Hello and thank you for standing by for Energy Monster's 2021 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference call, Director of Investor Relations, Hansen Shi.

Thank you. Welcome to our 2021 third quarter earnings conference call. Joining me on the call today are Mars Cai, Energy Monster's Chairman and Chief Executive Officer; and Maria Xin, Chief Financial Officer. For today's agenda, management will discuss business updates, operation highlights and financial performance for the third quarter of 2021. Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to this call as we will make forward-looking statements. Also, this call includes discussion of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures entered during this conference call are in RMB. I would now like to turn the call over to our Chairman and Chief Executive Officer, Mars Cai, for the business and operation highlights.

Thank you, Hansen. Good day, and good night, everyone. Welcome to our 2021 third quarter earnings call. We are pleased to announce the third quarter results with revenues being on the high end of our guidance. Despite so, we continue to see challenges from the continuous outbreaks of COVID-19 during the quarter. After the outbreak in Jiangsu in late July, there was a significant drop in offline activity and traffic throughout China. The outbreak in July and August had a significant impact on our operations. In the first half of July, which was before the outbreak, our GMV grew by around 30% year-over-year and GMV per power bank per day was approximately RMB2.2. In the first half of August, however, our GMV increased by about 9% year-over-year, and GMV per power bank per day was approximately RMB1.7. For the full month of August, Jiangsu product GMV decreased by more than 40% year-over-year, Henan down around 30% and Hunan also down around 30%. The impact that started in July had a countrywide impact as both affected and unaffected regions alike experienced decreases in offline foot traffic and spending resulting in a decline in traffic to our location partners. Both business and leisure travel were hit especially hard during the outbreak with hotel POIs with same-store GMV decreasing by more than 24% year over year during the third quarter. Transportation hubs and tourist attraction POIs were also down on a year-over-year basis. Entertainment venue, same-store GMV also experienced a 14% decline year over year due to the general decline in offline traffic and travel. The overall decline in offline traffic has resulted in a short-term secular challenge for us as well as for players in restaurants and hospitality industries. We continue to remain confident that both the consumer market, both online and…

Thank you, Mars. Now let me walk you through the financial results in greater detail. For the third quarter of 2021, revenues were RMB930 million, representing 0.6% year-over-year increase. Revenues from mobile device charging business were RMB895.4 million and accounted for 96.3% of our total revenues for the quarter. The flat year-over-year change is due to the impact of COVID-19 during the third quarter of 2021. Revenues from power bank sales were up 14% year-over-year to RMB27.4 million and accounted for 2.9% of our total revenues for the quarter. The increase was primarily attributable to the increase in available for use power banks and the numbers of customers and purchase for power banks. Other revenues were up 47.5% year-over-year to RMB7.2 million and accounted for 0.8% of our total revenues. The increase was primarily attributable to the increase in users advertisement efficiency and the new business initiatives. Cost of revenues were up 20.6% year-over-year to RMB139.8 million for the third quarter of 2021. The increase of cost of revenue was primarily due to the increase in the operational scale, resulting in increase in depreciation and maintenance costs. Gross profit was down 2.3% year-over-year to RMB790.2 million for the third quarter of 2021. The decrease was primarily due to the increase in cost of revenues. Operating expenses for the third quarter of 2021 were RMB872.5 million, up 26.7% year-over-year. Excluding share-based for compensation, non-GAAP operating expenses were RMB866.1 million, representing a year-over-year increase of 27.4%. Research and development expenses for the third quarter of 2021 were RMB29.1 million, up 63.2% year-over-year. The increase was primarily due to the increase in personnel-related expenses. Sales and marketing expenses for the third quarter of 2021 were RMB814 million, up 23.8% year-over-year. The increase was primarily due to the increase in incentive fee paid to…

[Operator Instructions] And our first question comes from the line of Vicky Wei from Citi. Your line is open.

Good evening, management. Thanks for taking my question. I have a small question. Can management share with us more details on the impact of COVID-19 on the fourth quarter in terms of GMV per power bank and other user habit metrics? Thank you.

Yes, Mars speaking. Thanks for the question. Sure, it is important to point out that the occasional outbreak of COVID in China has been impacting our operations both before and in the fourth quarter. Whenever there is the outbreak, there's a general drop in foot traffic both in the region of outbreak and out of the region as well. For example, as I just shared in my sharing during August after the outbreak in Jiangsu, GMV decreased 40%, 30% and 30% in Jiangsu, Henan and Hunan. So the impact of these outbreaks are significant as it results in a large drop in foot traffic to our location partner and a general decline in offline spending. These outbreaks are also followed by a very strict public health control measures in the form of travel restrictions or testing requirements, which further weighs down the recovery of our business. While this impact has historically been short term in nature, the continuous outbreak in terms of frequency remains a challenge. In the fourth quarter, the wider scale outbreak in Fujian and Heilongjiang during September have brought similar levels of challenges to our operations for the fourth quarter. As a result, during China's golden week of October, the holiday, the average same location GMV were down about 25% year-over-year. I think it's important to note that these outbreaks have negatively impacted not only us but also all the industries that rely on the offline traffic like restaurant, hospitality, and entertainment industries. But we are very confident that in the long run, these impacts on rental of our operations, and that we expect overall levels of offline foot traffic and normalized public are contained . In terms of user metrics, we continue to maintain a healthy growth of [indiscernible]. We see it will continue to grow. Because of these outbreaks, the GMV power bank per day was 15%. The decline was primarily due to the lower usage rate as a result of the decreased foot traffic to our location partners during the outbreak of the COVID. Overall, we believe that the offline foot traffic will eventually normalize in the long run. Hopefully it will be very soon; and our GMV per power bank will also normalize to historic levels. Thanks.

Our next question comes from the line of Sophie Li from Goldman Sachs. Your line is open.

Hi, thanks management for taking the questions. So, I was wondering if management can give a bit more color on the competitive landscape and the revenue sharing trends during the quarter? And what is the outlook of the company's margin going forward say, for next quarter and 2022?

Okay. Thank you for your questions. The general level of competition has been decreasing as COVID-19 outbreaks occurred. Given that, we have industry-leading levels of scale and efficiency. We believe our competitive advantage will be more apparent in the period of less competition. We will leverage our healthy cash reserves to continue strengthening our competitive advantage through optimized incentive fee structure, expanding our coverage of high-quality location partners, and acquiring strong performing network partners through our campaigns. Unfortunately, we do not offer additional guidance on the margins for the upcoming periods, but we are confident that once these outbreaks in China are contained and the new one-stop occurring, our operations and finance will be able to return to the normalized level, and until then our efforts at -- of optimizing our operations and the controlling costs will help limit the temporary impact. Thanks.

[Operator Instructions] Our next question comes from the line of Charlie Chen from China Renaissance. Your line is open.

Thank you. Thanks management for taking my questions. I have a question regarding the number of POIs. So can you share a bit more on the program that has resulted in a decline in power bank count for the quarter? And also, how does the company anticipate the expansion rate of the power banks count in light of the COVID-19 impact?

Sure. Thanks for the question. We launched the new power bank optimization program during the third quarter. This program dynamically calculates the suitable number of power banks in each cabinet based on the location and also on the historical trend. Once the system calculates the ideal number of power banks, they are output to our BDs through their proprietary tool via the to-do-list session. Our BD are recommended to adjust the power banks based on the ideal number as calculated by our system. The system helps us give users better experience and optimize the usage rate of each power bank. For our users, the end result is that they can more easily find power banks that are readily available for use and find more cabinets that have slots for power bank returns. These benefits will help us improve the user experience and in the long run, drive higher repeat purchase and satisfaction rate. On the operational side, this program will help increased power bank's efficiency by more clearly matching localized supply and demand. The increased efficiency will eventually transition into lower CapEx for each location and lower percentage of depreciation expenses. As for your question on the expansion rate, we continue to maintain a healthy rate of coverage expansion during the third quarter. Our network now spans over 220,000 locations across the 1,700 locations -- counties or cities -- counties or cities across China. The growth in coverage becomes from all POI types and tier, both under the direct and network partner models. We continue to see opportunities to expand our coverage and especially for key accounts. We also launched a series of campaigns tailored to attract more high-quality network partners by providing more attractive economics and lower CapEx to unlock their growth capabilities. But given the COVID outbreak impact on higher tier cities, we have started slowing down our BD recruitment under the direct model. Instead, we are focusing on providing additional training so that they can more effect -- efficiently expand our coverage and service in the existing locations. Thank you.

Thank you.

And our next question comes from the line of Sophie Li from Goldman Sachs. Your line is open.

Thanks management for taking my questions, again. Can you share with us the measures that the company plans to implement to combat the COVID-19 outbreak in the future given that these outbreaks may be a longer-term challenge going forward?

Yes, totally. Thank you. To better navigate ourselves during these special times, we have implemented a number of key initiatives to lessen our exposure to the volatility in offline foot traffic as a result of COVID. Namely, we have four key initiatives that we have launched during the third quarter. First, is the launch of the new network partner campaign tailored to attracting new high-quality network partners. These campaigns, as I shared, will effectively lower the initial investment for each cabinet giving our network partner the ability to invest in more cabinets. At the same time, the campaign gives high-performing network partner additional incentives which translates into faster scaling up of their operation. So far, the effects of these campaigns are positive as we were able to increase our network partner account by more than 150 during the quarter, which is nearly 1/4 of the total number of our network partners and continues to unlock their network partners' growth potential. We believe this network partner campaigns will continue gaining traction and help us extend our network through a light asset model. Number two, the second is our control on expenses and finances. Given the current conditions of the market, which periodical outbreaks, we have implemented higher -- tighter budget control measures. We continue to optimize our BD and back-end employee counts in order to make sure that our efficiency level continued to improve. We have also slowed down the overall hiring pace. Instead, we are focusing on better training and better technology building in preparation for the eventual recovery of the market. Thirdly, because of the impact of COVID, our BD's KPI metrics are revised to require them to do things more cautiously. The decreasing use of fixed upfront entry fee and increasing use of variable incentive fees is crucial for lowering the ratio of scales and marketing expenses as a percentage of revenue. Going forward, the transaction of fixed sales and marketing expenses to variable ones will benefit our financials during the period of external impact. Fourth and lastly, we have also launched our new power bank optimization program, as I shared, so that we can continue to reducing the effective CapEx amount for each location and thus reducing our long-term depreciation as a percentage of the revenue. Combined, these actions will help us both financially and operationally cope with the challenges of COVID outbreaks and develop into additional layer of competitive advantage similar to how we overcame the challenge during the initial outbreak of COVID last year. We are very confident that we will come out of these outbreaks as a stronger and better Energy Monster in the competition. Thank you very much.

Thank you.

[Operator Instructions] There are no further questions at this time, and we are now approaching the end of the conference call. I will now turn the call over to Energy Monster's CFO, Maria Xin, for closing remarks.

Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continued support, and we look forward to speaking with you in the coming months. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.