RLX Technology(RLX) - 2023 Q4 - Annual Report

Third Quarter 2023 Performance Overview The company's Q3 2023 performance was marked by a significant revenue decline due to regulatory impacts, alongside strategic moves toward international expansion and shareholder returns Financial Highlights RLX Technology reported a significant year-over-year decline in its third-quarter 2023 financial performance, with sharp drops in revenue, gross margin, and net income Q3 2023 Key Financial Metrics (YoY Comparison) | Financial Metric | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Net Revenues | RMB 428.1M | RMB 1,044.4M | -59.0% | | Gross Margin | 24.7% | 50.0% | -25.3pp | | U.S. GAAP Net Income | RMB 172.7M | RMB 505.2M | -65.8% | | Non-GAAP Net Income | RMB 197.5M | RMB 328.6M | -39.9% | Management Commentary Management addressed headwinds from illegal products and slow adoption of new standards while focusing on compliance, profitability, and combating the illicit market - The company is facing external challenges, particularly the impact of illegal products and slow user adoption of new national standard products due to a lack of awareness about regulations[3] - Core strategies include expanding the portfolio of compliant products, enhancing user understanding of new regulations, and collaborating with regulators to combat the illegal market[3] - Despite revenue headwinds, the company is focused on improving profitability through cost optimization, achieving a second consecutive quarter of positive operating cash flow[3] Corporate Developments The company is preparing for future growth by enabling international expansion and approving a cash dividend for shareholders - On November 10, 2023, the company terminated a non-competition agreement with Relx Inc, providing flexibility to build an international presence and conduct business outside China[11] - The Board of Directors approved a cash dividend of US$0.01 per ordinary share/ADS, payable in December 2023[12] Detailed Financial Results A detailed analysis reveals a sharp drop in revenue and gross margin driven by excise taxes and market challenges, leading to an operating loss Revenue and Gross Profit Net revenues and gross margin declined significantly year-over-year due to product transitions, illegal competition, and a new excise tax Q3 Revenue and Gross Profit (YoY Comparison) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Net Revenues | RMB 428.1M | RMB 1,044.4M | | Gross Profit | RMB 105.7M | RMB 522.0M | - The primary reasons for the revenue decrease were the discontinuation of older products and competition from illegal products[4] - The gross margin decrease was mainly caused by the imposition of a 36% excise tax that came into effect on November 1, 2022[5] Operating Expenses Total operating expenses rose sharply, primarily driven by a significant swing in share-based compensation expenses from a credit to a charge Q3 Operating Expenses Breakdown (YoY Comparison) | Expense Category | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Selling Expenses | RMB 39.7M | RMB 52.5M | | General & Administrative | RMB 74.5M | RMB (41.7)M | | Research & Development | RMB 30.8M | RMB 46.0M | | Total Operating Expenses | RMB 145.0M | RMB 56.8M | - The significant increase in total operating expenses was primarily due to changes in share-based compensation expenses, which were RMB 24.8 million in Q3 2023 compared to a positive RMB 176.6 million in Q3 2022[6] Profitability and Earnings Per Share (EPS) The company shifted from a significant operating profit to a loss, causing substantial year-over-year declines in net income and EPS - The company reported a loss from operations of RMB 39.3 million in Q3 2023, compared to a profit from operations of RMB 465.2 million in the same period of 2022[7] Q3 2023 Profitability & EPS (YoY Comparison) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | U.S. GAAP Net Income | RMB 172.7M | RMB 505.2M | | Non-GAAP Net Income | RMB 197.5M | RMB 328.6M | | U.S. GAAP Diluted EPS | RMB 0.127 | RMB 0.379 | | Non-GAAP Diluted EPS | RMB 0.146 | RMB 0.246 | Financial Statements and Supplementary Information The company maintained a strong balance sheet and positive operating cash flow, with detailed financial statements and non-GAAP reconciliations provided Balance Sheet The company maintained a robust balance sheet with strong liquidity, substantial cash reserves, and minimal total liabilities Key Balance Sheet Items (as of Sep 30, 2023) | Item | Amount (RMB Million) | | :--- | :--- | | Cash, deposits, and investments | 15,132.5 | | Total Current Assets | 9,113.3 | | Total Assets | 16,579.9 | | Total Liabilities | 651.5 | | Total Shareholders' Equity | 15,928.5 | Statement of Comprehensive Income The Q3 2023 income statement details the decline in revenue and gross profit, resulting in an operating loss but a positive net income Q3 2023 Income Statement Summary | Line Item | Amount (RMB thousands) | | :--- | :--- | | Net revenues | 428,069 | | Gross profit | 105,700 | | Loss from operations | (39,302) | | Income before income tax | 173,231 | | Net income | 172,697 | Statement of Cash Flows The company generated positive cash from operations for the second consecutive quarter, a significant improvement from the prior year Q3 2023 Cash Flow Summary (YoY Comparison) | Cash Flow Activity (RMB thousands) | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Net cash from operating activities | 67,452 | (1,016,862) | | Net cash from investing activities | 967,342 | 211,064 | | Net cash used in financing activities | (229,492) | (19,822) | - The company achieved a second consecutive quarter of positive operating cash flow, underscoring business resilience in the post-regulatory era[3][10] Reconciliation of GAAP and Non-GAAP Results This section reconciles GAAP to Non-GAAP net income by excluding the impact of share-based compensation expenses Q3 2023 GAAP to Non-GAAP Net Income Reconciliation (RMB thousands) | Line Item | Amount | | :--- | :--- | | Net income (GAAP) | 172,697 | | Add: Share-based compensation expenses | 24,790 | | Non-GAAP net income | 197,487 | - The company uses non-GAAP measures to evaluate operating performance and believes they help identify underlying business trends by excluding certain expenses like share-based compensation[18][19]