蘭亭集勢 (LITB) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the quarter two of 2014 LightInTheBox Holding earnings conference call. (Operator Instructions). I must advise you that this conference is being recorded today Wednesday, August 20, 2014.

I would now like to hand the conference over to your first speaker today, Ms. Margaret Shi. Thank you. Please go ahead.

Thank you, operator. Hello everyone and welcome to LightInTheBox second-quarter 2014 earnings conference call. Our second-quarter earnings results were released earlier today and are available on our IR website as well as on the newswire services. Today you will hear from our Chairman and CEO, Mr. Alan Guo, who will give an overview of the Company's strategies and recent developments followed by Mr. Robin Lu, our Chief Financial Officer, to address the financial results in greater 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 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 the results to materially differ from those in the forward-looking statements please refer to our Form 20F filed with the Securities and Exchange Commission on April 28, 2014. 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, CEO Mr. Alan Guo. Alan, please go ahead.

Thanks, Margaret. Welcome everyone to our call. We are pleased to report that we have reaccelerated revenue growth. Revenues were $89.8 million for the second quarter of 2014 which was a 24.3% rise over last year and ahead of our raised guidance of $86 million to $88 million. Total number of orders increased by 52.4% year-over-year while orders from mobile devices increased by 175% accounting for 28.2% of total orders.

Revenues from repeat customers rose to 40.4% of total net revenue compared to 32.5% a year ago. Selling and marketing expenses as a percentage of total net revenue improved sequentially to 27.7% from 31.8%. We believe the better than expected performance was a direct result of the (technical difficulty) strategy plan we set forth a few quarters ago and the hard work and solid execution of our team.

Robust growth in revenue came primarily from three sources, strong growth from mobile, fast growth from apparel and continued growth of repeat customers. Mobile has changed the way global consumers shop and this transition to a new mobile centric era offers a huge opportunity for us. We regularly upgrade our three primary mobile applications for co-verticals including LightInTheBox Mini and Flash. These apps have gained increasing traction with consumers, with revenue growing at an even faster rate than overall mobile revenue growth. We will continue to invest heavily in our mobile (inaudible) strategy.

Revenues from apparel for the second quarter of 2014 grew by 43.5% year-over-year. We achieved a solid rebound in wedding and customized apparel and gained extraordinary growth in ready-to-wear apparel. For wedding and customized apparel, we made changes to the management, improved merchandise and establish an in-house design team and more competitive pricing strategy, all of which led to a fast rebound in our wedding dress business.

Our ready-to-wear business continued to grow very fast. We have successfully leveraged our existing wedding customers' base to satisfy their ongoing day-to-day clothing needs. We have also increased the Flash sale model for our ready-to-wear apparel offering customers deeply discounted prices while a ride range of selection. This is also helping our suppliers to dispose of excessive inventory when necessary.

We launched our open platform for third-party apparel sellers to sell directly on LightInTheBox during the quarter. While it is still at an early stage, we have seen strong interest from merchants and brands. Our marketing efficiency has improved primarily driven by increased repeat customer purchases and our effort to diversify our traffic channels in order to optimize our return on investment. During the quarter, our marketing spending on non-search channels had increased significantly including social media, affiliate networks and other such channels.

Our European fulfillment center in Poland has been scaling up nicely to offer our customers in Europe our largest geographic market with faster lead times and a better customer experience. We are working hard to further increase the number of European direct deliveries from this center in the incoming quarters. Global e-commerce is still at its early stage and has huge market potential. We are fully focused on satisfying customers globally and on developing and strengthening our distinctive advantages in supply chain management, global customer reach and fulfillment capabilities, big data analytics and mobile commerce. We feel pretty confident with our strategy and ability to capture the global market opportunity presented to us.

I will now turn the call to Robin, our CFO, who will take you through our 2014 second-quarter financial results. Robin?

Thanks to everybody for joining us on the call. This is my first official earnings call as CFO of LightInTheBox. I look forward to meeting and getting to know you in the quarters ahead.

(technical difficulty) results, I would like to remind you that all (inaudible) change refer to year-over-year changes unless otherwise noted.

Net revenues increased 24.3% to $89.8 million on the back of strong performance in our apparel category, increasing contribution from our mobile commerce business, and strong repeat customer purchase. Total orders grew 52.4% year-over-year to $2.2 million; and the number of customers who made a purchase in the quarter increased 44.2% to 1.7 million.

Repeat customer orders accounted for 40.4% of total net revenues, significantly up from 32.5% while mobile orders were up to 28.2% total number of orders compared with 16.8%.

Apparel revenue increased 43.5% year-over-year to $35.4 million reflecting our initial success at reigniting growth in this category. The strong performance was largely attributable to strong growth in ready-to-wear apparel while our customized wedding business enjoyed another quarter of solid recovery.

As a percentage of total net revenues, apparel revenue was approximately 40% compared with 34% last year. Revenues generated from electronics and other general merchandise increased by 14.3% to $54.4 million. Geographically, revenues from Europe increased 25.7% to $55.4 million representing 62% of total net revenues.

Revenues from North America increased by 40% to $20 million representing 22% of total net revenues. While our revenues from other countries increased by 3.7% to $14.4 million representing 16% of total net revenues.

Gross profit rose 6.8% to $35.5 million and the gross margin declined to 39.5% from 46%. This change was largely due to shifts in product mix and the pricing strategy as we continued to expand our market share and grow our customer base.

Fulfillment expenses increased 46.2% to $5.5 million primarily reflecting the increase in sales model and the number of orders fulfilled. As a percentage of total net revenues, fulfillment expenses increased to 6.1% from 5.2% based on smaller average order size compared with a year ago. Fulfillment expenses per order improved to $2.50 from $2.60 a year ago. As a reminder, fulfillment expenses also include payment processing space.

Selling and marketing expenses were $24.8 million compared with $19.6 million reflecting our efforts to grow both customer base and the market share. However as a percentage of total net revenues, selling and marketing expenses improved sequentially to 27.7% from 31.8% and remained stable year over year. This reflects our commitment to optimize online marketing and diversify traffic acquisition channels. Selling and marketing expenses per order improved to $11.40 from $13.70 a year ago and also improved sequentially from $30.20 last quarter.

G&A expenses were $11.5 million compared with $8.8 million reflecting the growth of our business operations and our commitment to future growth. This includes $3.7 million in technology investments compared with $2.4 million in the year ago. As a percentage of total revenues, G&A expenses were 12.9%, down sequentially from 14% and almost flat compared with a year ago.

Total operating expenses as a percentage of revenue was 46.6% down sequentially from 51.9% and up from 44.5% a year ago.

Loss from operations was $6.3 million compared with operating income of $1.1 million a year ago. The operating loss narrowed sequentially by $2.3 million due to our progress in streamlining business operations, consulting costs and our commitment to improve our bottom line. This (inaudible), we will continue to invest in our long-term strategy to strengthen our distinctive global e-commerce platform. We believe this investment in our strategy will pay off in the future.

Net loss attributable to ordinary shareholders was $5.7 million compared with $0.4 million (sic - see Press Release, "$0.04 million") in the same quarter of 2013.

Net loss per ADS was $0.11 compared with break even in the same quarter of 2013. Each ADS represents two ordinary shares. On a non-GAAP basis, adjusted net loss attributable to ordinary shareholders which excludes the impact of approximately $0.1 million in share-based compensation expense was $5.6 million compared with $2.8 million in adjusted income a year ago.

Cash flows from operations were a negative $0.5 million as operating losses were partially offset by cash from working capital.

As of June 30, 2014, the Company had a cash term deposit and restricted cash of $95.8 million equivalent to roughly $1.93 per ADS. This compares with $99.7 million as of March 31, 2014.

On December 16, 2013, the Company announced a share repurchase program of up to $20 million. As of June 30, 2014 we had repurchased a total of $2.6 million of ADS.

Now let me turn to guidance.

For the third quarter of 2014, we expect net revenues to be between $92 million to $94 million representing year-over-year growth of approximately 35% to 38%. This forecast reflects our current and preliminary reviews of market and operational conditions which are subject to change.

With that, I will conclude our prepared remarks. At this point we are ready to take your questions. Operator?

(Operator Instructions). Sisi Lu, China Renaissance.

Good evening, Robin and Alan. Thank you for taking the question. So my question is regarding the marketing cost. Actually I noticed that the marketing cost per customer has reduced quite nicely both on a year-on-year basis and quarter-on-quarter basis this quarter. So could you help me understand better on the drivers behind?

And also the my note on the percentage of traffic from [ACM] model versus the other channels right now and also could you please comment on future trend of the customer acquisition costs? Thank you.

This is Alan. Thank you for the question. I think as you see, we have improved sequentially our marketing spending as a percentage of revenue. I think it is the result of increased repeat customers and also increased marketing efficiency by diversifying traffic source. Traditionally, we have spent heavily on search marketing which was our primary driver of traffic but this Q2, we were able to diversify our traffic source to social media to more affiliate networks and also to more mobile app installation. So I think that is a very important driver for the reduced marketing costs as a percentage of revenue and also increased efficiency in marketing.

(multiple speakers) Actually, we don't guide the marketing expense trends even though I should say continues leveraging the marketing spend and improve the marketing efficiency is our goal daily-to-daily basis to work out.

Okay, great. Thank you. That is helpful.

George Askew, Stifel.

Good evening. Thank you for taking the question and congratulations on the strong revenue. I guess I have a couple of questions. First, you noted the wedding apparel rebound. How much of that is seasonal? I know the second quarter is a pretty important quarter there. Is there a seasonal benefit that you are seeing here that may not repeat itself next quarter or beyond?

George, this is Alan. We actually are doing year-over-year comparisons internally for our wedding dress revenue and also number of dresses we sell during the quarter. So while we are doing the year-over-year comparison, there is no seasonality factor expecting and based on those numbers, I think while we are not disclosing them, it is safe to say that we see growth in both revenue coming from the wedding business and also the number of dresses we sold year-over-year during the same quarter Q2.

As I said, I think that was -- the rebound of the wedding was a combination of the right strategy of focus on merchandising, focus on design, strengthened supply chain, [type] of management, more competitive pricing and also very solid execution by the team during the past four quarters.

Got it. Okay, that is great. Thank you for that. Can you -- kind of shifting to a little bigger picture, what does your margin model look like going forward?

Let me take this question. Actually you know regarding the gross margin, I should say, our gross margin is much higher than other e-commerce players and the gross margin is really a combination of like a product mix change and competitive prices. As far as we -- our (inaudible) this industry, we are still in the very early stage so we put the top line growth to expand our customer base and the more orders is our first priority. So based on that first, pricing is one of the instruments for us to implement our strategy. On a daily basis, we evaluate our gross margin and use that as one of our strategies.

(inaudible) I think we focus on the collaboration between the marketing expense and the cost of products. When you look at the numbers in combination you can see we made achievement this quarter in the percentage wise.

Okay, so there is no sort of target percentage model at this juncture? At one point I thought you guys were sort of working toward a certain margin structure sustainable over time. Is there any kind of update on that or outline of how we should think about that?

George, this is Alan. No, Robin, go ahead.

Internally [on our side], we evaluate the gross margin in the operations space but we don't provide guidance for the gross margin.

Okay. I guess just a statement here -- just kind of interested in how the model looks. What is the path to profitability? Obviously you are driving revenue, profit really has turned negative here that is fine, it has been for a couple of quarters. Revenue growth is what matters but I think investors will care over time what the profitability model is and that is the reason for the question. But I think I got the answer -- at least the answer I'll get.

So George, let me add one point, after you gave some more background on your question. I think I do want to encourage you to think about even with reduced pricing in term of just increased competitiveness, overall we still have a very attractive gross margin structure by any traditional or online retail measure, that is number one.

Number two is we certainly know that after we gaining more and more market share, there will be opportunity for us to regaining the margin because in the end of day if you look at the categories we are applying, it is really still a lot private label product. It is not a [stick] commodity product, it is not very high branded product. This model has not changed so that we certainly will enjoy a better than average gross margin structure moving forward.

I think we are kind of playing a better tradeoff between marketing efficiency and the gross margin profile during the last quarter compared with the second half of last year.

Okay. That is helpful. That clarifies some things. Last question. You have had some management changes here in the first half of 2014 including the departure of your President, Mark, after a fairly short tenure. Can you just sort of frame what is -- I know everybody leaves for personal reasons and all that but at the end of the day, what holes remain in the management structure? Why have things changed as they have changed?

So, George, as a very fast growing global e-commerce company, we constantly kind of building up our management benches particularly we have been focused on that after the IPO. So as part of that, we bring a number of senior talent. We acknowledge the fact that Mark left the Company and announced his departure even though he is still working tirelessly on his job until the end of the year. But we are feeling very confident the current -- the leadership of the Company with a good combination of the founders and the new executive management joined and also home grown management that has been working with the Company for the past six, seven years, we feel very strong about our team. And I think the financial performance actually speaks by itself shows the (inaudible) of the team, we just think the success of last quarter was primarily as a result of that and also that will reflect into our Q3 guidance and onto 4.

Okay, super. Thank you very much.

(inaudible), ICBC International.

Congratulations on the strong earnings. I have two questions here. First is a broader question regarding the market for Alan. Could you bring us some updates about your present strategy to acquire market share for the coming quarters? And also could you give us some updates about your Flash sale business? The earlier combination is that you started to open platform for(inaudible) for (inaudible) merchandise sales. Any updates about this? Thank you.

Yes, so the first question is actually our pricing strategy. I think we definitely want to deliver a lot of (inaudible) to consumers, that is number one. And secondly, we want to be very cautious about our margin so that we will have a path to profitability. And thirdly, we think we want to be gaining market share over time.

So the second question is actually about Flash sales business. I think the Flash sales business -- yes, it is a very important driver for us in the past couple of quarters for the apparel business. I think it has a very unique model both attractive to consumers for pricing and also for suppliers for their -- to dispose their inventory. We think we will continue to get (inaudible) for our ready-to-wear apparel business. Sorry, what is the third question?

The open platform that applies to merchandise sales, some updates about that.

Yes, the open platform strategy. I think it is a proven strategy for many kind of B2C companies gradually moving to the open platform. For us it is a natural extension of opening our customer base to third-party merchants directly selling their product in a more flexible way. At the same time, we want to make sure the same level of customer satisfaction and our end-to-end accountability consumers so we require the merchants to actually put product through our fulfillment network so that when they come to our warehouse we will do quality check and it will be able to leverage in our infrastructure. We think this is very attractive to merchants in China who doesn't speak English and who doesn't able to manage the global logistic networks themselves.

But in terms of its development, we just launched this quarter we think it is very early so I think we are not ready to give any numbers at this time.

Thank you. Does the Company have any figure about the Flash sale business [around] contribution?

Yes, we have the Flash sales business in our apparel business. But we -- you want to look at exact number or --?

What is the (inaudible) contribution the Company can share, the (inaudible) contribution from Flash sales?

Yes, that is my feedback. We really don't break the revenue from (inaudible) but we do use this model in our sales.

Okay, thank you. I have one quick follow-up regarding the mobile side. Do you have a breakdown of mobile orders by category? What are the top three categories for the mobile orders if you can share something about this? Just trying to figure out if there are any difference from PC side?

What I can say is we have order increase overall which we disclosed. But for mobile, mobile for us is our strategy but we don't break to the order from mobile.

Yes, okay.

I think the mobile adoption is still in the early stage in our industry so when the time is appropriate we can share more with you.

Okay, thank you.

Eric Wen, China Renaissance.

Thanks very much for taking my questions and good evening, Alan and Robin.

I just have a quick question regarding your overseas warehouse. Can you walk through your strategy in overseas warehouse, how would that benefit you improving your consumer experience and how do you decide to spend the money to build a warehouse? I noticed that your CapEx actually has not increased that much in the last two quarters and how would you manage the risk associated with the inventory risk about this strategy? Thanks.

Eric, this is Alan. So I think there are a couple of things. A, is for overseas warehouse, our view is we don't want to introduce a large number of them. We probably initially are going build one for each continent. So basically we call it continental warehouse like the Poland warehouse covers the whole EU countries, the US warehouse covers North America and so on and so forth. So that actually -- it is the baseline that we will not actually incur a lot of CapEx.

And secondly in terms of the model, we are not acquiring land or building buildings ourselves. We try to leverage existing facilities as much as we could on an incremental basis and we are only kind of -- and also because we actually developed all of the software ourselves, so when we launch new facilities, there is no additional royalty fees or consulting fees we need to pay to anyone. So that also makes a huge difference compared with some of the other companies may outsource their software for warehouse and logistics management.

So thirdly for the inventory management, I think we are very data driven. We have a very sophisticated data mining team in China and we also acquired a very experienced supply chain oriented data expert in Seattle. So both teams have been working together to create a big data driven inventory model. So we don't actually, there will be certainly some level of increase of inventory for this two-tier model but we should not expect the inventory increase to change the overall nature or kind of capture of our business.

And also that being said, I think with additional inventory -- potential additional inventory increase, we will also have an opportunity to increase our accounts payable from a supplier so that we will still run a cash positive working capital cash positive business as our nature.

Lastly, I think from a consumer perspective, the biggest wing is actually delivery feed from the time they make an order and the time they receive the order. And the second wing is the shipping costs, the consumer are going to owe us -- LightInTheBox is going to occur. So I think it has both benefit in term of shipping speed and also shipping costs.

And in addition, it will also help the consumers for returning their goods. Any of the consumers they don't have to return back to China, they just return to our fulfillment center in Europe.

I think over time you can actually think of our continental fulfillment center not only as a warehouse but also as a comprehensive service compound where we can do fulfillment, we can potentially also do some alterations for the dress and some basic exchange of the parts for the goods. So basically that is kind of the model we are envisioning.

We think over time it is going to become a huge barrier to entry and a very distinct disadvantage for a company who want to have a global presence and I would even go further to say there probably hasn't been many companies especially e-commerce companies in the world has been able to establish this type of infrastructure in the past.

We really think it is a very -- the infrastructure we are referring to it is not talking about buildings and the land, it is actually the service and software and the process we design on top of those.

(multiple speakers) I have some more comments. In summary with a (inaudible) to our inventory management overseas, I think our primary goal is to improve our customer satisfaction with this solid infrastructure which is extremely important in the long run to conquer the market over there of course with some additions of cost savings.

Thank you very much. Very helpful.

Yujie Li, RHB.

Good evening. Thanks for taking my questions and congratulations, your mobile revenue was very strong this quarter. Could you please give us some updates on your mobile initiatives? Thank you.

As I said in my earlier script, I think we certainly have a mobile strategy for the Company. If we think about last year, our mobile strategy was primarily focused on developing our very good mobile Web experience. This year is really about developing our mobile app experience because we believe with the app installed in consumers' desktop on the mobile, we will be able to better engage with consumers in a very personalized way with push messages, with personal recommendations and so on and so forth.

And also we think mobile, it is very important for demand generation in the sense that the consumers can use a lot of small fraction of their time to browsing, quote unquote window shopping on the mobile app. So I think it is going to build a very good repeat browsing and purchase behavior. That is also kind of goes hand in hand with the daily Flash sale business model and personalized recommendation model. We also realize that in mobile, people want each app does only one thing and do it very well so that is why we actually launch multiple apps, with each one with a very specific category or kind of a promotional focus such as Mini, such as Flash.

Lastly, we think mobile commerce is still very early so we are open to all kinds of innovations internally at small-scale trials. So we think we may want to explore continuous innovations in mobile beyond what we have been offering. That will be also a part of the business that we plan to invest in terms of our future mobile direction. Thank you.

(inaudible) Stifel.

Thank you for taking my question. Congratulations, strong revenue guidance for 3Q. Just a quick one. You mentioned that repeat customers contributed 40% of your total revenues. I wonder out of your total orders, what percentage came from repeat customers?

Robin, can you take that?

Actually I think you can do some calculations for this one but in general, we don't disclose those numbers.

Okay. So like is it higher or lower? Just want to get a general sense.

I should say with the numbers we provide you may get a hint about these numbers.

Okay, thanks.

Rick Shea, Vardon Capital.

Good evening. Thank you for taking my question. Just wanted to get a little more detail on the third-party business and how we should think about that opportunity, how you are approaching that business, the number of people, the sales process and what are your plans for growing that business? And then what the margin structure looks like compared to the base business?

Richard, this is Alan. I think it is still very early. This call is certainly not the best time we lay out very comprehensive strategy to people on the third-party platform. And also it is safe to say it was not a material part of our Q2 financials. I think we are still internally baking the exactly right process, percentage (inaudible) and all the things for different types of merchants. So I just feel it is kind of premature to discuss this in length this time.

Understood. Thank you.

(Operator Instructions). We appear to have no further questions at this time. Ryan Roberts, China Stock Research.

Good evening and thank you for taking my questions. (technical difficulty) gave us color on what is going on in non-apparel. It looks like sales have been kind of drifting lower the past couple of quarters and I was wondering if we could just give an update on what is happening there?

The voice cut off. Which part of the business are you referring to?

I'm just looking for an update, some kind of information on what is going on in non-apparel sales. It looks like it has been drifting lower the past couple of quarters, quarter-on-quarter. Just kind of curious what is going on there?

So actually if you compare year-over-year growth, the Q2 year-over-year growth is actually slightly higher than Q1 year-over-year growth. It has been our strategy this year -- the beginning of this year we laid out our strategic focus of growth will be in apparel which we have been executing. And also you have to kind of remember that when we are saying the non-apparel business, it is a conglomerate of a larger number of categories. So within the conglomerate, we actually are doing adjustments over time. Some of the category growing faster for example home decorations and some of the categories where we are seeing longer-term, it might not be as attractive as other categories. So we don't want to -- it has kind of become our strategic focus.

So it is safe to say there is a lot of activity going on to kind of recalibrate different subcategories within the conglomerate and we feel good about our progress. We feel good about identifying additional growth drivers within and such as with home decor. That is kind of our take on that.

And just to follow-up on that, kind of give us a sense of where you are along in that process kind of recalibrating, rethinking that non-apparel stuff? Just qualitatively, how would you say you would gauge your progress?

We think at a different stage, we grow the different categories at different times. I mean we primarily focus on apparel at this moment as we do see the great result for that. And as Alan mentioned just now, we identified some potential growth drivers in the non-apparel sector. We are preparing for the growth for that so still in the process as you know.

I think the point being, we are a company that runs in multiple categories over time and you can almost think of it as a horse race and we will dynamically allocate our resources including marketing dollars essential to the kind of naturally emerging categories or strategically focused categories. But I would say that is kind of way we run the business.

(multiple speakers) We are still getting like 14% growth which is in line with our plan for this category, non-apparel category.

Thank you. Thank you.

I would now like to hand the call back to your presenter, Ms. Margaret Shi, for the closing remarks.

This concludes our second-quarter 2014 earnings conference call. Thank you for your participation and ongoing support of LightInTheBox. We look forward to providing you with more updates of our business in the coming weeks and months ahead. Have a good day. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect the lines.