Baozun Inc (BZUN) 2017 Q3 法說會逐字稿

Good day, and welcome to the Baozun Third Quarter 2017 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions) At this time I would like to turn the conference over to Caroline Dong, Investor Relations Director. Please go ahead.

Thank you, operator. Hello everyone, and thank you for joining us today. Baozun's earnings results was distributed earlier today and is available on our IR website at ir.baozun.com as well as on global newswire services.

On the call today from Baozun are Mr. Vincent Qiu, Chairman and Chief Executive Officer; and Mr. Beck Chen, Chief Financial Officer. Mr. Qiu will review business operations and the company highlights; followed by Mr. Chen, who will discuss financials and guidance. They will be available to answer your questions during the Q&A session that follows.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, beliefs, estimates, targets, going forward, outlook and similar statements. Such statements are based upon management's current expectations and current market and operating conditions and may relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Mr. Qiu, please go ahead.

Thank you, Caroline, and thanks everyone for joining our earnings call today.

Total GMV increased by 71% year-over-year to RMB 4.1 billion during the third quarter. Growth continued to be driven by increased -- increases in sales from our existing online stores and the further optimization of our business model mix towards a nondistribution model.

During our Q2 earnings call, I reiterated the essential role technology plays in our strategy. Technology creates a significant barrier to entry, strengthens our competitive advantage and has been the key for success since our founding. Customer and brand succession plays a similarly crucial role in our strategy, and therefore we need to continue to invest significantly in both of these strategic initiatives to strengthen our future business prospects.

We have always committed or focused towards anticipating the future needs of our brand partners across the entire brand e-commerce value chain. We will continue to invest in and strengthen our vast portfolio of technologies over the next 3 to 5 years. This investment in our future will further strengthen our leadership position and long-term competitive advantage as well as the expanded scale of our technological services to create greater value for our clients, consumers and shareholders.

We have been steadily expanding the array of services we are able to offer our brand partners in order to cover every aspect of the brand e-commerce value chain. I'm very pleased with the progress we have made in our digital media business. Last month, we were recognized with 2 bronze awards and 1 nomination during the ROI Festival 2017, which is one of the most influential creative festivals in Asia. This was our first time participating in the ROI Festival as a digital marketing agency, along with well-known multinational advertising peers such as WPP, Publicis, Dentsu, and I'm pleased to have performed so well on our first attempt. I believe our strong debut in the ROI Festival event demonstrates that our digital marketing services are on par with our global peers.

Our digital marketing services include marketing services as well as the unified ecosystem digital marketing services that incorporates various strategies, communication channels and operations. We have been authorized as one of the first certificated data bank service provider and independent software vendor on Tmall's Uni-CRM platform multichannel network providers.

Leveraging our competitive advantages in big data analysis and in-depth understanding of consumer behavior, we're using our digital marketing services to develop strong relationships with several global leading brands, which, I believe, demonstrates the increasing recognition for quality our digital marketing capability has.

On a more recent note, we were able to successfully settle total order value of RMB 5 billion during Singles Day earlier this month, almost double the amount on the same day last year. This solid increase in total order value was driven by our seemless integration of our IT infrastructure, online store management, digital marketing, customer service, warehousing and fulfillment and back-end administration. We are very proud of this performance. Additionally, one of our largest sportswear brand partners successfully rolled out Shopdog in its first large-scale trial during Singles Day this year. Overall, I'm very pleased with our outstanding performance during the third quarter. We will continue to drive growth momentum and expand the range of services we have on offer to generate great value for our shareholders.

With that, I will pass the call over to Beck, who will review our financials.

Thank you, Vincent. We are very proud of our results this quarter, especially the strong performance from brands and our nondistribution model, to further optimize our business model mix, in transitioning more brands towards our nondistribution model, we successfully transitioned the leading global electronics brand partners business from distribution model towards the nondistribution model in September. Under the distribution model, we recognize revenue on gross basis as product sales revenue because we take ownership of the inventory. Under the consignment model, we only recognize the revenue on a net basis as services revenue. We believe this is a major milestone in our strategy, and this reflects our strong belief in transitioning our vendors towards a more asset-light, lower-risk and higher-margin nondistribution business model. We are confident that this shift will greatly benefit our vendors and generate long-term shareholder value.

Let's now go over the numbers. A few housekeeping items in advance. We believe year-over-year comparisons are one of the most useful ways to judge our performance. All percentage changes I'm going to be giving will be on that basis.

Let's start to review the financials. Total GMV during the quarter increased by 71% to RMB 4.1 billion. Our focus remains on growing our nondistribution business, which saw GMV increase by 93% this quarter. We will continue to optimize our business model mix towards the nondistribution model going forward. The decrease of distribution GMV was primarily due to the transitioning of 1 electronic brand business to the nondistribution model.

The total net revenues increased by 19% to RMB 890 million. Breaking down further, product sales revenue decreased slightly by 1.5% to RMB 473 million, in line with the distribution in GMV, which I just talked about. Services revenue rose by 55% to RMB 418 million during the quarter. The decrease -- sorry, the increase was primarily due to the rapid growth of our consignment and service fee business model and, in particular, growth in sales of apparel products as they expand their online presence.

In Q1 this year, we began migrating parts of our media services towards a more asset-light model on an apples-to-apples basis, excluding the cost of media procurements from services revenue in both Q3 2017 and Q3 2016, services revenue during the third quarter of 2017 grew about by 65% on a year-over-year basis.

Total operating expenses were RMB 862 million. In particular, cost of products decreased to RMB 408 million, primarily due to the decrease in the volume of product sales from our core brand e-commerce businesses. Fulfillment expenses rose to RMB 173 million, mainly due to the increases in GMV contribution from our consignment businesses, more orders fulfilled by premium delivery service providers as a percentage of total orders and warehouse rental expenses. We have a best-in-class warehousing operation and procurement experience in the brand e-commerce industry, and we believe top-tier capabilities within procurement are the main driver of customer and brand satisfaction, which is a key factor to sustain our long-term growth.

Starting from July, our team began to prepare for the 11.11 campaign and had some preinvestment into the infrastructure and capabilities. During the Singles Day, our logistics team performed extremely well when compared to our market competitors in terms of efficiency, accuracy, stability and flexibility. So our investment has been well paid back and appreciated by our brand partners.

Sales and marketing expenses rose to RMB 222 million, primarily due to an increase in store operations staff and the promotional and marketing expenses associated with our online stores. This year in particular, we began investing in rolling out unified marketing campaigns for Singles Day in conjunction with our brand partners in August, which is earlier than usual. We believe that Baozun and our brand partners benefited from this marketing campaign strategy during Singles Day earlier this month.

Technology and content expenses rose to RMB 36 million. The increase was primarily due to increases in technology-focused staff, share-based compensation expenses and the project-based variable technological expenses from branded sports. We will continue to increase our investment in technology following the establishment of our innovation center in June 2017 to further enhance our competitiveness and drive long-term growth.

G&A expenses rose to RMB 30 million. The increase was primarily due to increases in administrative staff costs and share-based compensation expenses.

Income from operations increased to RMB 28 million, while operating margin improved to 3.1% compared with 3.0% in the same quarter of last year.

Non-GAAP income from operations was RMB 41 million, an increase compared to RMB 31 million in the same quarter of last year, while non-GAAP operating margin improved to 4.6% compared with 4.1% in the same quarter of last year.

In Q3, net income attributable to Baozun ordinary shareholders rose to RMB 22 million, an increase of 12% from the same quarter of last year. Basic and diluted net income attributable to ordinary shareholders per ADS were RMB 0.40 and RMB 0.37, respectively, compared with RMB 0.39 and RMB 0.36, respectively, during the same period of last year. Non-GAAP net income attributable to Baozun ordinary shareholders rose to RMB 35 million, an increase of 25% compared with the same quarter of last year.

Basic and diluted non-GAAP net income attributable to Baozun ordinary shareholders per ADS were RMB 0.64 and RMB 0.59, respectively, compared with basic and diluted non-GAAP net income attributable to Baozun ordinary shareholders per ADS of RMB 0.56 and RMB 0.52, respectively, for the same period of 2016. That completes the profit and loss statement for the quarter.

As of September 30, 2017, the company had RMB 510 million in cash, cash equivalents and short-term investments, a decrease from RMB 957 million as of December 31, 2016, due to the investments in the company's logistics space and procurement for the Singles Day shopping festival. Like we have told previously, we successfully completed a land purchase and obtained land certificate in September. The investment accounts for USD 40 million.

Turning to revenue guidance. For the fourth quarter of 2017, we expect total net revenues to be between RMB 1.49 billion and RMB 1.53 billion. While we are transitioning more of our benefits from the distribution model towards the nondistribution model, we started to provide [gross] guidance for services revenue since last quarter. Under the nondistribution model, we only recognize revenue on net basis as services revenue. For the fourth quarter of 2017, we expect services revenue to increase by over 55% on a year-over-year basis.

Last quarter, we raised our fiscal year 2017 GMV guidance from an increase of over 50% to an increase of over 60% on a year-over-year basis. With strong confidence in our strategy and operations, we expect that GMV during the fourth quarter of 2017 to grow faster than 70% on a year-over-year basis as services revenue continues to grow rapidly.

This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you.

(Operator Instructions) We'll take our first question from Joyce Ju with Citibank.

I have 2 questions. My first question is actually regarding the non-GAAP operating profit. This quarter, we saw GMV growth accelerating to 71% year-over-year, which is very strong, while we see non-GAAP operating profit only grow 33% year-over-year. Historically, we all know revenue growth, gross profit growth could be slower than GMV growth because the model shift and the media service migration. But wonder -- but the impact on the operating income were really muted. So wonder for this quarter, what factors change the trend, makes the operating profit growth actually slowing down. And how should we model the OP profit growth for the future quarters when you compare it to the GMV growth? My second question is regarding the -- housekeeping question for the same-brand sales -- store sales. If you can give me -- us some update on the numbers.

Thank you, Joyce. Let me take the question first. So regarding the first question about operating profit -- operating margin growth. So there are 3 reasons, I think, we can share with you. The first is, we have talked in the prepared remarks, we have preinvestments this year in Q3 for the 11.11 campaign, especially in procurements, infrastructure and fulfillments capabilities. And also we started to do the marketing campaign with our brand partners to secure marketing resources. And usually, if we start earlier in August and September for marketing resources, it's much cheaper than we start to do it after the national holidays and right before the 11.11. So that's why we think it's a very correct strategy, and we have already been paid back by the results in the 11.11 campaign and -- yes, and the results are fully appreciated by our brand partners. So this is reason one. Reason two is, like we have talked about in the last earnings -- last quarter's earnings call, we shut down MKF, and it had incurred some onetime severance costs, as you dispatch -- dismiss the employees and the shutdown for some other like kind of infrastructure and services. So this will also incur onetime expenses in Q3 as well. The third reason is, relatively, electronics and appliances grows very well and even better than our expectation. So there is some dilution effect from those relatively lower take rates categories. So this is how I address your first question. And for the second question about same-store sales growth rate. And actually for the first half of this year, we talked about the same-store sales growth like grows by around 50% on a year-over-year basis, and for Q3, the same-store sales growth rate is accelerating to about 60% on a year-over-year growth.

We'll take our next question from Eileen Deng of Deutsche Bank.

I have 2 questions. The first one is regarding the -- our fourth quarter guidance on service revenue growth. The 55% is same as the third quarter service revenue growth rate. So wonder what's the reason driving this growth rate to be flat, is to be the same as this quarter, especially when we see the Singles Day results largely meet rising expectations. I'm wondering what's the level is like if we exclude the accounting treatment adjustments. I'm wondering, what's the nondistribution GMV behind this in the fourth quarter. My second question is regarding the fulfillment expense. It seems like this quarter saw the expense ratio as a percentage of the corresponding GMV dropped clearly quarter-on-quarter basis. Wondering is there -- is this because of our upgraded logistics system and we see that operating efficiency increase? How should we think about the trend going forward?

Okay. So thank you for the question, Eileen. So regarding the first question, fourth quarter revenue -- services revenue guidance. And yes, usually we think we are fully comfortable to give the guidance of the services revenue growing by over 55%, fully confident and prudent. And also, we're talking about that we began migrating our media services towards a more asset-light model starting from January this year. So under the previous media service model last year, we recognized the cost of media purchase and our net commission as revenues. So -- and under this new model, we only recognize our net commission as our revenues, so it's like apples-to-oranges base. So if we look at like an apples-to-apples base, pro forma base, the services revenue for Q4, just like for the 55% increase, it could be like 68% year-over-year increase at least, if we exclude the effect of migrating the services -- migrating the media services model from gross to net basis. And in terms of the nondistribution model for the first 3 quarters of this year, the nondistribution model is growing, I think -- every quarter is growing over 80% on a year-over-year basis. And so for Q4, we think we are fully comfortable that we still can maintain, relatively, such kind of very high growth rate for nondistribution model. And in regard to the second question about fulfillment expenses. So in Q3, we still -- like we said before, we still had some investments -- a preinvestment to expand capabilities especially for like 11.11 for next year, so there is some preinvestment. And we also purchase one of the land of the warehouse, so there, we have incurred some costs for the future, and we think we can have more leverages in going forward. And especially, starting from this year, I think, we had started to provide services for technologies to network as well. So in the future, it will keep to grow. And this is also can bring us additional services revenue in the future as well. So yes. So this is how I address the 2 questions from you.

We'll take our next question from Monica Chen with Crédit Suisse.

I have 2 questions. So first one is regarding our total brand partner number. So we see our total brand partner number increased by 6 to 146, while our GMV brand partner accelerated more from 129 to 141 this quarter. So I was wondering, who are the new GMV brand partners? And what category are these brands belong to? And my second question is regarding the reasons we see in terms of the competition among major e-commerce platforms, especially in apparel category. So as we are the omnichannel e-commerce service provider for these apparel brands, so what is the impact to our platform and to our brand? So will our brand partners start to think to focus only on one of the major platforms instead of to have both channels?

Okay. Thank you for the question, Monica. Let me address the first question, and Vincent can take the second question about the platform competition. So like we said, we always value the quality over the quantity in acquiring new brand partnerships. So we think GMV brand partner is more valuable compared to non-GMV partner for our business in the long-term run. So that's why we focus in transitioning non-GMV partner to GMV partner. And in regards to new brand addition within the non-GMV -- within the GMV brand partners, especially in Q3, we still have a lot of leading international brands in apparel and sportswear. And we expect we will have more brands addition [capital] for apparel and sportswear. We will have more brand addition in FMCG, mother and baby products in the coming year.

Okay. Thank you for the question, Monica. I will take the second one, for the competition across platforms. I think right now, from our perspective, the major brand partners we are serving are quite -- in one direction, is quite focused on back-end improvements including the procurement network restructure and also technology preparation like data analytics and AI, these kinds of things. So I think, the platform for them is about the same competition like before. So several major platforms for them will be Tmall official web store and also JD as before. So that structure doesn't change. Then also -- that's one thing. But along with the establishment of the very strong back-end capability, I think we can have more, how do you say, distinctions to be created in the future. So of course, the brand partners, major ones, they're focusing on Tmall today, especially those apparel brands. And JD, I think, the station doesn't change a lot. But the brands are talking more about Tencent, WeChat, even some smaller, more interesting new platforms and ways to do – [come back] their additional marketing and sales. So Baozun is here not only helping them only from the front-end sales but also helping them a lot of back-end initiatives, innovations. So for us, we take brands as our priority and then prepare for all the business opportunities in the future. Thank you.

We'll take our next question from Binnie Wong with Merrill Lynch.

My question -- I have 2 questions here. My first question is that on the longer-term perspective, maybe, Vincent, can you give a small color on how do you see the take rate in terms of the potential upside that we could see? Basically, we are providing more services. Say, we have like Shopdog, ShopCat and then also Shopify, right? But similar to where we have -- like a software system to Shopify, in terms of like -- in terms of the potential services that we can provide. Those are things that investor generally see an upside for take rate. But this quarter, we see just maybe flat rates -- slightly flattish. So how do we see the take rate in terms of -- I'm not asking for exact number, but I'm just asking for company's direction in terms of how we see the trend could be? And then, second question is that we see this quarter is actually a very solid quarter in terms of the GMV growth. GMV growth actually accelerated from the third quarter. And potentially, if you look at, like, last year, it's not that relatively easy comp. But then, we still were able to manage to deliver an accelerated growth in GMV. So I think that's very impressive. Can management highlight to us what categories do you see the fastest growth? And what are the reasons in terms of -- is it because we expand into new categories? Or is it because we have additional services we provide, which brand see as value-added? So can you help elaborate on those?

Okay. So Binnie, let me take the second question first. Yes, and also yes, I can also -- I can take both the questions, and then Vincent can give some additional comments. And so firstly, for the long-term growth, and first, I want to clarify. We are Baozun. We are not Shopify, okay? So this is the first point (inaudible)

Sorry, sorry. I mean, in terms of the similar (inaudible)

Yes, I know. So just for clarification. So for the long-term run, I think right now, we have demonstrated our strong capabilities within the brand e-commerce industry, not only to platform but also to competitors and brand partners as well. So we are one service -- we are one-stop service package provider with integrating capabilities and also with strong innovation thinking and strategies. So that's why those top-leading brand partners would like to cooperate with Baozun in the long run. But still, the first thing is we can build partnerships with those leading brands and provide more value-added services. Traditionally, we may provide services within the platform or within the integration. Right now, we can provide more innovation to them. So that's why we have some very deep-dive talks with those senior management team of those global brands in global. So -- and we started to have some pipeline -- pilot projects to provide innovation services and the innovation technology capability solutions to those global brands. And we expect that we can achieve not only like the benefit but also the financial return as well. This is one way. The other way is, of course, we have those top leading global brands as our benchmark to lead the way and also to apply a more relatively smaller brand in a way. So obviously, we can have better commercial terms again -- with those second-tier brand partners compared with the first tier. So this can also help us to improve the long-term revenues and take rates from the businesses as well. Regarding the second question about the GMV growth by categories. So yes, the GMV growth is very promising and accelerating to over 70% this quarter and in Q4. So generally, our growth rate for those like apparel, the biggest category, apparel, is still very solid, very high speed. While we have seen that electronics and appliances categories, they are also accelerating. The growth rates are also accelerating in Q3 and as we expect in Q -- sorry, in Q4 as well. So even for some -- and also we share the same-store sales growth rate. Before that -- the Q3 same-store sales growth rate is also accelerating. So that's what we have seen in the e-commerce market. And we felt that the Chinese -- especially the Chinese consumers just want to consume more like top-tier and quality, authentic products and brands. So we have pure confidence that this momentum will keep to go for the next coming years. Thank you.

Beck, if I can just have a quick follow-up question here. When you see like the innovative services, can you elaborate a little bit more as to what are the innovative services or what are the differentiation against other peers? Because we constantly have investor would be asking for what are like -- I think, a general question -- common question is the differentiation here. So since you highlight about the innovative services, maybe can you elaborate more on how Baozun differentiate from its peers?

As you may know, last quarter we announced that the setup of the innovation center and also the joining of Professor [Nguyen]. So right now, our technology research direction is about 3 ones. First one is about the computer vision and then, the big data and then, the AI. So these 3 technology directions is very in line with what the brand needs today to better their capability in such an e-commerce era. So take, for example, using the historical operational data about products. We can use computer vision, big data and AI to better the product development, efficiency, quality. So we can deliver this kind of services and products to them to help them build a better product offering for the market. And also for their -- consumer engagements, for example. We can use machine learning technology, AI, big data to provide them with the -- how the consumers rank, rate their products; how they like the way we deliver to them. So in this case, we call this the voice of commerce, and this can also be very helpful for the brands. I just give you the 3 examples, but what we are doing are much more than that.

We'll take our next question from Billy Leung with Haitong International.

Just focusing on technology -- on investments in technology. Could management be more specific in what we are investing in, in terms of how much we are putting in terms of talent and how much we are putting in terms of technology upgrade? That's number one. And number two is, in terms of this investment, should we expect the investments in technology to grow incrementally? So is it going to be larger next year than this year and so forth? And finally, the final question is, could management sort of give us some color on any M&A plans or possibilities in the future?

Okay. So let me take the second and the third question, and Vincent can take the first question about the talent acquisition or the strategy about the tech investment. So in terms of the investment field -- scale, so we -- generally, we have talked about investments and we would increase our investment in technologies in the following period. So -- but we believe that, generally, we have a very targeted vision. So we don't waste money. So we just want to invest very targeted area and people. So we expect the technology expenses as percentage of revenues or as percentage of GMV will continue to grow in Q4 and next year but within reasonable speed. And in terms of the potential M&A, we are always open to look at the opportunities to do merger and acquisition. And we will update the market if there's any material M&A opportunities.

Yes, let me answer the first one. Yes, after the past several months, our research and technology team increased a lot. So now we have more than 500 engineers in the company. They are serving in different functions, including basic research, application research, engineering, customer support and maintenance, different functions. I think now, the key and core innovation team already have been set up. So I think the team is very strong, including a lot of very good talents. So I think, combined with the innovation and also engineering piece together, we can not only develop very good technologies for the application in the e-commerce scenario and also do a very good engineering job to adopt all these kinds of results into the commercial practice and in return, benefit our financials. Thank you.

We'll take our next question from Nicky Ge with China Renaissance.

I have 2 questions here. Just want to get more color on the first quarter guidance. Our guidance for the service revenue this year like accelerating from the third quarter. Does that mean that our nondistribution GMV accelerating from third quarter as well? That's the first question. And second question is housekeeping question about marketing cost. The marketing cost as a percentage of GMV increased a lot this quarter. Just want to know the reason behind that and the trend going forward.

Okay. So thank you for the question, Nicky. Yes, for the first question, let me -- like I have said before, we think the nondistribution GMV growth rate will keep to grow -- keep to a very high speed and so, definitely over like 80% in the previous 3 quarters. So -- and also in Q4, usually it's like peak season and especially, for example, for apparel products and also even for apparel products, they have big average order size -- bigger average order size. So that's why we expect we can generate higher services revenues from first quarter as well. And in terms of the marketing expenses -- selling and the marketing expenses, like I have said in earlier prepared remarks, so we -- especially for this quarter, we had some premarketing investments for the coming 11.11 Q4, and it has been paid back through the sales rollouts. And financially, we think we are totally fine. And in Q4, we think that the marketing cost as a percentage of GMV or the revenues will definitely drop.

(Operator Instructions) And there are no further questions at this time. I'd like to turn the conference back over to Caroline Dong for any additional or closing comments.

Thank you, operator. In closing, on behalf of the entire Baozun management team, we'd 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 us in China, please let us know. Thank you for joining us today. This concludes the call.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.