll have 11000 installs.
Obviously.
Our objective is to have more and more stores joining us and because this is our federation model.
There is very little barrier and what we are going to do is to continue to leverage our digital technology to help those pharmacies to improve their competitiveness, especially when it comes to.
The systems, the procurement and also managing their assortment and the prices that et cetera.
<unk>.
We are looking forward to providing more updates in future quarters.
So it's look let me answer your third question on the breakeven timeline I think all of our investors are <unk>.
So were looking at us and we're going to make profit.
And I believe we are now in a much clearer position too.
To protect that.
With.
The scale, we built up and the margin improvement are.
We expect to be profitable in 12 months time.
Our confidence level of achieving this target is pretty high.
So you look at our margin now it's like 5%.
And it will continue to grow to six 7% and even higher so was that.
Together with the scale, we built up and we are introducing more higher margin products into our portfolio.
Of course, we will continue to build a lean organization and optimize our investments.
So we think this.
Yes.
Game profitable is very close in a corner in the near future.
Thanks, a lot of management.
Right.
Well that we're looking forward.
Development in the future.
Thanks again.
Thank you Zoe.
Your next question comes from the line of Burgers Mcpherson.
Please ask your question.
Yeah.
Hello.
Kudos to you for your performance in the quarter for questions. If you don't mind.
First question is that I see that.
Your company has continued to strengthen our technology capabilities.
And what areas do you envisage effecting.
This industry.
Second question regarding your revenue from services rising rapidly.
Q what factors, Kansas be attributed.
How would you maintain such good momentum.
Third question is regarding the market sectors youre seeking to enter.
Query what are their sizes and what's the outlook as it relates to these market sectors and the final question is I'd like to ask about.
Status.
<unk> star market IPO.
Yeah.
Yes.
Okay.
Can you address the first question about.
The technology called higher appropriately.
Let me address the service revenue part.
I didn't hear the first question maybe.
The service revenue.
We're very happy to see that.
Increase.
Rapidly.
<unk>.
The increase the Germany will reflect the value creation platform.
Our technology capabilities.
Maybe.
From the following areas.
Steve.
First is.
The marketplace sellers.
The three platform.
On top of the one clinic and what medicine.
Okay. The third parties.
While our enabling services to pharmacies.
Such as that.
Yes, I am.
Your prescription services.
Roger.
The third.
Is the service fees for our services.
Obviously the companies.
Such as Louis mentioned about digital marketing patient education.
Management all of those.
Yes.
The fourth parties.
Supply chain services.
For our ecosystem.
Okay.
Very important projects such as.
Can you ballpark.
At BP.
Otherwise it's simple.
These are the criteria.
Management services to our.
Yes.
Hi, there.
Alright.
Go ahead please.
Okay. So I'll cover the first question.
The first question so with regards to the technology investments we have made.
Obviously, it was 155% increase compared to the same.
Period of last year.
This is an area, which we believe we can establish a competitive advantage. So.
Technology is really structured in a way to address.
<unk>.
Challenges that are faced by pharma companies like pharmacies.
In terms of supply chain and to doctors and to patients.
No.
We believe that our investments in this area will give us the necessary advantage I'll give you an example.
Our bond health program.
We have a pretty big team in terms of technology to really code everyday and.
Today, we have already digitally connected all the <unk>.
While close to 3 million consumers and those consumers have various disease tax and they have very we have very clear profile and we're happy with digital tools to interact with them and in the past those pharmacies were never in that position. So we believe.
<unk>.
The continued investment in this area will yield good results and if you look at what would have achieved so far we've already got 19 patents in.
In the areas in particular saw health big data.
Data analytics and <unk>.
In our supply chain.
More than 30 proprietary systems.
So really power our backend operations.
When it comes to your question three.
Size of the market.
Based on our intelligence.
To date the.
The pharma market is.
About two trillion.
And by 2030.
The outside of the hospital channel alone is going to account for more than two trillion. So.
No.
We anticipate this is going to be one of the most attractive markets in the world. So they.
The aging population in the world.
So this is going to be the space, we're going to play and we have already laid a very solid foundation to position <unk> as one of the key players in this space.
And we define our space is the out of hospital care so from patients perspective, they can actually.
To have a holistic care if they actually.
Step out of the hospital, let's say, even if they are from a rural.
Lower tier cities.
Even if the left home the left to the hospital. They thought they would they go home, we're still in a position to help them.
So we actually love the pharmacy space given the coverage we have had and this is a clear advantage.
<unk> managed to build so on the IMD.
The opinion that.
We're able to really redefine the supply demand relationship with our platform.
And obviously.
There are many other initiatives we have.
<unk> put in place so far.
There's nothing material as yet, but I am not.
Looking forward to providing updates moving forward in due course.
Yeah, Let me let me answer the question on the status of <unk>.
The star market IPO.
The domestic IPO preparation is still in progress.
Based on our internal assessment natural we are meeting all the requirements.
However, there are new rules coming out by the stock market and we are evaluating.
We are very optimistic.
About China market to be further to open up.
This news that.
China stock market.
Adopters reservation system versus a proven system.
Maybe next year.
And we believe we should get ready for that.
So we will keep the street informed all posted according to the FCC rules.
Yeah.
Okay. Thank you.
Okay. Thank you for.
For the Lightning response, and I look forward to.
Results in next quarter. Thanks.
Thank you.
Your last question comes from the line of Jesse Lee of HSBC. Please ask your question.
Thank you for taking my question this is Jesse.
Half of Xiaomi.
Any questions from me the first question to Bob.
Gross margin of the RFP to be something that we saw a very good improvement from last quarter and you just mentioned that the margin can grow from Pfizer.
7%, even higher I'm wondering.
If we think in a longer term.
And yes, how high would be what the BTB segment margin could achieve and my second question is on your fulfillment capacity.
I think it has been growing at a faster rate than previously guided in our Q2 results, which is very impressive. So I was wondering in terms of timeline and your target what is your ankle for these capacity enhancements and Huawei instruments.
And in terms of fulfillment centers will you be building more and will be the capex expectation on that.
And last one I'll leave the question on your Pharmacy claims you mentioned, you're already cannot christou from 85% of overall pharmacy in China. So can you share with US your strategy in terms of for the <unk>.
How can our relationship with existing pharmacies.
How to reach out to the other 35%.
Thank you.
Okay.
Jesse I will take the first question regarding the it will be margin.
So we are excited to see.
In Q3, our <unk> margin is year over year growth.
<unk> has reached a 145%.
Which is the three point.
One five times faster than our revenue growth.
Which means our PV business is getting more and more healthy.
And the margin improvement of <unk> comes from.
Early actions.
The first is.
Introduction of more high margin products.
Internally, we call them go labeled products.
And secondly are we.
Seeing a more effective use of our price in Paddington.
Yes.
Optimize our pricing.
And as a doctor.
Can you just mentioned we have more direct sourcing over 400, plus pharmaceutical companies.
We upgraded our sourcing towards the source.
And last.
We are seeing improvement at all continuous implement on our supply chain efficiency.
Talking about net next staff.
With the launch of the flooring phases of our as to B to C.
We are creating more value for our upstream and downstream partners and customers.
So we are confident that.
There will be enough room for us to further improve margin.
Uh huh.
We definitely we can see.
Even the margin growth rate.
Next quarter should.
Should be faster than our revenue growth stream.
And our <unk> business should be getting more and more healthy. Thank you.
Let me take the.
Our favorite Thunder has to be used to pay.
In the past.
We have observed that.
Center capacity and throughput has been a bottleneck.
World So we.
So we'll have a.
They need our capacity and the throughput.
During the year.
Year and.
We believe that the efficient optimized.
The corresponding backend systems Walmart for covenant.
So.
Certainly ensure our perfect customer experience.
Volatility of the product we offer.
The rapid turn off all your inventory.
The positive cash flow.
All very very important.
So.
The fulfillment.
Okay.
I think the throughput is very critical part of our supply chain.
No.
The lack of a direct impact on our operation.
Given our growth.
We are.
To optimize and automate our supply Kid why do you maybe.
And the only study our capacity through our own centers. We're also using.
We're also creating new business models in.
In the future, where I know that some new business models.
Use.
The capacities.
Are these all different new initiatives.
Help us.
Okay.
Not only capacity, but also.
Raise the barrier of entry.
Yeah, Jesse I want to.
I think on the third question I appreciate it that's a great question by the way.
When it comes to the pharmacy customers and obviously the first few years, we have made it a.
Operationally in Paris imperative to really cover as many pharmacies as possible.
Until we get to the 50% market coverage and obviously, we have successfully implemented that achieve that mission and the now we cover approximately 65% of the market with.
370000 pharmacies also so that is really mission accomplished and moving forward.
Will not be our first priority anymore, instead, we will be continuing.
Two really.
Grow our loyalty.
Grow our share of wallet and of course, we're going to continue to add.
More customers.
But.
It's not going to be the first tier priority and we will also be having other initiatives.
To really help the already.
Signed up pharmacists that havent been servicing.
Well just spoke about the one health that is an example.
One of the initiatives, we offered to bringing.
Value added services to those pharmacies, who are already on our platform and of course, we still welcome our new.
New customers to join in the future. Thank you.
Thank you that is very clean and looking forward to hearing from you and the next question. Thank you.
Okay.
As there are no further question I'd now like to turn the call back over to Mr. Stephen Kilmer for closing remarks.
Okay.
Thank you operator.
On behalf of the entire 111 management team, we would like to thank you for your interest and participation in today's call.
If you require any further information or have any interest in visiting 111 in China. Please let us know.
Thank you for joining us today. This concludes the call.
You may now disconnect your lines. Thank you.
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Good day and thank you for standing by welcome to the 111, Inc. Third quarter two earnings conference call. At this time all participants are in a listen only mode. After the Speakers' prepared remarks, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that todays call.
<unk> is being recorded I would now like to hand, the conference over to your speaker today, Mr. Stephen Kilmer.
Go ahead.
Okay.
Thank you operator, Hello, everyone and thank you for joining us today for 111 third quarter 2021 conference call.
On the call today from 111 are Dr. Gong Yu co founder and Chief Executive.
<unk> Chairman, Mr. Lu co founder Chairman and CEO, Mr. Luke Chen CFO of our major subsidiary.
Mr. Harvey one C O O.
Typically could you.
C N S V P of Investor Relations and business development card or a home finance director and Monica Mu Investor Relations director.
As a reminder, today's conference call is being broadcast live via webcast.
And a replay will be available on our website. Following the call. The company's earnings press release was distributed earlier today and together with our earnings presentation are available on the company's IR website at IR Dot one dot com that's yet.
Before we get started let me remind you that this call may contain forward looking statements under the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Such statements statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks uncertainties and other factors all of which could cause actual results to differ materially.
For more information about these risks please refer to the company's filings with the SEC.
111 does not undertake any obligation to update any forward looking statement as a result of new information future events or otherwise.
This required a drop a couple a lot.
Please note that all numbers are in RMB, and all comparisons refer to year over year comparisons unless otherwise stated.
Please also refer to our earnings press release for detailed information of our comparative financial performance on a year over year basis.
With that I'll now turn the call over to our CEO.
C media.
Good morning, and good evening, everyone. Thank you for joining our 2021 third quarter earnings call.
Before delving into performance I would like to talk briefly about the regulatory environment next I'll give a short summary of our business for those who are new to our story I will then cover our recent operational performance before handing the call over to Luke to discuss the financials.
We will conclude our prepared remarks with guidance for Q4, 2021 absolutely we will open up the call for Q&A.
We believe that current policies will continue to provide a tailwind to the health care industry and to our company.
In 2016, and President she announced the healthy China 2030 initiatives that emphasized public health as a precondition to future economic and social development.
This initiative is based on four core principles.
First put health care at the forefront of National development strategy.
Encourage innovation.
Third develop new methods of cash to focus on both prevention and cure and the combines Chinese and Western medicine.
And fourth ensure that rural areas of the country are given equal access to health care.
In the latest five year E Commerce development plan and the Ministry of Commerce has once again reinforced the importance of health care as a national priority and provided a blueprint for the future of China's health care industry, including Telehealth services, such as virtual registration on.
<unk> consultation and patient care management.
In addition, the government is encouraging the integration of online and offline channels as well as the development of <unk> platforms with solutions that help solve the pain points of the health care industry.
We are well positioned in the healthcare industry as our platforms in alignment with the blueprint for the future of China's health care system.
In addition, recently proposed policies aimed at curbing monopolistic and anti competitive practices will hinder efforts by large companies to form close to look ecosystems that blockhouse competition.
Large platforms will become more open leveling the playing field for all players, including one on one.
New policies could also unlock new opportunities for <unk>.
For example, a key challenge that new policies seek to tackle is a lack of information symmetry within the healthcare industry, which can lead to health care decisions being made when only a portion of the patient information is available.
This push to integrate data between online and offline healthcare businesses as well as new compliance requirements for this certification of doctors and patients on virtual platforms will require innovative solutions avoid that we are well positioned to fail.
While no one has been on a mission to transform and advanced the healthcare services industry in China by leveraging technology and the power over the internet to connect patients with the medicines and healthcare services.
Our ecosystem seamlessly integrate supply demand and data to provide products and services to patients when and where they need the most.
Our value proposition solves a key problem for the healthcare industry, where decisions are made with incomplete patient data.
Our patient centric CAD platform directly connect patients with product and a service providers and is enabled by three unique technology platforms.
One pharmacy, which is currently one of the largest online retail pharmacies in China and it was also one of the first entities to receive an online pharmacy license.
When clinic, which provides consumers with a myriad of cost effective healthcare services, including E consultations and Doctor patient management services over the web.
And the one medicine, a one stop shop for pharmacies.
While my one also uniquely delivers a holistic health care platform that integrates medicine with house cash services benefits to all parties within the broader healthcare ecosystem of pharmacies pharmaceutical companies stopped as health care providers and patients.
We are a differentiated company because we offer cohesive online and offline solutions.
Unlike traditional <unk> players that only distributed products across their service area, our as to B to C model provides tools that enable us businesses to achieve their goals.
For pharmacies, we can help them operate more efficiently trailing employees expand into online channels attract and retain customers and integrate data and service across the online and offline channels.
For pharmaceutical companies, we have a commercialization partner that can help sell their products outside of the hospital system.
Ill, providing services such as data analytics digital education and patient feedback.
For doctors and patients will provide a telehealth platform that improves patient care experience.
Our competitive advantage as demonstrated by vast network of health care players.
Can connect pharmaceutical companies to over 65% of China's retail pharmacies nationwide and connect patients to over 20000 adopters with expertise in chronic diseases, such as diabetes neurology dermatology at et cetera.
Yes.
Moving on to recent performance.
We had another strong quarter with net revenue, increasing 42% year over year to $3 3 billion RMB, marking the 13th consecutive quarter of year over year growth since our IPO.
The <unk> segment remains the core part of our revenue and continues to deliver impressive results accounting for $3 2 billion RMB of total revenue up 46% year over year.
The market continues to show strong demand for our diverse portfolio of service offerings.
On overall service revenue grew 106% year over year with <unk> service revenues totaling $16 1 million RMB.
Presenting a 336% year over year increase.
Non-GAAP net loss as a percentage of net revenues decreased from four 1% in the third quarter of 2022 of three 8% in this quarter.
Net loss for Q3, 2021 was primarily attributed to an increase in R&D and technology expenses and expenses attributed to the expansion of our fulfillment center capacity.
We expect these expenses to grow at a slower pace going forward.
Our revenue for the <unk> segment totaled 124 million RMB, 23% a decrease from Q3 2020.
The <unk> segment remains an important pillar of our patient centric mission.
We are pivoting the PTC towards profitable and positive margin contribution.
So that and we saw a managed revenue slowdown in the last few quarters.
Yes.
We will continue to invest in new initiatives and our D to C business segment, and we will report on this further going forward.
In addition to strong top line growth our gross margins grew twice as fast as our revenue in the third quarter.
Gross margins grew by 85% year over year and as a percentage of revenue our gross margins improved to 5%.
We're especially pleased with the margin improvement for our core business, which grew 145% from Q3 2020.
As a percentage of revenue the gross margins for the <unk> segment grew from three 6% in Q1 to three 8% in Q2 to four 4% in Q3.
As mentioned in our Q2 call. We are laser focused on margin improvement and this is just the beginning.
As our business continues to grow we will realize further benefit from the economies of scale, such as steeper discounts and cross selling our technology and service offerings.
We will also continue to optimize product categories improve supply chain and increase efficiency.
For example, using our proprietary technology, we'll have identified areas of pricing inefficiency and have made the appropriate adjustments.
We have also improved our product selection as compared to last quarter.
With almost tripled the number of excuse for products with higher margin profiles, and we will strive to double that number over the next 12 months.
In addition, the expansion of our service offerings will generate margin attractive revenue.
Our efforts should allow us to double our margins, putting us on a clear path to profitability.
As the healthcare industry in China and maintains its path towards Digitization. It is important that we continue to invest in our robust technology infrastructure for all one on one platform.
To support this requirement our technology expenses in Q3 totaled 56 million RMB.
155% increase year over year.
On a quarter over quarter basis technology expenses increased at a much more modest pace of 6%.
We're continuing to improve upon our smart supply chain infrastructure and in order to meet the growing demand for our products and services will have more than doubled our fulfillment capacity since the beginning of the year.
The additional capacity will position us for future growth by increasing the number of businesses selling products through our platform and growing the number of partnerships with businesses looking to commercialize in China.
In the third quarter, we expanded the number of direct sourcing partnerships with domestic and global pharmaceutical companies to over 400 up 33% from a year prior.
Today, there are over 5000 pharmaceutical companies globally, and we will look to form partnerships with at least 20% of these companies.
While my mind these an attractive partner for pharmaceutical companies, because we can help them establish and manage and out of hospital channel that connect them with the majority with the retail pharmacies.
Our value as a commercialization partner will continue to increase as we grow and enabling us to offer even more services to companies commercializing their products in China.
We launched our one health membership program in Q2.
And I'm pleased to report that it continues to gain strong momentum with our customers.
The one health membership program allows members pay an annual fee to unlock exclusive benefits.
And in the third quarter, we will have over 11000 participating stores.
Exceeding our internal target of 10000.
With this program. We have also seen the increase in purchases amongst the participating stores, who are not only attractive to our vast selection and competitive prices, but also in having access.
To the valuable tools that we offer to help them better manage their businesses.
Currently over 2000 stores are using our proprietary systems to help them manage inventory optimize their procurement and product selection improved customer experience through our CRM system and the <unk>.
Education to their customers and employees.
Going forward, we will build upon the early momentum this program has achieved.
Continuing to offer new products and technology solutions to help pharmacies improve their operations.
More robust businesses.
Yeah.
Before I conclude I want to spend a moment and touch on our ESG efforts.
To date would have provided approximately 400000 free online consultations, including two patients in Henan province faced with severe flooding conditions.
We have partnered with local hospitals to provide medical services for underserved populations.
We have also continued to support areas experiencing COVID-19 outbreaks through PPE donations.
As a company committed to helping people living healthier lives ESG is very much embedded in our core values and going forward, we will continue to support our community.
Help realize our collective goal of a healthy China.
Beyond these highlights will continue to strengthen our team developed a new technology and improve our capabilities as our business grows.
We are confident.
Going into the balance of the year that our leading position in the healthcare services sector, along with industry tailwind positioned <unk> well for continued growth as we transform medical services in China, and ultimately deliver excellent value to our shareholders.
Finally, I would like to thank our shareholders for their continuing support.
With that I'll hand, the call to look to walk through our financial results. Thanks.
Thank you Jamie moving.
Moving to the financial section on Slide 18.
You can see the details of the third quarter of 2021 results from slide 19 to 21 of our presentation.
I would like to highlight a few key business and the financial matrix.
And our focus on a year over year comparisons.
All numbers are in RMB, unless otherwise stated.
Total net revenues for the quarter grew 41, 6% to $3 35 billion.
It was within the range of our guidance.
We already had two consecutive quarters with quarterly net revenues exceeding 3 billion Mark.
Which will place us into 10 billion revenue club this year.
Our <unk> revenue grew 46, 3% to $3 2 billion, reaching a new record high for settlement revenue in a quarter.
<unk> segment revenue was down 22, 9% to $124 million year over year.
We expect this downward trend will be reversed.
As we launched several initiatives to accelerate the growth of this segment.
Our <unk> gross margin was four 4% up from two 6%.
<unk> gross margin remained stable at around 20%.
The improvement in gross margin of our <unk>.
Reflects our ability to continuously improved margin, while maintaining substantial topline growth.
Overall, our gross profit grew by 84, 6% to $166 1 million and the combined gross margin was 5% upfront three 8% a year ago.
Total operating expenses for the quarter were up 61% to $341 4 million.
<unk> of net revenue total operating expenses for Q3, 2021 accounted for 10, 2% compared to 9% in the same quarter last year.
Fulfillment expenses as a percentage of net revenue for the quarter was 3% up from two 5% in the same quarter last year.
This was mainly attributable to costs associated with upgrading and expanding our existing facilities to support our growth.
This expanded facility reached full capacity, we expect the fulfillment expenses to decrease.
Sales and marketing expenses as a percentage of net revenue for Q3, 2021, or three 9% down from four 4% in the same quarter last year.
Excluding the share based compensation expenses.
<unk> expenses as a percentage of net revenue were 1% as compared to <unk>, 9% in the same quarter last year.
Technology expenses accounted for one 7% of net revenue up from 0.9% in the same quarter of last year.
This was primarily driven by an increase in the number of personnel in the RMB and it teams.
We believe that continuing to invest in our team and technology and our service offerings in the area of digital House Big data and smart supply chain will strengthen our market leading position.
As a result.
Non-GAAP net loss in Q3, 2021 was $146 3 million.
<unk> 297 million in the same quarter last year.
Which accounted for three 8% of net revenue down from four 1% a year ago.
Non-GAAP net loss attributable to ordinary shareholders was RMB $213 4 million.
Compared to $94 4 million in the same quarter of last year.
As a percentage of net revenue and non-GAAP net loss attributable to ordinary shareholders increased to six 4% in the quarter from 4% in the same quarter last year.
The increase was mainly caused by accretion for profitable redemption of redeemable non controlling interest in the future.
A quick note our cash position as of September 32021, we had cash and cash equivalents restricted cash and short term investments up $1 1 billion.
RMB.
As to the guidance for the fourth quarter 2021 on slide 23.
The company expect total net revenue to be between 344 billion and $3 7 billion, representing a year over year growth of approximately 30% to 40%.
In addition to grow our top line, we are laser focused on growing our margins.
We expect the trend of margin growth outpacing revenue growth to continue as we keeping making strides towards becoming profitable.
It should be noted that this outlook is based on current market conditions.
And reflect the company's current and preliminary estimates of market and operating conditions.
As well as consumer demand, which are subject to change.
Please refer to slide 25 to 27 of the appendix sections of our selected financial statements.
Operator, we are now ready to begin the Q&A session.
Certainly as a reminder to ask a question you will need to press star one on your telephone to withdraw your question perhaps.
Once again to ask a question at Star and the number one on your telephone keypad.
Your first question comes from the line of <unk> from CIBC. Please ask your question.
Okay.
Yes.
Hi, This is Bryan and thank you for taking my question and congratulations on the company programs.
Japan.
They're very long we cannot hear you clearly.
Oh, I'm, sorry for that kind of hear me now.
And there is much much better.
Yes, okay.
That's fine okay.
Two questions actually.
My first question is about the policy.
You may notice the National Health Commission of China has just released a draft document detailing the regulations for online medical services. So could you. Please share some more colors on the impact of this policy or document both to the industry or to the company and my second question.
<unk> is well I see <unk> Zechman has delivered a strong growth in the past several quarters. So what's the reason behind it and what are the <unk> zachman maintained the growth momentum in the future. Thank you.
Thank you Shannon for the question.
Ill take on the first question about the policy.
I spent a little time in my speech talking about policy I had some key words like.
Healthy China 2030.
Health has become a national priority and.
Other key words include online plus offline and the recent <unk>.
<unk> com.
Policy.
Clearly stated supporting piece will be internet players and integration of Digitization of <unk>.
Finance of logistics warehouses et cetera, and I think overall those policies all tailwind and is all very good for the industry and also very good for my one.
And I noticed you were referring to the latest consultation paper, it's not our policy yet and.
Our interpretation.
It's not a final policy, it's at the moment, we're still guessing how.
How the final document is going to be but as you know.
As a first read.
And obviously it is going to be very clear that digital.
Digitization is the future.
And Internet is going to play a key role in the overall health care industry.
However.
There has to be a strict.
Clients and that kind of sealed the position of <unk>.
Digitization in the industry and.
We absolutely embrace.
That policy change and.
I think.
The.
Much more strict.
Compliance there are costs fall.
Innovative solutions and one more mundane.
We're well positioned in that space not to even talk about we have always had a very high standard when it comes to compliance.
Yes, she thought I would take the question regarding <unk>.
<unk> revenue has reached $3 2 billion in Q3 of 2021st.
Furthermore, we should even more importantly flat.
I mean margin growth rate is much faster than our revenue growth rate.
And which is the margin growth rate is 3.15 times, our revenue growth rates. So.
So we are very excited to see our coal business. This is the <unk> business is getting more and more healthy.
And we will continue to strengthen our competence on our end to B to C model.
Especially on the S side.
S. We are creating value for our upstream and downstream partners and customers.
We are offering more services to these customers.
And partner.
So we are getting more services revenue from this customer and partners, which you can see in our financial report.
So our as to B to C model.
It's getting robust we are confident that we will maintain a fast revenue growth rate and Meanwhile, with margin growth rate, even faster than our revenue growth.
Thank you.
Okay, that's a favorite player and.
Congratulations again on the company program.
Thanks Yvonne.
Yes.
Your next.
Next question comes from the line of Brian Brian of Citi. Please ask your question.
Even imagine Brian this is <unk> from <unk>.
And congrats on that strong growth.
Oklahoma, along again this quarter and thank you for.
Taking my question My question Mcpherson.
For the collaborations with pharmaceutical companies.
Any updates on a number of new work with any new forms of cooperation could you give us a few examples of digital marketing and Robyn Friedman.
The second is can you share more updates all the wrong House member program.
Can you differentiate that much.
The members versus other pharmacies.
One day.
When do you expect to breakeven thank you.
Let me take the first question.
You might notice that we.
We are.
Increase our direct sourcing relationships with our promising companies.
To over 400, and this is a very important to us it's very remarkable.
It's worth it.
The upgrade our sourcing too.
For Oregon.
You have with your exports from group companies, you'll reduce ought to be the layers.
Redo cohort.
Hum.
Also improve.
<unk> CFO upfront.
Oh well also.
We call specialized hospitals with comfort as a company.
We are have a.
100, <unk> with Eli Lilly.
<unk>.
Our prayer LG, maybe we started to receive one.
I felt a lot more.
March and now we have more than that.
Alright, the specialized hospitals.
Let's take the rate is about eight.
Well the partnership with <unk>.
The company.
Jay pharma.
From Japan.
Okay.
Walmart is the first E Commerce company in China.
So the channel.
<unk> relationship, which could be pharma.
This partnership.
Allow.
Cardiovascular patients who community access education materials.
Regarding their diseases.
Options effectively this is matti matures.
You will also improve patient quality of life Cos provide vouchers.
These are the tools that.
Or maybe better health for patients.
So we'll have formed a partnership.
Countries with a different pump companies aside.
From a direct sourcing relationship.
Yes.
Okay.
Okay.
Okay.
I'll address.
One health program and Zoe.
I appreciate that question.
Before I answer that one health program.
Let's look at the marketplace.
Today in the pharmacy space will have about.
580000 stores across the country.
There are a few very big players and if we look at all of those.
Our big chains, they are all very centralized.
In terms of the.
Organization I E.
Have some control of all of those pharmacies.
Their own chains et cetera.
One more money is trying to build a new model.
Our Federation model.
And with.
Our model, we're going to have a lot more stores joining our platform.
With digital franchising the smaller guys can enjoy the same benefits like the big guys in terms of procurement in terms of access to good assortment in terms of.
Access to systems to digital technology et cetera.
Now.
You know if you.
Look at.
The progress we have made today we.
<unk> already covered more than 28 provinces and.
There are more than 300.
Medium to small changed joining us and we'll have 11000 installs.
Obviously.
Our objective is to have more and more stores joining us and because this is our federation model.
There is very little barrier.
What we are going to do is to continue to leverage our digital technology to help those pharmacies to improve their competitiveness, especially when it comes to.
The systems, the procurement and also managing their assortment and the prices et cetera.
<unk>.
We are looking forward to providing more updates in future quarters.
So its luc.
So question on the breakeven timeline I think all of our investors are.
Sales are looking at us when we're going to make profit.
And I believe we are now in a much clearer position too.
To protect that.
With.
The scale, we built up and the margin improvement are.
We expect to be profitable in 12 months time.
Our confidence level of achieving this target is pretty high.
So you look at our margin now it's like 5%.
And it will continue to grow to six 7% and even higher so was that.
Together with the scale, we built up and were introducing more higher margin products into our portfolio.
Of course, we will continue to build a lean organization and optimize our investments.
So we think this gain profitable is very close in a corner in the near future.
Thanks, a lot of management that's right.
Well that we're looking forward to it.
This development in the future. Thanks.
Thanks again.
Thank you Zoe.
Your next question comes from the line of Burgers Mcpherson.
Please ask your question.
Yes.
Hello.
Kudos to you for your performance for the quarter up four question, if you don't mind.
First question is that I see that.
Your company has continued to strengthen the technology capabilities.
So in what areas do you envisage erecting barriers to entry.
Second question regarding your revenue from services rising rapidly.
Q, what factors, Kansas be attributed and how will you maintain such growth momentum.
A third question is regarding the market sectors youre seeking to enter.
Query what are their sizes and what's the outlook as it relates to these market sectors and the final question is I'd like to ask about.
Status on your star market IPO.
Yes.
Okay.
Can you address the first question.
The technology called higher appropriately.
Let me address the service revenue part.
I didn't hear the first question, maybe just to the service revenue.
We're very happy to see that.
Increase.
Clearly the continued decrease.
The increase the search revenue reflects the value creation power platform.
Our technology capabilities.
Maybe.
From the following areas.
Steve.
First is.
The marketplace sellers.
The three platform.
I find that the one clinic what medicine.
Good.
Okay. The third parties.
Let's see the floor neighborhood services to pharmacies.
Such as that.
CRM.
Your prescription services.
Dougherty.
The third.
Is the service fees for our neighbors to the companies.
As such as we mentioned about digital marketing patient education.
<unk> management all of those.
Yes.
The fourth parties.
Supply chain services for our ecosystem.
Wow.
Very important projects such as.
Thank you Bob.
At BP.
Otherwise it's simple.
These are the price management.
Management services.
Our.
That's it.
Others.
Go ahead please.
Okay.
I'll cover the first question.
The first question so with regards to the technology investments we have made.
Obviously, it was a 155% increase compared to the same.
Period of last year.
This is an area, which we believe we can establish a competitive advantage so our technologies really.
Structured in a way to address.
<unk>.
Challenges that are faced by pharma companies like pharmacies.
In terms of supply chain and to doctors and to patients.
No.
We believe that.
Investments in this area will give us the necessary.
<unk> I'll give you an example.
Our bond health program.
Have a pretty big team in terms of technology to really code everyday and.
Today, we have already digitally connected oba.
Close to 3 million consumers and.
Those consumers have various disease patch and they have very we have very clear profile and well have with digital tools to interact with them and in the past those pharmacies will never in that position. So we believe.
The continued investment in this area will yield good results and if you look at what would have achieved so far we've already got 19 patents in the areas of digital health data analytics and <unk>.
In our supply chain will have more than 30 proprietary systems too.
<unk> really Paula our backend operations.
When it comes to your question three.
<unk>.
Size of the market.
And based on our intelligence.
Today they are.
The pharma market.
<unk>.
About two trillion and by 2030.
The outside of the hospital channel alone is going to account for more than two trillion.
So we anticipate this is going to be one of the most.
<unk> markets.
And the world.
So with the aging population in the world.
So this is going to be the space, we're going to play and we already laid a very solid foundation to position <unk> as one of the key players in this space.
We define our space as the out of hospital care, so from patient perspective, they can actually.
To have a holistic care if they actually.
Out of the hospital, let's say, even if they are from a rural.
Lower tier cities.
Even if the left home the left to the hospital. They thought they would they go home, we're still in a position to help them.
So we actually love the pharmacy space given the coverage we have had and this is a clear advantage would have managed to build so on the IMD.
Of the opinion that.
We're able to really redefine the supply demand relationship with our platform.
And obviously.
There are many other initiatives we have.
<unk> put in place so far.
It's not nothing material as yet, but I am.
Looking forward to providing updates moving forward in due course.
Yes, let me let me answer the question on the status.
The stock market IPO.
The domestic IPO preparation is still in progress.
Based on our internal assessment natural we are meeting all the requirements.
However, there are new rules coming out by the stock market and we are evaluating.
We are very optimistic.
About the China market to be further to open up.
This news that.
China stock market.
Adopt close reservation system versus a proven system.
Maybe next year.
And we believe we should get ready for that.
So we will keep the street informed all posted according to the FCC rules.
Yeah.
Okay. Thank you.
Okay. Thank you for for the Lightning respond and I look forward to.
<unk> results in next quarter. Thanks.
Thank you.
Your last question comes from the line of Jesse Lee of HSBC. Please ask your question.
Thank you for taking my question this is Steve.
I'll hop off Shami.
I have three questions from me the first question to Bob.
Gross margin of your <unk> from where we saw a very good improvements on last codecs and you just mentioned that the margin can grow from 5% to 7% or even higher.
Wondering if.
If we think longer term.
Yes.
Hi would be what the BTB segment margin could achieve and my second question is on your fulfillment capacity.
I think they have been growing at a faster rate than previous guidance in our Q2 results, which is very impressive. So I was wondering in terms of timeline and you are talking what is your ankle for these fulfillment capacity and Thompson.
Huawei is finished.
And in terms of fulfillment centers will you be building more and will be the capex expectation on that.
Last one I'll leave the question on your Pharmacy claims you mentioned you already know Chris from 85% of overall pharmacy in China.
So can you share with us.
So our stride in terms of for the <unk> and how can our relationship with existing pharmacies and how to reach out to the other 35%.
Thank you.
Okay.
Jesse I will take the first question regarding the <unk> margin.
So we are excited to see.
In Q3, our <unk> margin.
Year over year growth.
<unk> has reached a 145%.
Which is the 3.15 times faster than our.
Revenue growth.
Which means our <unk> business is getting more and more healthy.
And the margin improvement of <unk> 10 strong.
Following actions.
First is.
Introduction of more high margin products.
Internally, we call them go labeled product.
And secondly.
<unk>.
Seeing a more effective use of our price in Paddington system.
Yes, Jason.
To optimize our pricing.
And as a doctor come you just mentioned we have more direct sales team.
Over 400, plus pharmaceutical companies.
We are upgrading our starting towards the source.
And last.
We are seeing improvement as our continuous improvement on our supply chain efficiency.
Talking about net next staff.
With the launch of the following phases of our <unk> B to C.
We are creating more value for our upstream and downstream partners and customers. So.
So we are confident that.
There will be enough room for us to further improve margin.
Uh huh.
Definitely we can see.
Even the margin growth rate in the next quarter.
It should be faster than our revenue growth story.
Our <unk> business should be getting more and more healthy. Thank you.
Let me take the.
Our favorite Thunder has to be used to the pricing.
In the past, we have observed that the booking center capacity and throughput.
That's been.
Important bottleneck about world. So we are I E.
So we'll have a <unk>.
Indeed, our capacity and the throughput.
During the year.
<unk> okay.
We believe that the accretion to akamai.
Okay.
Responding to backend systems Walmart for Covenant.
So the.
Third ensure our mercury customer experience.
Quality of the product we offer.
The rapid turn of our inventory.
The positive cash flow, we believe this all very very important.
So.
Okay.
The throughput is very.
We are a critical part of our supply chain.
So.
The lack of a direct impact on our operation.
All growth.
So we are.
To optimize and automate our supply Kid why do you think.
And the only study outside the throne.
We're also using.
We're also creating new business models.
In the future were announced that some new models.
Use.
The capacities.
Hunters.
These or different new initiatives.
We are a help us.
Okay.
Not only capacity, but also.
Raise the barrier of entry.
Hey, Jesse I want to.
I think on the third question I appreciate it that's a great question by the way.
When it comes to the pharmacy customers and obviously the first few years, we have made it to a.
Operational and privacy imperative to really cover as many pharmacies as possible.
Until we get to the 60% market coverage and honestly, we have successfully implemented that achieve that mission and the now.
Cover approximately 65% of the market with.
370000 pharmacies also so that is really mission accomplished and moving forward that will not be our first priority anymore. Instead, we will be continuing.
Two really.
Grow our loyalty.
Grow our share of wallet and of course, we're going to continue to add.
More customers.
But.
It's not going to be the first tier priority and we will also be having other initiatives.
To really help the already.
Signed up pharmacists that would have been servicing.
Well just spoke about the one health that is an example.
One of the initiatives, we offered to bringing.
Value added services to those pharmacies, who are already on our platform and of course, we still welcome our new.
New customers to join in the future. Thank you.
Thank you that is very clear looking forward to hearing from you and the next question. Thank you.
Okay.
As there are no further question I'd now like to turn the call back over to Mr. Stephen Kilmer for closing remarks.
Okay.
Thank you operator.
Closing on behalf of the entire 111 management team, we would like to thank you for your interest and participation in today's call.
If you require any further information or have any interest in visiting 111 in China. Please let us know.
Thank you for joining us today that concludes the call.
Okay.
You may now disconnect your lines. Thank you.