蘭亭集勢 (LITB) 2013 Q2 法說會逐字稿

Good morning, everyone, and welcome to the second quarter 2013 earnings conference call for LightInTheBox Holding Company Limited.

Today's conference is being recorded.

At this time, I would like to turn the call over to Bill Zima of ICR for opening remarks and introductions.

Please go ahead, sir.

Thank you, operator.

Hello, everyone, and thank you for joining us on today's call.

LightInTheBox announced its quarterly financial results on Monday, August 19, after the market closed.

Earnings release is now available on the Company's investor relations website.

Today, you will hear from LightInTheBox's Chairman and CEO, Mr. Alan Guo, who will discuss financial and operational results, followed by the Company's Chief Financial Officer, Mr. Richard Xue, who will address financial results in more details.

Before we proceed, I would like to remind you of our Safe Harbor statement.

Please note that the discussion today may contain certain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations.

To understand the factors that could cause results to materially differ from those in the forward-looking statements, please refer to the Company's prospectus filed with the Securities and Exchange Commission on June 5, 2013.

The Company does not assume any obligation to update any forward-looking statements except as required under applicable law.

At this point, I would like to introduce Mr. Alan Guo, Chairman and CEO of LightInTheBox.

Alan, please go ahead.

Thank you, Bill.

Welcome, everyone, to LightInTheBox second quarter 2013 earnings call.

We are pleased to have completed a successful IPO in June and to be hosting our first quarterly earnings call as an NYSE-listed public company.

We are pleased to report second-quarter 2013 financial results, which reflect continued strong growth momentum and a margin expansion attributed to our expanding sales platform, unique product offering with solid pricing power, continued optimization of repeat customer purchases, and the effective cost controls.

Our revenue increased 53% over the last year, the same period of time.

And we were pleased to experience both year-over-year and sequential improvements in both gross margin and adjusted net income.

During the quarter, our total number of customers increased 140% to 1.2 million, resulting in 53% year-over-year growth in our net revenues to $72.2 million.

Our focus on customer satisfaction and ongoing investments in CRM have contributed to the strong growth in repeat customer revenue volume, which increased 124% in the second quarter to $24 million, representing approximately 32% of our total revenue.

Revenue attributed to new customers increased 32% and represented approximately two-thirds of our total revenue in the second quarter.

Our investments in data mining technology for merchandising, website conversion and online distribution optimization helped contribute to our growth in new customers.

We added three languages -- Polish, Czech, and Turkish -- to our website in the second quarter and are making the necessary investments in customer service support to expand our customer pool in the long run.

Our e-commerce sites are now available in 20 languages and serving consumers in over 200 countries and territories.

We also expanded our sales in all major geographic regions, led by triple digit sales growth in both Europe and South America.

The gradual buildout of our platform in emerging countries such as Brazil in particular have allowed us to benefit from the explosive growth in e-commerce.

During the second quarter, our apparel, small accessories and gadgets, and the electronics and communications devices remained our three primary product categories.

Our small accessories and gadgets category increased 321% to $26 million from the prior year period.

Apparel decreased 5.4% to $24.7 million and electronics and communications devices increased by 31.7% to $9.5 million.

With the exception of our apparel category, revenue growth and margin performance in our other product categories were in line with our expectations.

Overall, revenue in April and May were in line with expectations.

However, we experienced lower sales in the month of June.

Our apparel business had both internal and external challenges.

We concluded that we placed too much emphasis on higher end products and not enough focus on lower end products that traditionally sell very well.

Additionally, we observed that the competitive environment has increased with off-line wedding retailers drastically reducing their prices, as well as China-based online wedding retailers attempting to copy our business model.

We believe this is a temporary challenge and are responding to it with better merchandising where we plan to work more closely with outside designer networks, better brand presentations, more competitive pricing, great customer service support, and increased collaboration with off-line partners such as retail stores and wedding planners.

We expect to correct our issues in time for the next wedding and prom season in Q1 and Q2 of 2014.

While sales are expected to slow in this category, reducing our overall sales growth outlook in the second half of the year, we believe we can sustain our gross margin during this period through great operational and supply chain efficiencies compared to our competitors.

LightInTheBox has a unique and competitive position with our supply chain management advantage and the data-driven merchandising and marketing expertise.

Looking ahead, we aim to leverage our resources and deliver a better customer value proposition, expand our customer base and improve customer satisfaction.

We have some exciting new initiatives planned for the next 6 to 12 months.

We certainly value our customers and are always evaluating ways in which to maximize their shopping experience.

During the second quarter of 2013, we launched our cash reward program on every purchase to incentivize repeat customer orders.

And at the same time, we will continue to focus on improving product quality, enriching our product selection, reduce shipping costs, and provide better support services.

We plan on adding new website languages and a support staff as we are expanding our geographic reach.

We recently established our first local return center in Europe to improve our post sales service.

Second, we aim to add further value to our supply chain.

Our goal is to significantly enlarge our supplier base to increase our product choices to consumers.

As it relates to product listings, we added net total of approximately 25,000 new listings during the second quarter, bringing our total count to over 240,000 listings.

As we expanded our sales network, we plan to establish our first overseas sourcing center in Korea as a starting point to establish a global sourcing infrastructure.

Third, we are identifying and capturing key business development opportunities for online distribution, especially our mobile platform.

Through our efforts, we are investing aggressively to develop a better shopping experience for smartphone and tablet platforms to capture growth in mobile Internet adoption and improve our conversion rate in such platforms.

As a China-based business, there is a scale effect inherent to our business model and we aim to further expand upon in the growth opportunities associated with global e-commerce industry.

We are confident we can deliver balanced growth and higher levels of profitability in the quarters ahead by, number one, building up on our increased operating scale.

Two, enhancing our marketing efforts through data mining and CRM to attract both new and repeat consumer purchases.

Third, expanding our product selection.

Fourth, broadening our geographic reach.

Fifth, strengthening our supply chain efficiency.

And, sixth, optimizing our logistics network.

On that note, I will now turn the call over to our CFO, Richard Xue, who will give you -- who will take you through our financials for the second quarter of 2013.

Thank you, Alan, and thank you, everyone, for joining us for our first quarterly conference call as a public company.

LightInTheBox continued to make progress with its operational performance and financial growth during the second quarter.

We are also encouraged with our initiatives to expand our customer base and improve overall customer shopping experience.

Now moving on to our quarterly financial highlights, before I get started, I would like to clarify that all the percentage changes refer to year-over-year changes unless otherwise noted.

For the second quarter of 2013, net revenues increased 52.6% to $72.2 million, mainly driven by growing the number of customers.

During the quarter, number of customers increased 140% to $1.2 million.

Revenue attributed to repeat customers increased 123.7% to $23.4 million compared to the same quarter of 2012.

During the quarter apparel, small accessories and gadgets, and the electronic and communications devices, remained the three largest revenue contributors.

Revenues generated from small accessories and gadgets increased by 321% to $26 million from $6.2 million in the same quarter of 2012.

As a percentage of total revenues, small accessories and gadgets revenue was 36.1% in the second quarter of 2013 compared to 13.1% in the same quarter of 2012.

Revenues generated from apparel categories decreased by $1.4 million to $24.7 million in the second quarter of 2013 from $26.1 million in the same quarter of 2012.

As a percentage of total revenues, apparel revenue was 34.2% in the second quarter of 2013 compared to 55.1% in the same quarter of 2012.

Revenues generated from the electronics and communications devices, increased by 31.7% to $9.5 million from $7.2 million in the same quarter of 2012.

As a percentage of total revenues, the electronics and communications devices revenue was 13.2% in the second quarter of 2013 versus 15.3% in the same quarter of 2012.

Geographically, Europe remained our largest market with revenue of $44.1 million, representing an increase of 105.4%.

As a percentage of total revenues, revenues in Europe were 61%, up from 45.3% in the same quarter of 2012.

Revenues in North and South America increased by 16.3% and 169.9% to $14.3 million and $7.3 million, respectively.

As a percentage of total revenue, revenue from North and South America were 19.8% and 10.1% in the second quarter of 2013, respectively.

Revenues in other countries were $6.6 million, representing 9.1 million (sic -- 9.1%, see press release) of total revenues in the second quarter 2013.

Now gross profit.

Gross profit was $33.2 million in the second quarter of 2013, an increase of 68.5% from the same quarter in 2012.

The increase was mostly driven by a significant increase in net revenues and continued gross margin expansion as we continued to optimize product mix and gain scale.

Gross margin increased to 46% in Q2 of 2013 from 41.7% in the prior year period.

Total operating expenses in the second quarter of 2013 increased 57% to $32.2 million from $20.5 million in the same quarter of 2012.

Again, within total operating expenses, fulfillment expenses increased 57% to $3.7 million from $2.4 million in the same quarter of 2012, primarily reflecting the increase in sales volume and number of orders fulfilled.

As a percentage of total net revenues, fulfillment expense increased to 5.2% from 5% in the same quarter of 2012.

Selling and marketing expenses increased 50.3% to $19.6 million from $13 million in the same quarter of 2012, reflecting the Company's efforts to grow our customer base.

As a percentage of total net revenues, selling and marketing expenses were 27.1% in Q2 of 2013, down from 27.6% in the same quarter of 2012.

General and administrative expenses increased 74.1% to $8.8 million from $5.1 million in the same quarter of 2012, reflecting largely increased share-based compensation expense as a result of recognition of a one-time share-based compensation expense relating to IPO-related vesting acceleration of stock options of some of our employees.

As a percentage of total net revenues, general and administrative expenses were 12.2%, up from 10.7% in the same quarter of 2012.

Income from operations in the second quarter of 2013 increased to $1.1 million from an operating loss of 0.8% (sic) -- $0.8 million; I'm sorry -- in the same quarter of 2012.

Operating margin was 1.5% in the second quarter of 2013.

Adjusted income from operations, which excludes the impact of share-based compensation expenses, increased to $3.9 million in the second quarter of 2013 from $1000 in the same quarter of 2012.

Adjusted operating income margin improved to 5.4% from 0% in the prior year period.

Net income was $0.6 million in the second quarter of 2013 compared to a net loss of $1.4 million in the same quarter of 2012.

Net margin was 0.9% for the second quarter of 2013.

Diluted net loss per ADS was $0.00 compared to a net loss of $0.12 in the second quarter of 2012.

I'll remind you each ADS represents two ordinary shares.

Adjusted net income, which excludes the impact of share-based compensation expense, was $3.5 million or $0.10 per ADS in the second quarter of 2013 compared to an adjusted net loss of $0.6 million, or a net loss of $0.08 per ADS in the second quarter of 2012.

Adjusted income from operations, adjusted net income, and adjusted net income per ADS for the Q2 2013 all excluded $2.8 million of non-cash share-based compensation expense, which, again, increased significantly from the same period last year as a result of recognition of a one-time share-based compensation expense relating to IPO-related vesting acceleration of stock options of some of our employees.

For the second quarter of 2013, the Company's weighted average number of ADS used in computing diluted income per ADS, was 26,089,912 shares.

As of June 30, 2013, the Company had cash and restricted cash of $103.8 million compared to $21.2 million as of December 31, 2012.

Net cash provided by operating activities increased over 500% to $4.5 million for the three months ended June 30, 2013, up from $0.7 million in the same period of 2012.

Looking at our business outlook, for the third quarter of 2013 we expect net revenues to be in the range of $68 million and $70 million, representing a year-over-year growth rate of approximately 33.2% to 37.1%.

On the share-based compensation charges, I would also make the comment that we anticipate approximately $600,000 in stock-based compensation for the third quarter as well as the fourth quarter.

This goes without saying, all these estimates are based on Company's current and preliminary view of the market and operational conditions, which are subject to changes.

This concludes our prepared remarks.

At this point, we will start taking questions.

Operator.

(Operator Instructions) George Askew, Stifel.

Yes.

Good evening, Alan and Richard.

Can you hear me?

Hey, George.

Oh, good.

Sorry.

Thanks for providing the revenue guidance for the third quarter.

Can you describe, what is the bottom-up process for forecasting third-quarter revenue?

I mean, how is that number constructed?

So from a Company perspective, we have quarterly based bottom-up profits where we start from different dimensions.

We start with geographic breakdown by the geographic owner team, and we also start with category breakdown by the category team, and we also start from the channel marketing team who spends our marketing dollars.

And three teams will come with independent judgment on the forecast, and then the senior management team will triangulate, the three teams, and then with the triangulation, we will further examine their assumptions and then we will [repeat] this process for the second time.

And then, after that, the senior management will meet together and agree on the management forecast and also the objectives for each management team.

And then we will present this guidance in the board meeting and with the discussion with the board meeting.

And so that is basically the general practice that we come with the quarterly guidance.

As you sort of look back to the second quarter, I mean, has the process kind of changed from that time?

And what was the weakness that caught you off guard in June?

I mean, I know you described the issues, but was that something you could have anticipated or worked through with a different marketing strategy?

I am just curious how that process may have fallen short in the second quarter.

So for the second quarter, I think there are two major things that impact on the result.

The first is the internal executions.

I think when we look at it, the original assumptions on conversion rate, that with our original forecast, it was in line with our -- with seasonality adjusted, it was in line with the last year -- the same period of time, and was in line with the Q1, the same 2013, which we did anticipate was a deteriorating of the conversion rate in June which was partially caused by the merchandising mistakes, focusing too much on the high end product and not enough on lower end product.

And, secondly, there was also an external supply discrepancy where we see a very aggressive competitive response to our business, potentially to our IPO news.

And that was something that we never experienced in the past.

The magnitude of dropping pricing, the severe competitiveness in beating our traffic.

However, we believe those things are very temporary because those competitive tactics we experienced by competitors, we don't think that is sustainable from their perspective.

I think what we learned in our own internal forecast and planning phases, not only will we examine the assumptions of the numbers, but also we will further look into their assumptions in external impact -- drastic impact even short-term, number one.

And we will also look into their operational strategies that enable them to achieve the assumptions that they presented.

So those are two things that we learned from the Q2 and we have already incorporated in our Q3 forecast methodology.

Okay.

Now, North America was up -- revenues grew just 16%.

Was that sort of ground zero?

I was surprised it was that slow a growth.

Is that where you saw the challenge in apparel?

Yes, that is correct.

So in North America, because -- there are two reasons.

A is, North America has traditionally very strong off-line wedding retailers and we think this responded very significantly in their pricing strategy.

And, number two, there is relatively more English-speaking competitors coming from China online wedding dresses versus other languages such as French or German or Brazilian.

So we also, from a domestic competitor perspective, we also experienced more competitive challenges there -- temporary competitive challenges there as well.

So that is the major challenges for the apparel, translating to the slower growth in North America.

Okay.

And then just one last and I will turn it over.

Alan, in your remarks, you said you were reducing guidance in the second half.

Should we look for fourth quarter revenue growth to be at about the same level as third quarter?

So at this moment, the Company is giving guidance for the third quarter.

We don't think now is the time that -- for us to be giving guidance for the fourth quarter.

Okay.

Thank you.

I'll turn it over.

Chad Bartley, Pacific Crest.

Thank you.

Just a follow-up on the Q3 revenue guidance and outlook for the slowdown.

Was there one primary driver?

For example, is that apparel or is it just a combination of some of the issues that you have already talked about?

I am just trying to determine if there is one key there.

And then, just in general, as you improve on execution and your strategy, when might growth trends start to improve and turn around?

Is that a one quarter process, two quarter process?

What are your thoughts a little bit longer term?

Thanks.

Yes.

So the guidance in Q3 majorly represents our adjustment in the expectation on the apparel business.

And that is the one category and the primary reason for the guidance.

And, secondly, we are in the process of fixing internal problems and respond to competitive landscape change for the apparel business.

But the apparel business, particularly the wedding and the prom dress business, has very strong seasonality.

So the next season will be next Q1 and Q2.

So we believe a lot of effort and investments we make from now on will be truly reflected in the next season, which means the Q1 and Q2 next year.

Okay.

Thank you, Alan.

Andy Yeung, Oppenheimer.

Hi, Alan and Richard.

Thank you for taking my questions.

My first question is about your second quarter sales.

When we look at across different regions, I think, besides of North America, other regions outside of Europe and South America also was quite weak.

In fact, I think there was a decline in other regions.

Can you perhaps give us some idea what is going on, did you exit some markets outside of those three key regions?

And what is the geographic expansion plan in those areas?

Andy, can you clarify your question?

Is that more of a sequential growth question?

I think on a year-over-year basis, countries outside of Europe, North America and South America did experience some declines, right?

No.

On a year-over-year basis, our European sales increased to $44 million from (multiple speakers) $31.4 million a year ago.

And our North America sales increased to $14.3 million from $12.3 million a year ago.

And our South America sales, again, increased to $7.3 million in Q2 of this year from $2.5 million a year ago.

So all those are very positive growth.

Obviously, South America, especially Brazil, and Europe are doing much better than North America, which Alan just articulated about the reasons behind that.

Okay.

Okay.

I got that.

But for countries outside of Europe, North America, and South America, did you experience growth as well?

Yes, but much slower.

Okay.

Okay.

That's a smaller -- that's a very small portion of our total sales.

We generate more than 90% of our sales from Europe, North America, and South America in Q2 this year.

Okay.

(multiple speakers)

Yes.

So it is worth highlighting from the strategy perspective.

So Europe has been our largest geographic market.

And the European sales is growing more than 100% year-over-year.

We feel a lot of strategies, such as introduce more languages in Czech, Polish, and Turkey, and also some of the language we introduced the later part of last year, really helped us driving the growth in Europe.

And South America is the representative to emerging countries where we are experiencing explosive growth.

And we think it is also the right strategy of focusing on these countries where the e-commerce adoption curve is at a tipping point.

Great.

And then, in terms of your expansion plan for the coming quarters, is there new languages or new countries that you are expanding into?

Yes.

There will be several new languages we plan to launch in the second half of this year.

But, given the development cycle, we are not giving the exact timing and numbers of those languages.

And we will be able to announce them while they are ready.

But the answer is definitely yes.

Our strategy of launching new languages to breach the language barrier between the consumers and our platform is -- will continue to be an important significant strategy for us to increase customer base in our addressable market.

Okay.

I just have one more question, Alan.

In your prepared remarks, you mentioned that you are establishing a global sourcing network beginning with your South Korea.

Is there any particular product category that you are focusing on initially and what other categories are you thinking about expanding in the future?

So we have a global supply chain and a sourcing strategy, which gives us an opportunity of not only limit us -- the sourcing from Chinese manufacturing, but also from suppliers all over the world.

And we decided to choose Korea as our first pilot project because we think Korea's suppliers have unique designing capabilities in categories such as apparel and accessories.

So those will be the starting point for us to think about merchandising from Korea -- sourcing from Korea.

But in the future we will not limit the categories that we were sourcing from, either Korea or any other part of the world.

Got it.

Thank you.

Thank you.

(Operator Instructions) Alicia Yap, Barclays.

Good morning and good evening.

Thanks for taking my question.

My first question is actually regarding your geographic breakdown.

Can you actually break down the European regions?

Specifically, what is the percentage contribution from the Eastern Europe versus the Western Europe?

And then, can you also remind us when did you actually start entering Brazil market?

For the European market breakdown, it's actually pretty extensive.

So I'm not going to go through the full details.

But I will single out one country; that is France traditionally has been our largest European country because French, as a language, is the second language we rolled out after English.

So out of the European total sales, we roughly generate somewhere between 20% to 25% of the sales in French alone.

And we do have a whole group of other language from the earlier ones of German, Spanish, to some of the later ones, the Portuguese, the Dutch, to the latest one we rolled out, including the Scandinavian languages.

In terms of Portuguese, Alan, do you remember when we rolled out Portuguese?

2011.

2011.

Okay.

And what about Brazil?

When did you enter Brazil?

Brazil is 2011.

It is a Portuguese language we launched.

So when we launched the Portuguese language, it supports both Portugal and Brazil at the same time.

Sure.

Sure.

I see.

Okay.

Got you.

And my second question is, if you could break down the margins for apparel -- gross margins for apparel was just the small gadgets and also the electronic and communication products.

Alicia, we don't give category level gross margin information for competitive reasons.

But qualitatively, if you look at our main categories, apparel, because it's softline, and gadgets and accessories, because of its lower price tag, and the fast fashion elements of the offering, tend to have higher than other category gross margin.

So that's the qualitative description in terms of different categories, different margin structure.

I see.

So you mentioned apparel will have a little bit higher margins, right?

Yes.

Both apparel and small gadgets and accessories tend to have the highest margin among all the categories.

Sure.

So then, the follow-up question is that, given there are some difficulty and challenges on the apparel side, would there be any change on your gross margins, for example, on the third quarter?

So we don't expect major changes in gross margin outlook for the third quarter.

We think that, while we are fixing internal execution problems, with a focus on improved supply chain and operational efficiency, we will be able to maintain similar margin structures in the third quarter while we are fixing those problems.

I see.

I see.

And then, just lastly, if I may, can you remind us of the seasonality of your business?

I think you mentioned apparel is strong in first quarter and second quarter.

But just in general, your total business, what is the seasonality?

Right.

For the total business, traditionally, due to seasonality the strongest quarter is the fourth quarter for the Christmas shopping season.

And we will have a slightly stronger presence of wedding and prom related in Q1 and Q2.

That has been the case traditionally.

The weakest quarter, on the other side, Alicia, tends to be Q3.

The weakest one, right?

I see.

Yes, for seasonality.

Okay.

Thank you so much.

All right.

Congratulations on the first public earnings call.

[Maria Sing], China Renaissance.

Thank you for taking my question.

Good evening.

And so for this quarter, you find the gross margin was up four percent compared with one year ago.

So could you give more color on this?

Is this a seasonal reason or the different category mix?

And how about the trend in the future?

And this is my first question.

And I have a follow-up question.

Okay.

From the margin perspective, we increased from the same period last year to this year.

We think it is attributed to a couple of factors.

A is our scale effect.

When we grow bigger, we have a higher negotiating power and purchase power from our suppliers.

So that being here is scale effect of the improved margins.

And, secondly, it is also a factor of the category mix while the small gadgets and our accessory business increased 4X from a year before, which is a high-margin business as we qualitatively describe.

So that is second.

And thirdly, we also certainly -- it is also certainly a part of -- a result of operational improvements where we are more sophisticated in pricing, and I think the margin improvement is a combination of those three things.

Okay.

Okay.

And -- (multiple speakers).

Okay.

So for the margin outlook, I just described that in Q3 we think we are going to maintain the margin outlook.

Okay.

Okay.

Thank you.

Gross margin outlook.

Okay.

Okay.

So you also mentioned that the apparel and -- would only contribute a slight -- about 30% in this quarter.

So is this mostly because of the slowdown in the North America or any other reasons?

So could you -- and, second, SO can you talk more on the gadgets?

So what is the subcategories?

And there is a gadget so you find more growth potential?

So the major reason, as we described the major reason for the revenue was slower than we had expected in the second half of Q2 was mainly due to the apparel business slowdown and mainly represented in the wedding and prom dress business.

And that North America grows slower than others was a result of the apparel business declining year-over-year, because traditionally, we sell more apparel in North America than other geographics.

And can you repeat the second question about the small gadgets and accessory business?

What's the question?

So what is the subcategory under the gadgets category?

So that the company finds more growth potential in the future?

So small gadgets and accessory business in our Company, primary listing on a website called www.miniinthebox.com.

And it has a large number of subcategories.

Things like iPhone cases, adapters, protectors, all kinds of cables, travel kits, some small ticket fashion jewelry, pad suppliers -- supplies, and et cetera.

So it's a very wide range of small items with a much smaller average ticket size and with a long tail of choice of product selections.

We think the growth in a large number of subcategories within the small gadgets and accessory business will continue to drive strong growth momentum for these categories.

Okay.

Okay.

And my last question is regarding the high growth in the area of South America.

So is this mostly because a small base before or the more potential in the future?

So what's the Company's strategy in this area?

So we think our growth in emerging countries such as Brazil, primarily coming from two factors.

The factor number one is our global platform that enables us to sell product efficiently directly from our website to consumers in those places, and also offering their native speaking languages.

And, secondly, it is also because the fast growth is also because these countries are at a tipping point of quickly adopting e-commerce as a shopping experience.

So basically, the market growth rate is very high in these countries and also we have given a formula to offering very unique product offerings in a very convenient way at a very attractive price for the consumers in these countries.

We think Brazil is not alone -- we will also get attraction in other emerging countries where the e-commerce is at the tipping point such as Russia.

Okay.

Sorry.

I have another follow-up question.

So how about the new customer acquisition accounts trend in the recently -- in the second half this year?

So [we then took] -- the Company had a $1.2 million active customers in this quarter and how many is a new customer?

So can you break down that?

Maria, we don't break down that.

Okay.

Okay.

So how about new customer acquisition costs?

New customer acquisition cost.

Yes.

Yes.

You are asking me to break out new customer acquisition costs from sales and marketing?

I don't understand your question, Maria.

Yes.

So for the single (multiple speakers).

(multiple speakers) marketing costs --

(multiple speakers) trend.

So is this we need spending more to attract new customers in this year?

From the dollar value perspective, obviously we are spending more dollars compared to 2012 to attract more customers.

Yes.

Okay.

Okay.

Thank you.

Very helpful.

Betty Dai, Standard Chartered.

Thank you for taking my question.

Your fulfillment costs as a percentage of revenue is much lower than other peers in China's e-commerce space.

So could you please help me understand, what is a main factor contributing to a lower fulfillment cost as a percentage of revenue?

Sure.

Our fulfillment cost has two major components, which is very different from some of the other e-commerce players' definition of fulfillment cost in China.

Our fulfillment cost component number one is the service fee we pay to third-party payment gateways such as PayPal or credit card companies.

The second component of our fulfillment cost is our own internal fulfillment center operation costs, which include both the rental cost of our warehouse facilities as well as the payroll we incur with the workers that work in the warehouse facilities.

We do not have shipping or logistics charges as part of the fulfillment cost.

In our financial presentation, we have shipping charges as part of the cost of goods sold.

Okay.

Thank you very much.

Eric Wen, China Renaissance.

Hi, Alan and Richard.

Thanks for taking my call.

Good evening.

I just want to hear from you some of your thoughts on your category strategy and any of the new developments in terms of new geographies and categories, and what is the timeline that is under planning?

Thanks.

So our category strategy is we always want to find the categories where it has attractive weight to value ratio, which means it's effective to shipping overseas by Express or by post offices.

And, secondly, we want to find categories where there is no brand domination.

We try to avoid categories where there is a brand domination.

And, thirdly, we want to find categories where consumers value variety and merchandising and also want to value all kinds of different choices.

And, in addition to that, if it's a category with a potential to be customized, that will be a plus.

So those are the general category selection strategies.

And in addition to that we also want to make sure that, because our time to the primary sourcing center [bases] in China, we want to find categories where China is very strong in manufacturing base so that we gain a supply chain advantage.

And we could work with supply chain to optimize and improve over time.

So those are our primary categories of strategy selection.

And, secondly, when we talk about category expansion, we basically talk about two things.

A is select a mega category -- a major category.

And second is within our major category, expanding in subcategories.

We are very systematic and methodic in terms of increased subcategory within each category.

For example, in wedding dresses, in the apparel business we start with wedding dresses and then bridesmaids, and then flower girl and mom and then mother of the bride and so on so forth.

In home decorations, we start with floor sets and then chandeliers and then bedding, and then window treatment and then paintings and so on so forth.

So for each category as we go, we want to build a very rich and complete portfolio within that category, so that we will become a go-to place for people who want to shop within that category.

So that is our subcategory expansion strategy.

And, secondly, our new category expansion strategy, we are very cautious on going to each new category because we think a lot of value we introduce to consumers is coming from supply chain optimization and innovation.

So we are very cautious in new category expansion.

So as of today, we have three key categories where we think we introduce tremendous value for consumers, starting from apparel, home decorations, and the small gadgets and accessories.

And we have plans to enter new categories and also spin off subcategories within our existing categories and make them become a major category.

For example, we plan to spin off the fashion jewelry category as a popular category.

We already give early attraction in that category and we think by spending more and invest in that category we will incubate this category into a very major category.

And we are also looking to customize corporate gift category, where we think has a lot of synergy with our existing gadgets and accessory business, but also add a customization element to that.

And we plan to launch that very quickly as well.

So those are the two examples of the new categories we plan to enter in the next couple quarters.

And, again, each major category we enter is going to take multiple quarters for them to ramp up and for them to optimize.

So it's going to be definitely a multi-quarter ramp up journey.

Thanks and two follow-up questions.

You mentioned about corporate gift and fashion jewelry categories.

How material do you expect them to be, say, by the end of next year?

How much revenue contributions do you think these two or maybe other new category companies are planning that will contribute to next year's revenue?

And my second question is, apparently, the wedding dress is one category that is fitting to all the criteria you just described.

But do you see that our market share in the wedding dress market is approaching to a saturation point?

Some light you could shed on that point will be very appreciated.

Thanks.

So, Eric, for your first question, we think we are not in a position to give very specific revenue impact of those category expansions for the next year yet.

So it is still at a very early stage of development, but definitely not at a point where we are ready to quantify the revenue impact for next year.

For your second question, we don't -- we did extensive studies on the wedding and special occasion dresses business.

Based on third-party data we believe it is a very large market compared with our current revenue size.

We don't think it is a market saturation point.

We think we only represent a very small percentage in the total market.

We think our temporary setback was an executional problem we need to correct, and also it was a temporary setback by competitions.

And we definitely want to look forward to further expanding that.

We are far from a saturation point in that regard.

Thanks.

Thank you.

Ladies and gentlemen, we now have time for one last question.

George Askew, Stifel Nicolaus.

Great.

Thank you.

I have a little bit confused by something stated earlier in the call.

The 1.2 million total customers -- am I correct that that is the number of customers who made a purchase in the second quarter?

Yes, George.

Okay.

Now, if 32% of revenue came from repeat customers, can't we, therefore, assume that roughly 32% of customers are repeat customers, recognizing that there could be some average selling price differences?

30% -- that is a revenue concept.

I'm sorry.

You broke (multiple speakers).

(multiple speakers) 32% -- that 32% of the revenue was from non-first time transacting customers.

Right.

So I mean basically, assuming average selling price (multiple speakers).

(multiple speakers)

I know, but (multiple speakers).

No.

But, George, if you look -- I was going to say, George, if you look at the repeat purchase behavior at different categories, they do batch very differently.

Most of the repeat customers are coming from the accessory and gadget categories, which tends to have a much smaller ASP or order size than some of the other categories for the Company on average.

Okay.

Yes, no, I understand that.

But it seems that as apparel, which is sort of the gateway category for a customer, as apparel shrinks, we should see the ASPs or average revenue per customer, for example, start to converge a little bit with that total customer count.

I am just trying to ballpark the numbers, but I appreciate your comment there.

You made a (multiple speakers)

Are you ballparking (multiple speakers) sequentially from Q1 2013 to Q2 2013, though?

No.

Look, I'm just saying that if you had 32% of revenue in the second quarter from repeat customers, and you had 1.2 million total customers, somewhere around that 32% with a wide standard deviation is going to be the number of customers that were repeat customers.

So -- but, we can make out our own (multiple speakers).

Maybe we can continue off-line (multiple speakers)

Okay.

And, Richard, you made a comment regarding -- I forget the exact phrase, but it was like early acceleration of options in the quarter.

Was that IPO related?

Kind of give us some terms -- some sense of what that was.

Yes.

There was a roughly $2 million onetime IPO-related stock-based compensation that is reflecting acceleration for some of the employees' stock option plan.

That is why I made a comment at the end of my prepared remarks that we believe, for Q3 and Q4, the share-based compensation will come back to a more normalized range of around $600,000 for each quarter.

Right.

What was the strike price on those one-time option grants?

It was mostly restricted to shares.

Oh, okay.

Got it.

Sorry.

Okay.

Okay.

Well, good.

I am curious; I know part of the motivation of the IPO was to incent employees and whatnot.

What is sort of the mood internally, given the turn of events here this quarter and the stock price reversing obviously today?

What is the mood?

Well, from an internal perspective, we had a communication with our executive managers.

We think we were meant to be very confident about our best model, about the core competence of the Company.

And the whole team feels as excited as before and feel fully energetic, and to correct the temporary one-category challenges and move forward with expansion plans and with the successful IPO and the resources that -- new resources and opportunities presented to us.

Got it.

Okay.

Very well.

Thank you very much.

Thank you, George.

We have now approached the end of the conference.

And I would like to hand the conference back to today's presenters.

Please continue.

This concludes our second quarter 2013 earnings conference call.

Thank you for your participation and ongoing support of LightInTheBox.

We look forward to providing with updates of our business in the coming weeks and months ahead.

Have a good day.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for participating.

You may all now disconnect.