蘭亭集勢 (LITB) 2013 Q3 法說會逐字稿

Good morning, everyone, and welcome to the third-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 Miss Margaret Shi, IR Manager of LightInTheBox, for opening remarks and introductions.

Please go ahead.

Thank you, operator.

Hello, everyone, and welcome to LightInTheBox third-quarter 2013 earnings conference call.

The company's third-quarter earnings results were released earlier today and available on the company's IR website as well as on Newswire services.

Today you will hear from our Chairman and CEO, Mr. Alan Guo, who will give an overview of company strategies, recent developments, and operational results, followed by our CFO, Mr. Richard Xue, who will address financial results in more detail.

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 our prospectus filed with the Securities and Exchange Commission on June 6, 2013.

We do not assume any obligation to update any forward-looking statements except as required under applicable laws.

At this point, I would like to turn the call over to LightInTheBox Chairman and CEO, Mr. Alan Guo.

Alan, please go ahead.

Welcome, everyone, to the LightInTheBox third-quarter 2013 earnings call.

Our third quarter reflected our continued year-over-year topline revenue growth, which we attribute to our expanding sales platform and growing customer base.

Net revenue increased to $68.1 million, meeting our forecast range and expanding growth up 33.4% compared to last year.

During the quarter, our total number of customers increased 74.7% to $1.3 million and our total number of orders increased by 80% to $1.6 million compared to the prior year, demonstrating the growing penetration of our online retail platform.

Revenue attributed to repeat customers increased approximately 92% in the third quarter to $23.8 million, representing approximately 35% of our total revenue.

All of our major product categories experienced a year-over-year growth in sales with the exception of apparel, which decreased by 8.1%.

Excluding revenue contribution from our apparel category, third-quarter revenue from our other categories increased 59.6% from a year ago.

We experienced a year-over-year gross margin increase of 160 basis points to 43.9%, a net loss of $2.4 million compared to a net loss of $1.0 million in the third quarter of last year.

As we addressed last quarter, our apparel category is undergoing adjustment.

We have identified the issue caused by a significant number of online new entrants coming to the market, which resulted in increased fragmentation.

This was further compounded by our execution team was not adequately responding to the fast-changing comparative environment initially.

To meet our challenges and improve our competitive position in apparel, we are working hard to fix our challenges in wedding apparel using technology innovation to drive more consumers to our platform, and are expanding our ready-to-wear fashion category to increase our consumer base -- our customer base unlocking value.

Within our wedding business, we are responding in the area of management, merchandising, supply chain, and customer service.

We have made management changes and established a new merchandising team.

We have significantly improved our product launch speed with more than 1300 new wedding and special occasion dress designs in the third quarter to better prepare for the peak selling season for wedding and special occasion dresses that will take place in the first half of 2014.

We have established a new supply chain enabling us to establish a lower pricing point of wedding and a special occasion dress with without sacrificing margin, and we plan to launch a separate website and brand in the near future for this line of products.

Wedding apparel continued to have the highest to service request rate among all product categories.

In an effort to improve our customer service, we now have native speakers in over 25 languages who reside in the same time zone as the corresponding customers for call out service to provide real-time interaction to answer questions and resolve complicated customer service issues.

We are also testing plans to better coordinate with off-line partners to resolve any fitting and alteration issues.

With respect to technology innovation in the wedding category, we plan to launch our wedding planning mobile application in the fourth quarter.

We believe this effort will help us lower traffic observation costs for our wedding apparel and create additional monetization of (inaudible) in the future.

Looking beyond wedding and special occasion dresses, which still represents the majority of the sales of our apparel category, we are focusing on creating a more balanced platform within our apparel category, and are expanding our product offerings into other brand ready-to-wear fashion.

We already have a large user group of women, and we are getting greater traction leveraging our customer base.

We also recently established assorting capability in Korea which will bring more unique fashion merchandising to our customers.

We believe mobile represents a very large opportunity for LightInTheBox.

In Q3, we reached a historical high for mobile revenue in both absolute dollar and a percentage of revenue turns, which was primarily fueled by our mobile optimizer [rabbit scripts].

The percentage of total revenue derived from mobile users continued to accelerate over the same period last year as more customers accessed our sites while their mobile phones and tablets were aimed to develop a more robust mobile app offering.

We relaunched our LightInTheBox iOS app and launched our first miniinthebox iOS app in October and November respectively, and have already observed a significant increase in downloads and usage of our apps.

Furthermore, we plan to launch our Android app in Q4, and iPad app in Q1 2014.

We expect our mobile app development will drive repeat purchase behavior from our existing consumers more often.

For LightInTheBox, the mobile experience means great level of innovation beyond simply transferring and reformatting our existing new website experience to mobile.

We also intend to (inaudible) innovations in transaction-enabled mobile apps designed for global markets in vertical categories.

Our wedding planning app is the first initiative, and if it receives good attraction, we will continue to invest further in this area.

We believe we are in the beginning stage of global mobile eCommerce and believe LightInTheBox is well-equipped to capitalize on this large global market opportunity.

Our non-apparel categories continue to gain strong year-over-year growth momentum.

Small accessories in gadgets, apparel and electronics and communication devices remain three leading product categories in term of revenues.

Third-quarter sales within our small accessory and gadgets category increased 94.5% to $26.7 million from the prior-year period.

This was followed by apparel, which decreased 8.1% to $18.2 million.

Our third-largest category, electronics and communication devices, increased by 12.1% to $10.2 million.

We continue to focus on the expensing of our existing categories as well as continue to develop new category opportunities as well.

We are incubating new categories in other areas such as kids fashion, shoes, and customized corporate and office gifts.

We will provide greater detail to you on these categories in the future, but want to emphasize that we intend to be disciplined and selective with any expansion efforts.

Geographically, sales from Europe, North America, and South America contributed to approximately 89% of total revenue in the third quarter.

Europe and South America contributed most significantly to our year-over-year growth, rising 92.2% and 105% respectively.

The gradual building out of our platform in emerging countries such as Russia and Brazil have materially benefited our performance in these regions.

At LightInTheBox, in recent years, our strategy was to expand into as many different geographic markets as possible.

As our market presence has expanded all over the world, moving forward, we will place great attention and marketing focus on certain markets such as Brazil, Russia and France, where we have already reached a tipping point or experienced strong growth.

We intend to provide better in-country or in-region inventory levels in these countries, provide more local customer support, and work with more local commerce to assist with our traffic acquisition, co-marketing and sorting strategies.

To conclude, while our apparel business is under growing adjustment, our non-apparel categories maintain strong year-over-year growth momentum.

We believe we are taking the right steps to address the competitive challenges in our wedding apparel category.

And the contribution of our ready-to-wear business, apparel business, will improve our overall apparel category performance.

We are excited to further develop our core strategies that include increasing mobile user engagement and revenue, capturing revenue opportunities, and deepening our calculation of select geographic markets.

Among others, that takes strengthening our growth platform and meaningfully improve our operating performance and the profitability in the quarters ahead.

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

Thank you, Alan, and thank you everyone for joining us for our quarterly conference call.

I would like to clarify that all the percentage changes refer to year-over-year changes unless otherwise noted.

For the third quarter of 2013, net revenues increased 33.4% to $68.1 million, mainly driven by growth in the number of customers and total orders.

During the quarter, number of customers increased 74.7% to $1.3 million, while numbers of orders increased 80% to $1.6 million.

Revenue attributed to repeat customers and new customers increased by 92% to $23.8 million and 15% to $44.3 million respectively compared to the same quarter of 2012.

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

Revenues generated from small accessories and gadgets increased by 95% to $26.7 million.

As a percent of total revenues, small accessories and gadgets revenue was 39.2% in the third quarter of 2013 as compared to 26.9% in the same quarter of 2012.

Revenues generated from apparel decreased by 8% to $18.2 million.

As a percentage of total revenues, apparel revenue was 26.6% in the third quarter of 2013 as compared to 38.7% in the same quarter of 2012.

Revenues generated from electronics and communication devices increased by 12% to $10.2 million.

As a percentage of total revenues, electronics and communication devices revenue was 15% in the third quarter of 2013 as compared to 17.8% in the same quarter of 2012.

Geographically, Europe remained our largest market with strong revenues of $40 million, representing an increase of 92.2%.

As a percentage of total revenues, revenues in Europe was 58.8%, up from 40.8% in the same quarter of 2012.

Revenues in South America increased by 105% to $7.5 million.

As a percentage of total revenues, revenues in South America were 11% in the same quarter of 2013.

Revenues in North America and other countries were $13 million and $7.6 million respectively.

As a percentage of total revenue, revenues in North America and other countries were 19% and 11.2% in the third quarter of 2013 respectively.

Total operating expenses in the third quarter of 2013 increased by 50% to $33 million from $22 million in the same quarter of 2012.

Fulfillment expenses increased 52% to $3.8 million from $2.5 million in the third quarter of 2012, primarily reflecting the increase in sales volume and the number of orders fulfilled.

As a percentage of total net revenues, fulfillment expenses increased to 5.6% from 4.9% in the same quarter of 2012.

Selling and marketing expenses increased 53.8% to $21.6 million from $14 million in the same quarter of 2012, reflecting the company's efforts to grow customer base.

As selling and marketing expenses for the quarter increased by 53.8%, the number of customers served by the company increased by 74.7% and the number of total orders increased by 80% respectively over the same period from the prior year.

As a percentage of total net revenues, selling and marketing expenses were 31.7%, up from 27.5% in the same quarter of 2012.

General and administrative expenses increased 39.3% to $7.6 million from $5.4 million in the same quarter of 2012, reflecting the growth of the company's size and business operations.

As a percentage of total net revenues, general and administrative expenses were 11.1%, up from 10.7% in the same quarter of 2012.

Loss from operations in the third quarter of 2013 increased to $3.1 million compared to an operating loss of $0.4 million in the same quarter of 2012.

Adjusted loss from operations on a non-GAAP basis, which excludes the impact of share-based compensation expense, in the third quarter of 2013 was $2.5 million compared to an adjusted income from operations also on a non-GAAP basis of $0.4 million in the same quarter of 2012.

Net loss was $2.4 million in the third quarter of 2013 compared to a net loss of $1 million in the same quarter of 2012.

Net loss per ADS was $0.05 compared to a net loss per ADS of $0.10 in the third quarter of 2012.

Each ADS represents two ordinary shares.

Adjusted net loss on a non-GAAP basis, again which excludes the impact of share-based compensation expenses, was $1.9 million or $0.04 per ADS in the third quarter of 2013 compared to an adjusted net loss on a non-GAAP basis of $0.2 million, or $0.05 per ADS, in the third quarter of 2012.

Adjusted loss from operations and net loss both on a non-GAAP basis for the three months ended September 30, 2013 excluded $0.5 million of non-cash share-based compensation expenses.

For the quarter ended September 20, 2013, the company's weighted average number of ADS using the computing loss per ADS was 49,464,423.

As of September 30, 2013, company had cash, term deposit and restricted cash of $103 million compared to $21.2 million as of December 31, 2012.

Net cash provided by operating activities was $1.4 million for the three months ended September 30, 2013, compared to $2 million in the same quarter of 2012.

Now I would like to take you through our guidance for the fourth quarter of this year.

For the fourth quarter of 2013, we expect net revenues to be in the range of $75 million to $77 million, representing a year-over-year growth rate of approximately 15.8% to 18.9%.

This concludes our prepared remarks.

At this point, we will start taking questions.

Operator?

(Operator Instructions).

Andy Yeung, Oppenheimer.

Hi, good morning.

My first question is about your guidance.

It looked a little bit weak on the growth front.

Can you give us some ideas of when do you expect growth could re-accelerate again?

It's Richard.

As much as I would like to give you specific guidance on the timing, we only provide next quarter guidance in terms of revenue.

But obviously our aim is to work hard, and through the initiatives that Alan has discussed in his remarks to try to come back to revenue acceleration growth as fast as possible.

I see.

Okay.

And then maybe to put it another way, can you tell us a little bit about your --t he other website, which is miniinthebox.

It seems to going pretty nicely.

What are you doing over there that is helping the growth?

And in terms of the fourth quarter, should we expect more growth coming from miniinthebox with (inaudible) LightInTheBox?

Yes.

So, miniinthebox, actually, if you're matching the website to the financials, it's probably the small gadget and accessory category.

So that category has been growing nicely trending in Q3, and we expect it's going to continue to grow on a strong momentum in Q4.

And particularly seasonality-wise, Christmas season is strong for small gadgets and accessories as well as electronics, so there will be positive seasonality kicking for miniinthebox as well.

And in addition, I would comment on our revenues attributes to repeat customers.

That was also driven by the categories such as small gadgets and accessories, which have an increasingly high repeat rate which in turn has higher customer long-term value.

So, that's also contribute to the strength of the growth for miniinthebox.

Okay.

Thank you so much.

George Askew, Stifel Nicolaus.

Yes, thanks for taking the question.

Good evening.

You had a fairly nice gross margin expansion in the quarter.

What are the drivers behind that?

Was it product mix shift kind of away from apparel, or was there something else going on?

It's Richard.

We did experience a little bit of decrease on the gross margins side.

And you are right.

Sequentially it's mostly from a shift in product mix.

If you look at Q3 product shift, the highest gross margin category, which is our apparel category in terms of percentage of revenue, came down to 26.6% from 34.2% in Q2 a quarter earlier.

So that explained to a large extent the decrease in gross margin.

The second factor I would also bring to your attention is the category specific gross margin for apparel.

As Alan had explained in his remarks, we are also actively extending our product offering within apparel.

Traditionally, we have been very strong in customized apparel such as wedding and special occasion dress, which has much higher gross margin because of the customized nature.

Nowadays, we are offering more on the ready-to-wear standard size products.

Those tend to have lower gross margin compared to our customized products.

So, overall, the apparel category gross margin itself also had some downward pressure.

So, the two factors combined explain the decrease of our gross margin sequentially from 46% to 43.9%.

Got it.

Thank you.

And then you mentioned kind of the incremental customer service efforts in the wedding category, the outbound call effort, etc.

Is this in response to an increase in product returns in that category, or is there more of a revenue gross revenue element to that?

Yes.

So we are not experiencing an increase in customer complaints for apparel or for the company.

But when we're doing deep research on customer service, we found our wedding category remaining to be highest percentage category in terms of customer needs to be handholding and serviced.

And we also identified that it was customer service was the major consideration for a consumer to choose their wedding and special occasion dress based on our surveys to consumers.

So we proactively decided to establish a cohort of service in many different languages, so that we will be able to solving complicated customer service issues and increased customer satisfactions in that category.

Okay.

Good, thanks.

And then finally, sales and marketing expenses were up a fair amount as a percentage of revenue.

Was this driven by higher CPCs, some other drivers?

And I know you expect this line to decrease as a percent of revenue over time.

Should we expect it to stay kind of near current levels for the next several quarters?

Thanks.

Yes.

So, if you look at the sales and marketing costs as a percentage of revenue, it increases Q3 over Q2.

However, if you compare customer acquisition costs per customer, it actually stayed pretty flat, which means the major driver for increase of sales and marketing was the manifest of the reduction of orders, average order size.

The average order size actually dropped from more than $50 to around $43.

That was the major driver for increased marketing dollars percent to revenue.

So moving forward, we think, in Q4, we will reduce marketing percentage as a percentage of revenue.

Partially was our response to our more efficient customer acquisition and also our (inaudible) respect to the average -- new average order size we experienced, and also an increase of repeat customer, continuous increase of repeat customers, as well as our adjustment in the apparel categories.

So, all those initiatives together, we expected a small decrease of marketing spending as a percentage of revenue in Q4.

So, to put it differently, we were not less efficient in terms of customer acquisition or transaction acquisition in Q3 compared to Q2 on a sequential basis.

In terms of the percentage change, it's really driven by the change in ASP, or average order size, if that makes sense.

Yes, no, that makes sense.

Great.

Thanks very much.

Eric Wen, China Renaissance.

Eric Wen: Hi.

Thanks for taking my questions.

I have a question about the implication of your revenue mix.

It seems to be changing from apparel to electronics and gadgets.

What is the implication of this to your profit margin going forward, and how do you address this impact going forward?

Thanks.

So, the question is about the change of category mix and desk.

So we do experience a change of product category mix, and we've increased in other categories non-apparel.

From this regard, apparel (inaudible) has to be our largest profit margin category.

So, we will experience a small reduction of gross margin, expecting happening this Q4 while we are also addressing the margin improvements in other categories.

Specifically, we are focusing on reduced shipping costs as a percentage of revenue for the other categories.

As you know, traditionally, we have used most of the shipping through carriers like FedEx, UPS and DHL, etc.

While we are expanding new categories for very small items like small gadgets and accessories or for larger items in home decorations, where we will continue to establish overseas warehouse either by ourselves or other outsourced vendors.

And we will ship the product in continents in those categories to those overseas warehouse, and using more ground shipping in those countries so that aggregatively we will have a lower shipping cost as a percentage compared with our current offering today.

And we think the ability to establish such an infrastructure, both in the contractual level and in IT system level, will give us a competitive advantage compared with other Chinese outbound eCommerce players, and as (inaudible) to compete with us.

Just to add on Alan's point, obviously the change of revenue mix also will have some impact on the fulfillment cost line because it's largely driven by the order number.

If you -- and this quarter is the first quarter we decided to disclose the number of orders just to add transparency on the operating matrix lines to help the investors better understand some of the underlying trends.

So, if you take our fulfillment cost and look at it on a per-unit per-transaction cost basis, actually, in Q3, the per-transaction fulfillment cost is lower than both year-over-year and sequentially.

So, we are getting more cost-effective at handling fulfillment on a per-transaction basis.

And obviously this is a minor impact compared to the gross margin line, but I just want to point that out too.

Thanks.

William Huang, Barclays.

William Huang: Hi.

Thank you for taking my call.

I have two questions.

I understand apparel, particularly wedding, is under restructuring due to some competitors' reaction.

I just want to know from management's perspective what are the major drivers to move into next year?

What are the major drivers to potentially enable our apparel categories to rebound?

And do we see any other risks on the execution side?

And my second question is it seems that our mobile app is doing very well.

Can you share with us some of more matrix, including, like, unique users or maybe percentage of transaction finish for mobile?

Thank you.

So, for our apparel business, we have a three-layer strategy.

The first is fix the cloth, the wedding apparel, which we have been focused on, improved management team, building a faster merchandising practice, improve supply chain to respond to competition in terms of pricing point, yet not sacrificing the gross margin at the same time, and lastly with improved customer service and consumer touch.

We feel we are on the right track.

The path for us will be the next wedding and prom season, which will be next Q1, Q2.

We feel our progress is on track.

That's fixing the core of the wedding and wedding apparel.

And in addition, we have been getting very good traction in our non-wedding apparel business.

We primarily sell third-party brand goods in that category, and we have experienced a significant increase in revenue.

And most of the revenue has been driven by repeat customers who have already been our existing customers, either on wedding apparel or other relevant categories.

And thirdly, we have mentioned that we think the innovation in mobile is very important, and we are doing this together with our apparel business.

We plan to launch the wedding planning app, which we think will potentially start giving us free traffic to lower traffic acquisition costs for our wedding apparel business.

So, we think all of these efforts are on track, and we will monitor progress to the next wedding and prom season.

As far as the mobile, we think it's still early to disclose those metrics for competitive reasons.

And we will -- but we will continue to monitor the progress of that.

And when it becomes mature enough to a point where we feel less sensitive to competition, we will be able to introduce new metrics to share.

Thank you.

(Operator Instructions).

There are no further questions at this time.

And I would now like to hand the call back to Miss Margaret Shi for closing remarks.

This concludes our third-quarter 2013 earnings conference call.

Thank you for your participation and ongoing support of LightInTheBox.

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

Have a good day.

Thank you.

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

Thank you for your participation.

You may now disconnect.

Good-bye.