蘭亭集勢 (LITB) 2013 Q4 法說會逐字稿

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

Please go ahead, ma'am.

Thank you, operator.

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

The Company's fourth-quarter earnings results were released earlier today and available on the Company's IR website as well as on the wire services.

Today you will hear from our Chairman, CEO, Mr. Alan Guo, who will give an overview of Company strategy and recent developments, followed by our President, Mark Stabingas, who will address financial results in more detail.

We are also joined here today by Jennifer Hu, our acting Chief Financial Officer.

Before we proceed I would like to remind you of our safe harbor statements.

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 law.

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

Alan, please go ahead.

Thanks, Margaret.

Welcome, everyone, to LightInTheBox fourth-quarter 2013 earnings call.

Before we comment on the results of the quarter, I want to take this opportunity to review how we think about our mission and strategy.

We are building a global cross-border e-commerce platform.

Cross-border e-commerce is one of the fastest-growing segments within e-commerce as technology is making it easier and more cost effective to reach and serve consumers on a global basis from anywhere.

According to iResearch, China-based cross-border online retail is expected to grow to a $9 billion segment by 2015.

It's still incredibly early for global cross-border e-commerce and for us as a company.

We think about our business model in terms of a series of platform capabilities that allow us to serve our global consumers in a fashion that is authentic and native to each one of them.

The most significant components including supply chain management, through which we can integrate suppliers and manufacturers and give them access to markets they otherwise may not be able to reach; our fulfillment and transportation management capability through which we can deliver products to our consumers and our localization capabilities through which we manage our product catalog and translate content into 27 languages and offer native-speaking customer services in those languages.

We also employ local merchandising and promotion strategists and enable the most popular local payment options.

Localization also includes the ability to connect our supply chain to consumers through mobile services.

Our mobile revenue has tripled on an annual basis, growing at a more than 5 times the rates of our desktop business.

Finally, we have built a demand discovery and online marketing platform that enables us to spot local product trends and acquire customers globally, while automating keywords bidding across categories and languages through big data.

Through each of these services we are intensively data driven and leveraging technology to manage complexity in global e-commerce and to identify opportunities.

Most of this technology is proprietary and has been built by our engineering team to suit particularly to our own business needs.

As you know, we began leveraging this platform on behalf of manufacturers and suppliers based in China and that continued to be our primary focus in the near term.

Today we have shipped to over 200 countries and regions.

As we develop, we expect to focus on additional manufacturers and supplier bases in additional geographies.

During 2013 we added approximately 0.5 million items in our catalog and continued to onboard over 40,000 each month.

Our onboarding and management tool continued to improve and we are investing heavily in this area.

During 2013 we signed an agreement with additional logistic providers in the United States to expand our transportation and fulfillment capabilities in country.

This allows us to offer a better customer experience and reduce shipping costs.

We expect to open a facility in Europe in the first half of the year and South America before the year-end.

As our business scales we envision a small number of operational hubs serving key regions.

Additionally, we continue to grow our merchant company strategy, allow us to serve markets in a more authentic local fashions through employees or department workers in their home countries.

We also announced our acquisition of the US-based social e-commerce startup, Ador, our first acquisition since our IPO nine months ago.

Through this acquisition, we welcome Mark Stabingas as our President and Quinten Shay as our Senior VP of Operations.

Both of these e-commerce veterans, formerly with Amazon.com, will lead key areas of our business and are great additions to the team.

With this acquisition we've established our US headquarters in Seattle that brings us closer to our North American customers and allows us to attract talent in disciplines outside China.

Lastly, I want to comment on our success in mobile.

Mobile has really changed the way our customers around the world shop and pay for our products.

And we are pleased to experience continuous growth from mobile revenue in both absolute dollar and revenue percentage terms through our LightInTheBox and mini mobile applications.

In addition, we have also launched our dedicated wedding planning app called InTime on iOS platform during the fourth quarter.

As we touched on the last quarter, InTime is our first initiative in mobile apps designed for global markets in virtual categories.

As we integrate the Ador team, our Beijing and Seattle teams are working together to introduce new features and capabilities to bring worldwide wedding planners and brides to be on to the next version of our wedding planning platform.

On that note, I will now turn the call to our President, Mark Stabingas, who will take you through our financials for the fourth quarter and the full year of 2013.

Thanks, Alan, and thanks to everybody for joining us on the call.

I'm excited to be participating in my first earnings call for LightInTheBox and look forward to meeting many of you and getting to know you in the coming weeks and months.

Before we get into the results, just a reminder that all percentage changes that we refer to are year-over-year changes unless otherwise noted.

As we indicated in the release, net revenues increased 21.6% to $78.8 million for the fourth quarter of 2013 and increased by 46.2% to $292.4 million for the full year 2013.

The quarterly performance was just above our guidance and that was driven by better-than-expected performance from our apparel category and the contribution of our mobile commerce business that Alan referenced.

Total orders grew 61.5% to $2 million in the quarter, while average order size declined based principally on changes in our product mix.

Total number of customers purchasing in the quarter was up 42% to $1.6 million, while repeat customer orders accounted for 37% of total revenue compared to 28% in the same quarter of 2012.

Apparel category revenue grew 13% year over year to $21.1 million in the fourth quarter and represented a good first step in putting that segment of our business back on its growth trajectory.

We continue to work through some softness in the wedding business, but in the quarter that was offset by our success in expanding product offerings with ready-to-wear fashion products.

We do expect our wedding business to grow sequentially in Q1 based on improvements to our product mix, where we've added over 2,500 new designs in the last six months of the year compared to 1,500 in the prior period.

In addition to that, we've made some pricing adjustments in areas where we needed to be more competitive.

As a percentage of total revenues, apparel revenue was 26.8% in the fourth quarter of 2013 compared to 27.8% in the same quarter of 2012.

Revenues generated from electronics and other general merchandise increased by 25.1% to $57.7 million in the fourth quarter 2013.

We are seeing significant growth, in particular in mobile accessories, and are optimistic about extending that offering both in terms of products and geographies.

Geographically Europe remained our largest market with revenues of $51.4 million, representing an increase of 27.7%.

As a percentage of total revenues, revenues in Europe were 65.3%, up from 62.2% in the same quarter of 2012.

Revenues in South America increased by 25.3% to $6.3 million in the quarter and constituted 8.0% of total revenues, while in North America revenues were $13.1 million, up 8.6% year over year, and that were presented 16.7% of total revenue for the quarter.

Fourth-quarter gross profit was $30.8 million, representing an increase of 12.3% from $27.4 million in the same quarter in the prior year.

And for the full year gross profit was $127.2 million, representing an increase of 52.2% from 2012.

Gross margin decreased to 39.1% of revenues from 42.3% in the same quarter of 2012.

The decrease was due in large part to the change in product mix within apparel, although on a full-year basis our gross margin was up to 43.5% from 41.8% as the shifts that we saw were -- we didn't see until the second half of the year.

Total operating expenses in the fourth quarter of 2013 increased 43.9% to $36.9 million.

Fulfillment expense increased 48.2% to $4.7 million from $3.2 million in the fourth quarter 2012, which primarily reflected increases in sales volume and the number of orders that we fulfilled.

As a percentage of total net revenues, fulfillment expenses increased to 6.0% in the quarter from 4.9% in the same quarter 2012.

And that increase was the result of expansion of our fulfillment facilities in China.

Just as a reminder, fulfillment expenses also include our payment processing fees.

Selling and marketing expenses increased 59% to $24.7 million from $15.4 million in the fourth quarter of 2012, reflecting our efforts to grow our customer base.

Investments that we made in marketing-related infrastructure helped increase the number of customers served by 42% and the number of orders by 61.5% in the quarter versus the same period prior year.

As a percentage of total net revenues, selling and marketing expenses were 31.4%, up from 24% in the same quarter of 2012 as our average order size declined, driven primarily by our products mix shifts.

We continue to believe that selling and marketing expense, as a percentage of total net revenues, will decrease in the long term as we achieve greater economies of scale and utilized channels more efficiently.

General administrative expenses increased 8% to $7.5 million from $7.0 million in the fourth quarter of 2012, which reflects the growth of our overall business.

As a percentage of total net revenues, G&A expenses were 9.6%, which was down from 10.8% in the same quarter of 2012.

Total operating expenses for the year was $132.1 million, which was an increase of 53.9% from prior year.

This was mainly due to the increase in selling and marketing costs as the number of customers and orders increased.

Loss from operations in the fourth quarter of 2013 increased to $6.2 million compared to an operating profit of $1.7 million in the same quarter of 2012.

For the full year, loss from operations increased to $5 million compared to a loss of $2.3 million in 2012.

Net loss was $5.6 million in the fourth quarter of 2013 compared to a net profit of $1.1 million in the same quarter of 2012.

And for the full year, net loss was $4.8 million compared to a net loss of $4.2 million in the prior year.

Net loss per ADS was $0.11 compared to net income per ADS of $0.01 for the quarter.

Each ADS represents two ordinary shares.

On a non-GAAP basis, adjusted net loss, which excludes the impact of share-based compensation expense, was $5.1 million compared to an adjusted net income, again non-GAAP, of $1.5 million in the fourth quarter of 2012.

Adjusted loss from operations and net loss non-GAAP for the three months ended December 31 excluded $0.5 million of non-cash share-based compensation expenses.

Net cash provided by operating activities was $3.8 million for the three months ended December 31, 2013, compared to $1.9 million in the same quarter of 2012, in part due to a $2.6 million increase in our customer order backlog.

At December 31, 2013, the Company had cash, term deposit, and restricted cash of $105.1 million compared to $21.2 million as of December 31 of 2012.

In terms of guidance, we expect net revenues in the first quarter of 2014 to be in the range of $78 million to $80 million, representing a year-over-year growth rate of approximately 6% to 9%.

While we won't issue guidance beyond the first quarter, we do expect that the rate of our year-over-year revenue growth will increase starting in the second quarter of this year.

This concludes our prepared remarks and at this point we will start taking questions.

(Operator Instructions) Ella Ji, Oppenheimer.

Thank you for taking my questions.

My first question is with regards to your 1Q guidance.

6% to 9% seems to be pointing to a low rate comparing to your historical growth trends.

Could you give us some color in terms of this direction?

Also, is there any seasonality that is facing these factors?

Thank you.

It's Mark.

There's really two things I would respond with.

Number one, we are still kind of working through some of the softness in our wedding business in Q1, although we are seeing progress there and we do expect to grow sequentially.

The year-over-year comparisons will still be challenging in the quarter.

And I think, as we have said in the guidance, we do expect beginning in Q2 that the rate of year-over-year growth will begin accelerating.

And so we don't necessarily believe that the Q1 growth rates would be indicative of long term.

Okay, thanks.

Then, also with regards to your mobile offering, can you share with us -- some of the operating data such as the number of downloads of your mobile app or the active users of your mobiles and how much does your mobile revenue represent as a percentage of your total revenue?

This is Alan.

So I mentioned in my remarks that our mobile revenue growth more than 5x year over year.

We continue to think that mobile will be the most -- one of the most important growth drivers for us in 2014.

So we have launched four apps in-house plus Ador-branded apps and we think we will continue to actually adopt this strategy.

We also think that the mobile will drive up the higher customer repeat behaviors and, in turn, increase the efficiency of customer acquisition and also the lifetime value of consumers.

But, as for the metrics you are asking for, I think we are not ready to disclose those for competitive reasons.

Okay.

Then, lastly, can you give us an update of your CFO search?

We have kicked off our official search for a new CFO.

We are in the process of screening our resumes and meeting candidates.

We feel we -- the process is on track and we want to make sure that we go through the process to find the right CFO who is going to be very strong operationally and to lead the financial organization for the Company.

Okay, thank you for taking my questions.

George Askew, Stifel.

Thank you.

You mentioned that, of course, apparel beat expectations in the quarter, better than expected.

But how did the other categories, other major categories in your business do relative to expectations in the quarter?

It's Mark, George.

I think in general I would say we were -- obviously we came in slightly above our guidance, so I think the beat to guidance was in large part due to the apparel business outside of wedding.

And I think, in addition to that, the other categories were -- performed just about as we expected.

I don't think there was any -- there is sort of ups and downs in individual categories, but on balance I would say they were about as we expected.

Okay.

Good, thanks for that.

Then could you take a moment and talk about per order shipping costs?

Clearly, as the average order size has come down, the cost of shipping is presumably a bigger percentage of the purchase to a given customer.

Is that becoming a friction point in the business?

Are you having to offer more free shipping deals?

Can you just kind of address that?

Is your question about our expenses or --?

Just want to make sure I respond --.

It's really just the total -- the expense in general.

In other words, I order a wedding dress; I end up paying $20 shipping.

If that order size, on average, is coming down at the Company, then the shipping cost is not coming down, I think, and, hence, becomes a bigger percentage of the cost.

And that's either borne by the customer or borne by the Company in terms of free shipping.

How are you guys handling that issue?

I'd say a few things.

We are constantly looking at different shipping promotions and evaluating our shipping pricing in the context of demand.

Overall, our cost of shipping per order has been stable to down during the year.

And I think obviously the big thing we are doing, which we referenced, is we are opening up the small number of regional fulfillment facilities.

We added an additional partner in the US in Q4.

We expect to open a facility in Europe in the first half of the year and we are looking at South America as well.

So I think in each of those instances the intention is to reduce shipping costs and provide a better customer experience, so we are sort of trading shipping expenses for what we expect will be lower fulfillment expenses.

And that's kind of our near-term strategy to continue to be able to offer good value to customers.

Got it, that's good.

Just last question; in the last, say, quarter or so I know that forecasting has been a focus of the Company kind of getting -- better calibrating that.

What have you guys done in the last few months to help give you better confidence in your forecasts and your guidance going forward?

Yes, maybe I'll take a crack at that and ask Alan to comment perhaps on some of the longer term.

I can just talk to the process that we've been through here in the last -- in preparation for this quarter.

As you might expect, we do a combination of bottom-up forecasting, looking at countries and categories.

And then we are also looking at top-down demands, so we are looking at demand curves by category and overall and looking at how those curves compare to prior year.

Obviously in this particular quarter, although we beat guidance, we actually had an increase in the backlog as of the quarter end, so that was about 2.6 million orders that we took that we didn't yet ship during the quarter, an increase of $2.6 million.

And so I think we are learning as a company of course, as would be expected, and at least the process that I have participated in here in the last month and a half or so is consistent with what I have seen at other places I have been.

Just to build on top of what Mark just said, from a CEO perspective, I think I felt that over the learnings we've had in the past couple quarters, financial forecasting is not only a job for the finance team, it's really a job for the whole company.

It's really important for us to nurture the business leaders to better understand their business drivers and also better to have plans to -- responding to any external changes or external market changes or internal driver changes.

I think that's just a very wider part of this process as well.

I feel that over the course of a couple quarters the business leaders, seeing our variety of functions, have become more mature, and also more familiar with this type of methodology so that will also continue to be very helpful to help us to increase the rigorousness of our -- rigor of our process.

Got it.

Great, thank you for that.

Cheng Cheng, Pacific Crest Securities.

Thank you, just one question on the apparel gross margins.

Wondering how much was impacted by just the mix and how much was impacted by the pricing adjustments you guys mentioned earlier.

Thank you.

I think almost all the impact was mix-related.

We didn't really have a change in our pricing strategy in Q4.

Obviously we are selling thousands of products; on any one product the mix shift might be slightly different.

But we didn't have a fundamental change in pricing strategy in Q4.

I think what you may be referring to a comment I made about some changes that we've made since year-end in the wedding category and so that's more of a Q1 impact.

Thank you.

[Rick Scheer, Wadden].

Thank you for taking my question.

Really if I could cover three areas, if I could get an assessment of the businesses.

As you have expanded both in geographies and product categories, how are you tracking and assessing the long-term prospects for those opportunities?

Then second piece would be could you summarize the key initiatives for 2014?

Last, how should we think about getting to a point where we've got a sustainable operating margin?

What leverage points have to be achieved in terms of either sales or customer accounts in order for that to manifest itself?

Thank you.

Okay, so for the first question --

Pursuing these long-term opportunities and categories.

The way we think about the uniqueness of our business model is we will have the capability of accessing a large number of the geographies without being basically presented there.

I think that is a very big leverage for us to actually try out markets and items, which ones will get more traction and so forth.

But after being in the business for six years, I think we have had a pretty good idea which markets that we have better traction than others.

For example, Europe has been very strong to us.

And we also show very strong growth in emerging countries like Brazil and Russia, so those will be the geographic areas where we will continue to focus in nurturing.

So that's number one.

For categories, we actually have a set of criteria of selecting categories which is started with -- we want to fine categories where the market size is very huge.

The categories would play at -- the apparel business, accessory business, those are very big categories.

And, secondly, of course the category has to have certain unique economics that work for e-commerce, the business.

So that's why -- typically the product size is smaller and the value is higher and so forth.

Thirdly, we also want to find categories where consumers value variety and choices, value fast time to market.

There's always constant change of new products, new novelty products, so those are the areas that we would feel very strong about.

Moving forward, we feel the fashion business, including the wedding and also the accessories -- small gadgets and accessory business will remain to be our primary focus for the categories.

So that's kind of the way we think about the category and the countries.

We do feel that in some countries we actually -- just one thing to add is we do feel in some countries we have, by far, way better traction than in other countries.

So one of the strategies we're going to move forward is really going to actually -- just nurturing and calculating a couple of countries where we get the most consumer votes.

Secondly, the second question is about --

The second question was about 2014 key initiatives and I think (multiple speakers) want me to take that?

So there's probably four things that are kind of -- you could map all the activities toward.

The first one is getting the wedding business on track.

We've talked about that, but obviously that's a big business for us and we still see huge opportunity there.

We are encouraged by the first steps that we've taken to get that business growing again.

The second one again is -- the second key initiative and focus area is the fast fashion space, which is -- we have a lot of momentum in right now and so we just want to continue to grow that.

Mobile would be third.

We've talked about the success we are having there, but we think there's a fundamental shift in consumer behavior underway.

We are certainly seeing that in our business and we think continuing to build on that will be a big part of 2014.

Then the last is diversifying our traffic, so we are focusing on driving traffic from a more diverse set of sources and our affiliate -- our efforts around affiliate are critical to that, as are our customer acquisition efforts in mobile.

So those are kind of the four things.

I think your last question was where is the leverage in the model?

There is -- no surprise, there's three areas.

One is the marketing.

We have talked about that, and in terms of the leverage and marketing it is about diversifying traffic.

It is about mobile and stickiness in mobile and it is about repeat customer behavior where we saw a nice increase year over year.

We went from 28% to 37% of revenue from repeat customers.

So we think there's leverage in marketing for the short and long term.

Fulfillment and shipping, we talked about swapping shipping expense for fulfillment expense.

Won't repeat that, but again that's part of our strategy of establishing some geographic hubs.

Then, lastly, G&A which is really pretty self-explanatory, but we certainly feel like we will get leverage on G&A over time as we extend our platform.

Thank you.

(Operator Instructions) [Roger Peretti], Silverhorn.

Thanks a lot for taking my question.

The question is first for Mark.

Mark, what is your role?

I heard that what you had announced that you are the President of the group.

Could you explain to us what your concrete responsibilities are?

The second question is related to what you just mentioned regarding the activity for 2014, you told us the goals, but what are the concrete measures that you are doing?

I will answer your first question, which is where am I kind of focused on my time?

Obviously initially I am doing my best to learn the business and meet the people, as you would expect.

I think functionally I'm spending more of my time with the finance organization working with Jennifer; spending some time with the operating leaders, particularly on the category management side.

Just trying to share some best practices that I have learned or been exposed to.

Then, as we get through that, I will probably spend more time on business development and opportunistically on M&A, which I think we still feel like there could be some opportunities there.

So that's where I spend my time.

I think in terms of the specifics, I think the question I got was what were the sort of key areas that you guys are focused on.

Those are the four.

I'm not sure I would be going into very specific details about tactics in each of those areas.

I think you should expect that, as we are talking to you in the coming weeks and quarters, we will be updating our progress there.

But I don't think we are going to be sharing the details of our specific tactics and strategies within those areas.

Then maybe let me ask differently.

You are confident that after Q1 your revenues will go up significantly then.

What gives you that confidence that part -- there must be some activity, some changes that you're thinking of?

And the question is maybe to Alan and Mark at the same time.

I think the things that we talked about a little bit are number one, first and foremost, we are expecting and we are beginning to see a recovery in our wedding business.

And I think, particularly as we get to the second half of the year, the comps are -- become easier so that turns from a negative to a positive.

We are counting on continued momentum in fashion, which has been a big part of our success in Q4 and we continue to see at a big opportunity there.

We think we are only beginning to scratch the surface.

Then, lastly, mobile.

We are just very bullish on adoption that we are seeing of customers in accessing our site through mobile devices, downloading our apps.

We think that's a great way to reach customers and customers that we get from mobile are, by and large, stickier customers so we think that has all sorts of benefits.

I don't know if you would --.

Also, just from the whole-company perspective, we had great addition of talents.

I talked about Mark and Quinten through the acquisition of Ador, but we also hired a number of very senior retail executives in respect for retail and for e-commerce companies globally.

I think we have been on board for a period of time and that is a lot of the strength of our team.

And also the technology team as well.

So there certainly is significant improvements of our functional expertise team and overall the Company's management team.

Also, after a couple quarters of the IPO we felt that the existing team also learned a lot about how the to better manage the business as a listed company.

So there's a lot of growth in the team as well.

So that's also -- just from an internal perspective, we feel in a much better position than where we started a couple quarters ago.

Thank you.

Thank you.

As there are no further questions at this time, I would now like to hand the conference back to the management for closing remarks.

Thank you.

This concludes our fourth-quarter 2013 earnings call.

Thank you for your participation and ongoing support of LightInTheBox.

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

Thank you.

Thank you.

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

Thank you for participating.

You may all disconnect.