蘭亭集勢 (LITB) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the LightInTheBox Holding second-quarter 2015 earnings conference call.

(Operator Instructions).

I must advise you that this conference call is being recorded today, September 16, 2015.

And now, it's a pleasure to hand over the conference to your host for today.

So, Christian Arnell, please go ahead.

Thank you.

Hello, everyone, and welcome to LightInTheBox's second-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 through PR Newswire.

Today, you will hear from LightInTheBox's Chairman and CEO, Mr. Alan Guo, who will give an overview of the Company's strategies 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 our Safe Harbor Statement.

Please note that the discussion today may contain 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 these in the forward-looking statements, please refer to our Form 20-F filed at 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, Chris; and thank you, everyone, for joining us today.

I am pleased to report that we've delivered a strong performance despite continued economic uncertainty in several major markets and unfavorable currency fluctuations, especially the euro.

We made significant progress in our efforts to reduce costs and improve operational efficiency, which is reflected by our improved gross margin and bottom line on a sequential basis.

Our GAAP gross margin reached 37.5% from 34% last quarter, which represented 3.5% of gross margin expansion sequentially.

Total operating expense were reduced by 30.9%, which translates into cost saving of $15.8 million and includes reductions in marketing fulfillment and G&A.

Excluding unfavorable impact of year-over-year changes in foreign exchange rates, we achieved a non-GAAP net income of $7.1 million, a significant increase from a non-GAAP net loss of $6.9 million in the same quarter of 2014.

Our GAAP net loss was $5.6 million, an improvement of $16 million sequentially.

Revenue from repeat customers increased to 46.1% of total net revenue from 40.4% a year ago.

Revenues from mobile users increased significantly to 32.9% of our total net revenue from 28.2% a year ago.

Macro-wise, while we don't predict currency trends, we do welcome the recent slight depreciation of the RMB which modestly helped our cost structure.

These achievements were a direct result of executing our strategy of improving cost structure and operational efficiency which we explained during our last earning call.

We realigned our product and geographic focus towards markets with greater profit potential.

We enlisted more upstream suppliers to cut out more middle men in the supply chain.

We scaled up our procurement bidding program to keep our sourcing prices competitive.

We enhanced our executive oversight program with our key suppliers to better align strategy and interests across the supply chain.

We developed a more sophisticated pricing model to expand the gross profit margin.

We further improved our marketing efficiency by implementing a more advanced traffic acquisition program and a better CRM system.

We upgraded our website and mobile technology platform in a number of major ways, including better search functionality, more advanced rankings and recommendation algorithms, as well as improved user interfaces, which led to a higher conversion rate and marketing efficiency.

We optimized our global logistic planning system, renegotiated with a number of major shipping companies, enlisted a number of new shipping partners with better services and cost structure in many key geographic markets.

We also significantly improved our packaging program to reduce shipping weights.

We also upgraded our warehouse management system to improve warehouse efficiency.

We worked very hard to reduce G&A costs.

We reorganized and streamlined our corporate structure to improve the efficiency, optimize operations and reduce costs.

We reorganized our corporate structure into business units from a functional standpoint in order to shorten the command chain, foster faster decision making and achieve better efficiency and accountability.

As a result, we successfully reduced a significant portion of our labor costs, yet were able to maintain the operational effectiveness and customer satisfaction.

During last quarter, we were also very excited to welcome Aokang as a strategic investor and partner.

Together, we have taken a first step in driving industry revolution by combining mobile Internet technologies and big data analytics with first-class manufacturing capability and powerful supplier networks.

We believe this partnership will act as a role model for China's Internet Plus strategy and create tremendous opportunities for us.

While it is still very early in the collaboration between LightInTheBox and Aokang, we have identified that mobilizing the best Chinese manufacturers and brands to embrace the cross-border e-commerce which was invented by LightInTheBox is the most important objective here.

Aokang not only is the number 1 brand in men's shoes category in China, but it also has great connections and significant influence in the whole fashion retail and manufacturing industry in China, which would help us to enlist other powerful players to join our cross-border retail platform with favorable terms, we believe.

We are also working together to identify other important areas where Aokang can leverage LightInTheBox's Internet and big data technology, as well as our software systems and platforms to empower their businesses and potentially incubate new business initiatives.

I would also like to mention that LanTingZhiTong, our open cross-border logistics platform, is growing very fast in both customer base and total number of packages shipped with an extremely small cost base.

Moving to the second half of the year, we are focusing on the following four objectives.

Number 1. Continue to improve our operational efficiency.

Number 2. Continue to improve and upgrade our supply chain, in part by leveraging our relationship with Aokang, in order to achieve better customer loyalty.

Number 3. Continue to migrate and improve our user experiences into mobile Internet.

And number 4. Introduce new monetization and revenue streams without additional investments, such as advertising fees and annual platform services fees from suppliers and platform sellers, and shipping insurance and extended warranties from purchasing customers.

Geographically, we'll be focusing on developed countries where we are traditionally strong and are less affected by economic problems, including North America, Northern and Western Europe, the United Kingdom, and so on.

In summary, we made significant progress during the quarter, which I believe has positioned us strongly for future growth.

All in all, we are working to rebuild LightInTheBox into a leaner, stronger and more efficient company without sacrificing our core values.

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

Thank you, Alan.

As Alan mentioned, we continue to face significant currency headwinds which are having an adverse effect on our business.

We expect our performance to continue to improve in the coming quarters as a result of initiatives we implemented to reduce costs, improve supply chain and operating efficiency to offset pressure we are facing from depreciating currencies.

While all these measures will somewhat counter the effecting of depreciating currencies, they will also improve our performance and competitiveness over the long term.

Some of the progress can already be seen in our second quarter P&L, as we swung to a non-GAAP net profit of $7.1 million from a non-GAAP net loss of $6.9 million in the same quarter last year.

While relatively modest, the recent depreciation of the RMB will increase the positive impact of our cost cutting, giving us increased confidence in our future.

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

Our numbers quoted are in US dollars.

All the percentage changes refer to year over year unless otherwise noted.

Net revenues decreased 12.6% to $78.4 million.

Backing out the $12.4 million unfavorable foreign exchange impact, net revenues actually increased to $90.8 million.

Repeat customer purchases accounted for 46.1% of total net revenues, up from 40.4% one year ago, while mobile revenues as a percentage of total net revenues increased to 32.9% from 28.2% year over year.

Total orders fell 7.2% year over year to 2 million, and the total number of customers who made a purchase in the quarter decreased by 6% to 1.6 million.

Revenues in the apparel category were down 1.3% year over year to $34.9 million, despite a strong performance in the ready-to-wear apparel business.

As a percentage of total net revenues, apparel revenues were 44.6% compared with 39.5% a year ago.

Revenues generated from other general merchandise were down to $43.5 million, also reflecting the impact of depreciating currencies, especially the euro.

Looking at our business geographically, revenues from North America were up by 18.2% to $23.6 million and accounted for 30.1% of total net revenues, up from 22.3% one year ago.

Revenues from Europe decreased to $44.6 million, representing 56.8% of total revenues.

Revenues from other countries decreased to $10.2 million, representing 13.1% of total net revenues.

Gross profit was $29.5 million, and the gross margin was 37.5%, down from last year's gross margin of 39.5%, but up sequentially from 34%, demonstrating our success in re-expanded margins.

Excluding the total $4 million unfavorable impact of year-over-year changes in foreign exchange rates, non-GAAP gross margin would have been 46.1%.

Fulfillment expenses decreased to $5.4 million from $5.5 million during the same period last year.

Fulfillment expenses per order were $2.68, up from $2.51 from last year.

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

Selling and marketing expenses were $20.1 million, much lower than $24.8 million last year.

As a percentage of total net revenues, selling and marketing expenses accounted for 25.7%, a decrease from 27.7% last year and 36% last quarter.

Selling and marketing expenses per order improved to $9.97 from $11.4 a year ago.

G&A expenses were $9.8 million, or 12.5% of total net revenues, compared with $11.5 million, or 12.9%, of total net revenues last year.

G&A expenses includes $3.9 million in technology investment compared with $3.7 million during the same period 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 income was $7.1 million, a substantial turnaround from a non-GAAP net loss of $6.9 million that we recorded in the second quarter of 2014.

Non-GAAP net income per ADS was $0.15 compared with non-GAAP net loss per ADS of $0.14 in the same quarter of last year.

As of June 30, 2015, we had cash, term deposits, and restricted cash of $56.8 million.

As of June 30, 2015, we had repurchased a total of $17.7 million of our ADS as part of our share repurchase program.

This was extended for an additional 12-month period through December 15, 2015.

For the third quarter of 2015, based on our estimates of foreign exchange depreciation against the US dollar, we expect our net revenues to be between $67 million to $70 million.

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

This concludes our prepared remarks.

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

(Operator Instructions).

Rick Shea, Vardon Capital.

I just wanted to know when you thought customers would see the product offering from Aokang available.

Rick, this is Alan.

We actually just started off some small trial programs with Aokang.

There's a very small number of product offerings as a trial that it's already online that people can buy from.

But we think in general we are still in our final planning phase with Aokang with bigger scope of collaboration.

But the initial trial has already started.

Okay.

And what percent of their full branded offering would you expect would make it into the relationship with LightInTheBox?

I think from our -- based upon our relationship, they certainly have a very open mind that basically open the whole selection of their products that are available for us to choose from, and also would like to provide us with very good prices and terms.

We are still doing research to look into the products that matches our customer bases, but we feel very positive about the match because Aokang not only is the number 1 men's shoes manufacturing brand in China, they also have a long history of doing OEM manufacturing for many major US and foreign brands.

So they are quite familiar with the western customers with their manufacturing and design capabilities.

Great.

Thank you.

Good job in a tough environment.

Xiaonan Bian, CITIC Securities.

This is Xiaonan from CITIC Securities.

I have two questions.

The first is that I know that it is for the first time there is decline in both the number of customers and the number of orders.

Could you please explain the reason why these two metrics are declines for the second quarter?

And secondly, the second question is that could you please shed some light on why there is a big improvement on the non-GAAP gross margin for the second quarter over second quarter last year?

Thank you.

So I will take the first one and I think Robin will actually explain the second one in details.

I think we actually talked about our strategy last quarter.

Just fast backwards, during last Q4, it was a huge, very sudden climate change in the currency market, particularly in euro, which caused us to shifting our strategy from acceleration of growth which happened the second half of last year to a more conservative strategy in terms of improving operational efficiency which we were running full speed executing in Q2 which related to a couple of initiatives.

A is to reduce the marketing spending.

As you can see from our financials, we actually significantly reduced the marketing spending, which certainly slowed down our new customer acquisition across the board.

And secondly, we were also more focused on the markets or sectors where we have a higher profit, gross profit margin structure, and also have a bigger profit potential.

We certainly cut down our investment in some of the developing countries where they get hugely hit by the currency problem such as Russia, such as Brazil, etc.

We also focus more on the categories with bigger margin, and we certainly reduce our investment into the categories where the margins are thinner, which will also as a result slow down our new customer acquisition.

I think those -- both the general strategy shift and also our alignment of investment and geographic and category focus really caused the reduction of the new customer numbers.

And also, I want to remind you on top of that, because the currency fluctuation, so the total number of revenue on top of that also reduced due to our currency fluctuation as well.

So I think those three things combined together which caused you to see a GAAP reduction of revenue and order numbers.

But we feel strongly that even though we have slightly smaller number of packages and new customers, we actually have better quality customers.

The customers who will generate more life-time value and also more profit-wise over the time, we think it's a very strategically selectively picking up of customers and the categories we choose, which is perfectly in line with our cost cutting and efficiency improvement strategy and program.

And then I will let Robin to answer the gross margin question.

Hi, Jona.

It's Robin.

Actually, just add one point.

We have a better average order size in Q2 which really prove we are in the better customer base than before.

Regarding gross margin, when you look at our non-GAAP basis, we are at 46.1%, and even for the GAAP basis we improved about 3.5% sequentially versus Q1.

I think that's a really positive traction we can see when we do the supply chain realignment, and we put lots of hard work to improve our supplier quality and also to try to reach the direct manufacturers.

We see the positive results for that.

And also, as you know, our cost of products also include shipping products based on our experience and our networks in the overseas logistics where we allow our shipping networks and better rate of the suppliers also contribute some of the cost reduction in the shipping costs.

Based on these two reasons, we have a better gross margin than before.

Okay.

Thank you, Alan and Robin.

Just a follow-up question.

What do you expect these three metrics,total number of orders, total number of customers and the gross margin for the third quarter this year?

Could you please give some guidance on these three metrics?

Thank you.

Hi.

It's Robin.

Actually, we -- in general we don't provide the guidance for that, but what I can say, with the realignment in the supply chain and our cost reduction that we focus the primary market, I think we are in the right direction to get a better future.

Okay.

Thank you.

John Harrell, Harrell Associates.

Congratulations on finally turning a profit on the non-GAAP line.

Listen.

With Q3 forecasted revenues of $67 million to $70 million, do you guys foresee the Company once again turning a profit on a non-GAAP basis, just like you did in Q2?

Actually, as I said before, we don't provide the guidance for the bottom line.

What I can say here is we are in the right direction to implement our strategy.

Just to add on Robin's point, I think our operational focus is certainly continuing to improve our operational efficiency as our number 1 focus while we are doing other initiatives, as I laid out.

But I also want to remind that we are doing so without sacrificing our long-term business perspective, also without sacrificing our customer satisfaction.

And also, it's very important to remind that in our business, we have a natural seasonality of Christmas holiday season which will happen right after Q3, so a lot of efforts of the second half.

Now the Company is really focused on building the right momentum and the right foundation for the Q4 which will be the biggest quarter from a seasonality perspective in our business which will come in the next months.

Okay.

Thanks.

I've got one follow-up question.

Back in 2013, the Company instituted, enacted a 20 million share buyback, or $20 million buyback, a pledge you're now at close to having that matched out.

Is the Company confident enough in its cash position, in its cash flow, in its future business, to enact yet another share buyback, or is this going to be it?

Actually, we are very confident for the future of our business with the implementation of our various strategies, and we have the -- I think we have the cash position to support us to fulfill our goals.

And about the buyback, I think that depends on the Board decision.

Yes.

Very good.

Well, thank you.

(Operator Instructions).

As there are no further questions, I would now like to hand the conference over to Mr. Christian Arnell.

Please go ahead.

Thank you.

This concludes our second-quarter 2015 earnings conference call.

Thank you for your participation and ongoing support of LightInTheBox.

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

If you have any questions, don't hesitate to reach out to us.

Thank you very much.

Thank you.

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

Thank you all for participating.

You may disconnect your lines now.

Good day.