The mystery of LeEco's terminal and membership fee income: The more it sells, the more it loses, the net interest rate is only 0.8%

In the mid-year report that has been announced, LeTV's revenue has increased significantly "without any surprises". The company achieved operating income of 10.063 billion yuan in the first half of the year, a year-on-year increase of 125.59%; the net profit attributable to ordinary shareholders of the listed company after deducting non-recurring gains and losses was 267 million yuan, a year-on-year increase of 54.63%.

In terms of revenue types, data shows that the significant increase in revenue in the first half of the year mainly depends on the increase in terminal sales and member paid income. Among them, LeTV achieved sales revenue of 5.132 billion yuan in the first half of the year, a year-on-year increase of 171%; membership fee sales achieved revenue of 2.709 billion yuan, a year-on-year increase of 152%. As of June 30, 2016, LeTV's cumulative sales of Super TVs in the three years since its launch were approximately 7 million units. In addition, although super mobile phones that are not in listed companies, total sales exceeded 10 million units in May.

In terms of gross profit margin, LeEco's data is basically the same as in the previous period. Data shows that LeEco's gross profit margin in the first half of 2016 was 14.9%, while the gross profit margins for the same period last year and the whole year of 2015 were 15.08% and 14.63% respectively. However, the more obvious change is the net interest rate indicator. Compared with the net interest rate of 2.45% in the same period last year, the net interest rate in the first half of this year was only 0.8%, a year-on-year decrease of 1.65 percentage points, with a decrease of more than 67%.

According to data from the board of directors report in the semi-annual report, LeEco has achieved sales of 7 million super TVs in the first half of 2016. In an interview, LeEco Mobile President Feng Xing also revealed that LeEco's current sales of super phones have exceeded 10 million units. These data undoubtedly owe part of the credit to LeEco's unparalleled marketing and "festival building" skills.

What has brought LeEco's membership number and sales data to a higher level is LeEco's eye-catching marketing activities. Looking back at the first half of the year, the two ecological days on April 14 and June 18 were the most unavoidable. The "Ecology Day" event held on LeEco's official website on April 14, 2016 generated a total of 2.32 billion yuan in member revenue through the method of "buying members and giving away hardware", and the sales of Super TVs on that day also exceeded 549,000 units; At the LeEco 618 event, during the event from June 1 to June 18, the total sales of Super TVs were 467,000 units, the total revenue of LeEco members was 1.015 billion yuan, and the total sales of smart hardware and derivatives were 24 million yuan. On June 18 alone, LeEco's total sales of Super TVs reached 295,000 units.

However, one code is one code, and the so-called "buy members and send hardware" activity of marketing will definitely not be treated in this way in accounting. According to current domestic accounting standards, the purchase amount includes hardware and member income, and should be apportioned between hardware and membership fees in proportion. For example, on LeE618's Eco-Activity Day, one of the activities is to purchase a 4-year and 8-month Super Film and Television membership for 2287 yuan, and you can get a 4-year and 8-month Super Film and Television membership worth 2287 yuan, as well as a S50 Air 2D Super TV worth 1999 yuan. However, the accounting treatment of this marketing activity is to allocate the revenue of 2287 yuan between terminal hardware and member income in proportion. According to usual practice, the income ratio between members and terminals may be 28 or 37, and terminals naturally account for the vast majority.

However, if we follow this calculation, from the perspective of LeEco's terminal equipment gross profit margin, unexplained problems will arise. Based on LeEco's terminal revenue and cost data for the five semi-annual periods disclosed by LeEco from 2014 to the first half of 2016, the reporter calculated the change level of LeEco's terminal gross profit margin in the five semi-annual periods. However, it should be noted that the detailed data of LeEco's annual sales terminals are not disclosed in the semi-annual report and annual report, so the interface news can only be as detailed as possible on the disclosed data.

Data shows that in 2014, 2015 and the first half of 2016, 900,000 units, 600,000 units, 1 million units, 3.5 million units and 2.5 million units were sold respectively. Coupled with the terminal revenue and terminal costs per half-year, it is measured that each terminal has suffered losses of 575 yuan, 1390 yuan, 833 yuan, 631 yuan and 589 yuan respectively, and the loss amount is narrowing. In addition, the gross profit margins of each terminal in the five semi-years were-44%,-54%,-44%,-30% and-29% respectively, and the gross profit margin continues to increase.

This phenomenon is consistent with economic principles. According to the basic logic of production, the marginal costs of TV manufacturers decrease year by year, so the marginal benefits are increasing year by year. Judging from the gross profit margin of LeEco's terminals, this principle is also in line with. Therefore, LeEco will vigorously promote the increase in LeEco's super TV production, thereby continuing to reduce marginal costs.

However, this does not conform to the phenomenon of "buying a member gives away hardware". As mentioned earlier, income will be apportioned on hardware and membership fees in proportion. Regardless of the proportion, a 20%-30% income difference will greatly affect the gross profit margin. You should know that it is already extremely difficult for manufacturing companies to increase their gross profit margin by 1%, not to mention the increase in gross profit margin driven by consumption in the first three years. Behind the 1% change is already difficult cost control. If 20% of the income is to be apportioned to membership fee income, there will definitely be obvious changes in the terminal's gross profit margin.

In fact, this change has not been reflected. Although the gross profit margin of LeEco's terminals is losing money, the extent of the loss has been steadily narrowing. An investor who owns LeE.com shares asked LeE.com about this issue, and the reply was: All income earned from LeE.com Eco-Day activities is directly recognized on terminal equipment and is not apportioned to membership fee income in proportion.

The securities affairs representative explained to the investors mentioned above that there were two main types of income related to membership fees in the first half of this year. One was the "buy members and send hardware" activity in marketing activities, and these incomes were fully included in LeTV's revenue from terminal equipment sales. The other is the income from member renewal, which is included in deferred income and recognized as membership fee income every year at a certain percentage.

The explanation for the first situation is consistent with the reporter's inference. Take the previous example to illustrate that the accounting treatment of the 4-year and 8-month super film and television membership and a terminal equipment obtained by the user for 2287 yuan is to include the income into the income of the terminal equipment, which means that 2287 yuan of terminal equipment income is recognized. This is a reasonable explanation for why the gross profit margin of LeEco's terminals is steadily increasing step by step: all hardware sold at events is included in revenue based on normal selling prices, and the gross profit margin should increase steadily based on scale effects.

But in other words, the vast majority of LeEco's 170% increase in terminal revenue is due to extended growth through marketing. Among the 2.5 million TV sales achieved in the first half of 2016, the cumulative sales reached 1.016 million units during the 414 and 618 Eco-Day activities, accounting for 40.64% of the total sales in the first half of the year. Marketing activities have contributed significantly to the growth of terminal revenue.

But what followed was the puzzling mystery of membership fee income. According to LeEco's explanation, the income earned from the two eco-day marketing sessions of "buy members and send hardware" in the first half of the year was not included in membership fee income. It should be noted that the revenue generated by these two marketing activities was 2.32 billion yuan and 1.015 billion yuan respectively. Especially during the 414 Ecological Day, at least 1.69 billion yuan of the 2.32 billion yuan was revenue from LeTV Super Films, and this income was not recognized as membership fee income. Similarly, at least 700 million yuan in 618's marketing revenue is not included in membership fee income.

On the other hand, LeEco's membership fee income increased year-on-year along with terminal revenue like God's help. LeEco's membership fee income is increasing at a rate of 60%-70% every year. By the first half of 2016, membership fee income has increased significantly by 152%, reaching 2.709 billion yuan. In other words, LeEco's membership fee revenue achieved a spontaneous growth of 125% without the help of marketing activities (all revenue from marketing activities contributed to terminal revenue). In an environment where video sites are so competitive, this growth rate is as mythical as possible.

In addition, there is another contradiction in the growth rate of deferred income and prepayment in LeEco's statements. In accounting, the recognition of revenue needs to be based on the accrual basis. For example, assuming a user purchases LeEco members for one year at a time, a listed company cannot recognize all revenue as operating income at one time in the semi-annual report. If users subscribe and pay off for a full year from January 1, LeEco can only confirm half a year's revenue in the semi-annual report. For example, the membership fee for one year is 490 yuan, and LeTV can only recognize revenue of 245 yuan in the half-year period. The remaining 245 yuan is included in liability accounts such as receivables or deferred income, and the corresponding income for the current period will continue to be recognized in the second half of the year.

However, the reporter looked through the report and found that the amount of deferred income was far less than expected. Data shows that deferred income is 125 million yuan, of which 123 million yuan is new deferred income this year.

The significance of the additional 123 million yuan is that less than 5% of LeEco's paid members in the first half of the year made one-time full-year payments. However, the data compared with this is membership fee income of 2.7 billion yuan in the first half of the year. That means that 95% of the 2.7 billion yuan in revenue is purchased by members on a monthly basis, of which only 123 million yuan was reserved for LeTV to confirm in the second half of the year.

The contradiction is that if LeEco's membership renewal rate in the second half of the year is calculated based on deferred income income, the difference between the amount and the data recognized as revenue in the current period is too large, and LeEco's two marketing activities in the first half of the year did not include membership fee income. In this case, membership fees can still maintain a growth rate of 152%, which is really a mystery.

To sum up, all LeEco's marketing activities are aimed at reducing the marginal cost of terminals, but in the end, they still cannot offset the current situation of losses. In the second half of 2015, the loss on terminals was 1.263 billion yuan. Although sales increased in the first half of 2016, the loss on terminals continued to expand, reaching 1.472 billion yuan. "The more you sell, the more you lose" can still describe the current situation. However, the income from film, television and drama earned by relying on Huaer Film and Television cannot make up for the "bottomless pit" of the terminal, so LeTV's net interest rate is only 0.8%.

Behind the surge in sales through marketing activities is the gradual decline in net interest rates. Perhaps only LeEco knows the pain best.

Editor: yvette