蘭亭集勢 (LITB) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the LightinTheBox 2015 first-quarter earnings conference call.

(Operator Instructions).

I must advise you that this conference is being recorded today, Friday June 5, 2015.

I would now like to hand the conference over to Mr. Christian Arnell from Christensen for the opening remarks.

Thanks.

Thank you, operator.

Hello, everyone, and welcome to LightinTheBox's first-quarter 2015 earnings conference call.

The Company's results were released earlier today and are available on the Company's IR website, as well as PR Newswire's wire services.

Today, you will hear from LightinTheBox's Chairman and CEO, Mr. Alan Guo, who will give you an overview of the Company's strategy and recent developments, followed by Mr. Robin Lu, the Company's Chief Financial Officer, who will address financial results in more detail.

Before we proceed, I would like to remind you of the 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 form 20-F filed with the Securities and Exchange Commission on April 17, 2015.

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

At this point, I'd like to turn the call over to LightinTheBox's Chairman and CEO, Mr. Alan Guo.

Alan, please go ahead.

Thanks, Christian.

Welcome, everyone, to our first-quarter call.

We made a substantial progress during this quarter, despite continued foreign exchange turbulence in many of our markets, particularly in Europe.

Net revenue grew year over year 7.4% on a GAAP basis and 21.5% on non-GAAP basis, excluding the impact of the ForEx fluctuations.

Revenue from North America grow year over year 36.2% on a GAAP basis, and now accounts for 25.5% of our total revenue, up from 20.1% a year ago, as we continued to rebalance sales geographically to mitigate currency fluctuations.

Our apparel business continued to perform strongly, with revenue up 29.6% on a GAAP basis year over year.

Revenue from repeat customers, as a percentage of total revenue, continued to grow and reached a new historical high.

More importantly, we acted very quickly to take a number of measures to improve efficiency as a response to the ForEx turbulence.

These measures cover almost every aspect of our business, and already started to have a positive effect in Q2, and will continue to improve our financial performance in the incoming quarters.

We've made major progress in lowering our cost of goods sold by realigning and streamlining our supply chain.

We launched a new supplier of bidding systems to increase competition among our suppliers, eliminated many sourcing agencies to go straight to the source.

We enlist a number of new suppliers with better price quality ratio.

As a result, we have a much more competitive supply chain and expect higher margins in Q2 and beyond compared with Q1.

We negotiated with our shipping partners to lower our shipping costs per weight unit and introduced a number of innovations in our packaging program to further reduce shipping costs.

We further improved our CRM systems to sharpen our focus on nurturing and remarketing to our existing customer base, to increase repeat orders, while become more selective in acquiring new customers in strategic categories and geographies.

As a result, we expect marketing as a percentage of revenue will drop significantly in Q2 from Q1 this year.

We implemented a number of programs and system enhancements in our warehouse operations, so productivity and the efficiency will improve.

And we negotiated better rates with payment lenders to lower our transaction costs in Q2 as well.

We also streamlined our organizational structure and optimized our staff allocation, which will lead to significant lower G&A costs in Q2.

In the meanwhile, we identify a number of key employees and provide them better performance incentives, including stock options from our existing ESOP programs to further boost productivity and loyalty.

We are part of the new economy which is not only evolving rapidly, but growing very fast with the expanding opportunities.

Beyond improvements in our near-term performance, we are also focused on catching new opportunities such as mobile.

Last month, we launched WeStore, a new global social network-orientated e-commerce platform which enables small sellers to quickly open their social mobile stores at no cost to easily promote their products through social networks.

We also observed that increasingly, different players around the Internet with different skill sets and capabilities start to be very creative and constructive to form strategic partnerships to create synergies and expanding business prospects.

So as a company, we are also actively considering opportunities for strategic business alliances and partnerships to further strengthen our business growth prospects.

In summary, we believe we are strongly positioned going through the rest of this year as we continue to face currency and the macroeconomic uncertainty.

We are working fast to better balance revenue and expenses with a long-term growth and innovation mindset.

We will now turn the call over to Robin who will take you through our financial results.

Thank you.

Thank you, Alan.

As I mentioned in my remarks during the last earnings call, we expected continued currency challenges to have an adverse effect on our business in Q1.

March was in fact the worst performing month in Q1 for the euro adding to our challenges in managing the turnaround of the business.

Despite this, today we believe we have turned the corner.

We are fully focused on the execution of the measures Alan mentioned, and have recently started to see the benefit flow through our P&L.

We expect a stronger performance next quarter with higher quality revenues, improved gross margins, lower marketing spending as a percentage of revenues, and a significant reduction in operational loss when we compare to the first quarter of 2015.

As I review my financial results, let me remind you about a few things.

All numbers quoted are in US dollars.

All the percentages refer to year over year unless otherwise noted.

Net revenues increased 7.4% to $87.6 million, primarily driven by the strong performance of the apparel category, increasing contribution of repeat and new customers, and our growing mobile commerce business.

Considering the $11.7 million unfavorable impact from year-over-year change in foreign exchange rates throughout the quarter, non-GAAP net revenues would have been $99.3 million.

Total orders grew 43.6% year over year to $2.8 million, and the total number of customers who made a purchase in the quarter increased by 32.4% to 2 million.

Repeat customer purchase accounted for 46% of total net revenues, up from 37.8% a year ago, while mobile revenues as a percentage of total net revenue was up 30.4% from 23.8% year over year.

Revenue in the apparel category was up 29.6% year over year to $31.7 million, reflecting the strong performance from our ready-to-wear apparel business.

As a percentage of total net revenues, apparel revenue was 36.2% compared with 30% a year ago.

Revenues generated from other general merchandise was down slightly to $55.9 million due to substantial exposure to Europe.

Look at our business geographically, revenues from Europe were up slightly to $54.3 million, representing 61.9% of total net revenues.

Revenues in North America were up by 36.2% to $22.3 million.

Revenues from North America accounted for 25.5% of total net revenues, up from 20.1% a year ago, which resulted from our strategy to rebalance revenues to mitigate the impact of the euro.

Revenues from other countries were up slightly to $11 million, representing 12.6% of total net revenues.

Gross profit was $29.8 million, and the gross margin was 34%, down from last year's gross margin of 41.3%.

Excluding $11.7 million unfavorable impact from year-over-year change in foreign exchange rate throughout the quarter, non-GAAP gross margin would have been 41.7%.

Fulfillment expenses increased to $6.9 million from $5 million during the same period last year, primarily reflecting the increase in sales volume and the number of orders fulfilled, as well as ramping up our overseas fulfillment centers.

Fulfillment expenses per order was $2.43 down from $2.52 from last year.

As a reminder, fulfillment expenses also include payment for processing fees.

Selling and marketing expenses was $31.5 million compared with $25.9 million last year.

This reflects a strategic decision to invigorate sales in the face of a weakening environment in Europe.

Going forward, we expect marketing costs as a percentage of revenue to decrease.

Selling and marketing expenses per order improved to $11.2 from $13.2 a year ago.

G&A expenses were $12.8 million, or 14.6% of total net revenues, compared with $11.4 million, or 14% of total net revenues last year.

G&A expenses include a one-time severance cost of $0.9 million, and also include $5.1 million in technology investments compared with $3 million during the same quarter last year.

The consistent investment in technology reflects our confidence in the future of our business and the need to continue to build up our core competencies.

Non-GAAP net loss was $8.7 million compared with non-GAAP net loss of $7.6 million in the first quarter of 2014.

Non-GAAP net loss per ADS was $0.18 compared with net loss per ADS of $0.15 the same quarter of last year.

As of March 31, 2015, we had cash, term deposits and restricted cash of $67.7 million, equivalent to roughly $1.41 per ADS.

As of March 31, 2015, we've had repurchased a total of $13.9 million of our ADS as part of our share repurchase program which was extended for an additional 12-month period through December 15, 2015.

For the second quarter of 2015, based on our estimate of foreign exchange depreciation against the US dollar, we expect net revenues to be between $78 million and $81 million.

These forecasts reflect the Company's current preliminary view on the market and operational conditions, which are subject to change.

This concludes our prepared remarks.

At this point, we are ready to take some questions.

Operator?

(Operator Instructions).

Cheng Cheng, Pacific Crest Securities-KBCM.

Two quick questions from me, first one, just on your Q2 guidance.

I'm just wondering if you can provide some more color on how much of a foreign currency exchange impact is baked in there.

And maybe the second question is: It looks like in Q2, you're also expecting some increasing operating efficiency or decreasing cost.

I'm just wondering if you can provide a little more color around the magnitude of the improvement in your cost structure.

Thank you.

Hi, Cheng Cheng.

It's Robin.

Actually, excluding the impact of ForEx exchange based on our best current estimates, the revenue would roughly be -- almost remain the same as we compare with the same period of last year.

And regarding the cost structure, we reduce the costs in both shipping and the packaging.

Also, we reduced costs in the G&A costs, as we mentioned in the last conference call.

And also, we tried to improve our marketing efficiency.

What I can say is we would have a much better gross margin in Q2, and also, we would have more efficient marketing spend in Q2, as well as some other cost structures.

Okay.

As a quick follow-up to that, I was wondering.

Have you guys done, or are you guys planning to do any pruning of your product offering in terms of removing any lower margin products from your portfolio, I guess?

Cheng Cheng, this is Alan.

Yes.

We certainly have done a number of initiatives in our product assortment merchandising, and also the supply chain, as you suggested.

We are certainly focused from a product-ranking perspective.

We'd certainly recommend users with both attractive and a higher margin product to expand the margin.

But more importantly is to actually identify popular items and try to find alternatives of new suppliers who can actually resource with better price to quality ratio.

We have done very extensive number of those initiatives in this quarter.

I can tell you that we actually enlist unprecedented number of new suppliers this quarter with much more competitiveness in that regard to actually expand our margin in Q2.

Just to build on Robin's point, I want you guys to think about our Q2 is while our revenue, if we normalize the euro or ForEx impact, would be essentially similar to last year, but the quality of the revenue is much better.

On one hand, we will have extended margin compared with Q1; and on our other hand, we will also have a much lower marketing cost as a percentage of revenue compared with Q1.

And we also made major progress in the cost-cutting G&A as well, so adding all those things together, we think we will have a very significantly reduced loss in Q2.

It's going to be -- so that's why Robin was referring this Q2 as a turning-of-the-corner quarter for us in term of improving profitability.

Great.

Thank you.

George Askew, Stifel.

On currency hedging, did you do any currency hedging in the first quarter?

Do you have any plans for that going forward?

Yes.

We have a plan for that, and we continuously evaluate the currency hedging metrics, and we talk with the companies for that.

And the Q1, we did something for this, but as you know, in the overall situation, this kind of -- the euro is about 20% down versus last year same period.

So we still see an active impact of the euro.

Right.

No.

That's unprecedented, for sure.

Alan, you just addressed the notion of higher quality revenue in the second quarter.

The way you described it, it sounds like higher quality gross profit.

You've got the new suppliers.

You're getting better pricing from them.

But are you seeing better pricing from consumers as well?

Is that part of what's going on, or is it just higher price points of your assortment?

Can you just describe a little bit more what's going on?

Right.

Yes, George.

So I first want actually to chime in on the ForEx hedging question you asked Robin.

I think the way we think about it is when the ForEx situation is very stable, then you enter into a hedging program.

The cost is very low.

But if you have not entered a program in that situation, when it becomes very turbulent, and then the cost of hedging is actually very high.

So that's why the Q1, last Q4 and Q1 when it became very turbulent, it's almost impossible to actually hedging it with a hedging program if that hasn't been done, let's say, six months or 12 months back when things are stable.

So with that, it's very minimal that we could actually hedge those risk during the turbulent.

I do think in the future that when the situation become more stabilized, it actually makes sense for the Company to actually look into some longer-term ForEx hedging programs while things are stabilized.

But now is still not our best time to actually do large-scale implementation of those hedging programs after we actually talk with a number of providers of those programs, including banks and payment companies, etc.

That's just where we are.

So that's the add-on on top, what Robin just said.

The second is to my comments on the quality of the revenue, I think it's actually came into a couple of different angles.

The first is certainly higher margin revenue which actually means actually two things.

A is expansion of -- streamline of supply chain which give us a lower cost of goods sold while not sacrificing our product quality.

And secondly is certainly our primary pricing currency showing to consumers are US dollar, but the consumer is paying us in Europe, most of them, in euros.

So we will actually frequently update the euro to US dollar exchange ratio, which means when the euro is going down relative to US dollars, with the updated exchange rate, the consumers in Europe will actually see higher price probably in euro, but that actually does not expanded our margin when we convert the revenue back into US dollar.

So I just want to explain that.

That does not actually cause of expansion of the margin for us in a GAAP basis.

On the other hand, when the economy is hurting, it's almost impossible for us to further increase price in US dollar terms so that the European customer will get a double dipping of price increase, will actually drastically hurt our conversion rate and the ability of generating revenue in those market.

So I think the primary driver of the margin expansion that's happening in Q2 is actually a supply chain efficiency improvement, not the pricing strategy change.

But that being said, there is also a focus of where we are spending our marketing dollar and our overall marketing effort.

So in Q2 we are certainly actually switching the whole marketing team much more focused on CRM programs which generate more revenues from repeat customers.

I do want to guide people to look at our historical trend.

We always had a continuous growth of repeating customer as percentage of revenue in many quarters in the past.

But we do think actually we have accelerated growth of repeat customers in the revenue in Q2 this quarter due to our improved CRM systems and more focus on the marketing towards our existing customers.

For example, we actually have cash reward programs which we will from time to time to actually selectively identify loyal customers and high -- [large unrewarded] customers, we are actually using our CRM program to give them those rewards so that to recall them back to actually repurchase.

We certainly actually have done more of those activities in Q1 compared with the last quarters, and we are also certainly more sophisticated in giving out those rewards, which actually demonstrate much, much higher return on investment comparing with acquiring new customers.

So that's also what I refer as the higher quality revenues.

And thirdly, there's also a strategic choice of which categories and which geographics we want to acquire new customers and new revenues.

As you can see, in Q1, our revenues from North America actually expanded significantly from a year ago, because we believe that over time, it makes more sense to actually make more sustainable, balanced business across different geographics.

We definitely don't want to be too heavily loaded in Europe in the coming years in terms of revenue distribution.

And also, category-wise, our apparel continues to grow fast.

And I can also say that within apparel, the ready-to-wear apparel actually grow faster than weddings.

It's almost like two-thirds -- qualitatively, two-thirds of our revenue from apparel now it actually come from ready-to-wear apparel, which we believe is a much bigger market than the traditional wedding business, and also will actually generate more repurchase behaviors from our consumers as well.

So I do think the quality of revenue also has the elements of the strategic choice and target that we focus on.

That's been very helpful.

Thank you.

Just two last quick ones and this gets to what you were talking about as well.

What are your repeat customer statistics for mobile?

So we don't actually break down that, but qualitatively, we do see actually a higher life and value in mobile users compared with PC users.

We actually do see more frequent engagement from our mobile users.

For example, in many of -- a majority -- a significant portion of our revenue actually came from CRM programs, and we do observe that most people actually open their emails from their handsets, which actually leads to our mobile website, which will actually promote them to install our mobile app.

And then after they install our mobile app, they will actually engage more frequently with us.

So we do think that we will continue to invest heavily in mobile in terms of the R&D.

We actually mentioned in the last call, said we actually established a mobile R&D center in Chengdu which has a lower labor cost for the software engineers and also has a lot of mobile R&D talent.

We think those investments in the last year actually really paid out.

I guess I really want to say that we believe overall we're in a very well-planned path for growth and profitability but it was interrupted by the euro crisis.

But the Company reacted very quickly.

The labor cost cutting was very significant and we were very determined in turning the corner for us.

We understand it was a very -- the magnitude of those ForEx exchange was unprecedented, not only in the Company's history, but also actually in the past 12 years of euro's history.

So the Company and the Board will very decisively make those decisive and difficult measures in terms of cutting costs and streamlining operations and so forth.

But I think we have made very big progress in the last 90 days, and now I think it's set up in a much better position now compared with last quarter earnings call in terms of where the Company is in terms of its health of the operational margins and so on and so forth.

Okay.

Great.

And then just a very last question.

In the cash flow, there's a long-term investment $2.1 million.

Does that represent an acquisition of some sort or is there something else happening?

It was a minority investment into a company which is very relevant to the cross-border e-commerce.

For competitive reasons, and also because it's immaterial, so we decide not to disclose that company's name.

But it's a minority investment.

Got it.

Okay.

Thank you for all this.

Appreciate it.

Hanjie Mi, Orient Securities.

I have one question.

Considering the current capital market change, and trend also called "Internet Plus" in China, do you have some idea for your Company?

Thank you.

Yes.

As we mentioned in our earnings release, we are considering the opportunities in business strategy and partnership.

Actually, as usual, the management and the Board regularly review our business strategy and the capital market strategy in the light of evolving business and the market environment.

If and when we decide to do anything of this nature, we will obviously update the market in compliance with security laws and regulations.

So just on top of what Robin just said, we do think now there is a lot of opportunities for cross-company partnerships which can be very powerful and can create a lot of synergies and values and business prospects.

So if anything, I think the Company is more active and constructive in seeking business partnerships and alliances than the past.

Thank you.

Jun Zhu, CICC.

I just have one question.

Do you think you have any business opportunities in domestic China based on my understanding of your technology expertise?

Thank you.

So we actually -- so LightInTheBox has always been a leader of cross-border e-commerce.

Our business model and setup certainly does not prohibit us from doing cross-border e-commerce, reverse cross-border e-commerce; i.e., selling foreign goods back to the China market.

We have not made major investments in those efforts, but we are very closely monitoring the policy changes and also the market opportunities in this.

And we remain to be very open-minded in that regard.

And I also want to remind you that we have overseas warehouses and we also have overseas offices which we think if we ever decide to actually enter that business, this would be a very good asset for us to doing that.

But as of today, we have not made any major investment into that business yet, but we remain to be very open minded.

Okay.

Got it.

Thank you.

Unfortunately, that is all the time we have today.

I'll now pass the call back to Christian.

Thank you.

This concludes our first-quarter 2015 earnings conference call.

Thank you for your participation and your ongoing support of the Company.

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

Have a good day, this concludes the call.

Ladies and gentlemen, that does conclude your conference call for today.

Thank you for participating.

You may all disconnect.