Vipshop Holdings Ltd (VIPS) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to VIP Holdings' first-quarter 2012 earnings conference call. At this point, I would like to turn the call over to Ms. Millicent Tu, Vipshop's Director of Investor Relations. Please proceed.

Thank you, operator. Hi, everyone, and thank you for joining Vipshop's first-quarter 2012 earnings conference call. Before we begin, I will read the forward-looking statement.

During this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations, assumptions, estimates, and projections about Vipshop Holdings Limited and its industry.

All statements other than statements of historical fact in this release are forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as anticipate, believe, continue, estimate, expect, intend, is likely to, may, plan, should, will, aim, potential, or other similar expressions.

These forward-looking statements speak only as of the date hereof and subject to change at any time, and we have no obligation to update these forward-looking statements.

Joining us on today's call are Eric Shen, Chairman and the Company's CEO and Cofounder; and Donghao Yang, the Company's Chief Financial Officer. At this time, I would like now to turn over the call to Mr. Eric Shen.

Okay, welcome, everyone, to our first earnings conference call as a public company. To begin with, we would like to thank our employees for their contributions. They have helped us build Vipshop into China's leading online discount retailer for brands. Moreover, we want to also thank our shareholders for their support and the confidence in our team.

This has truly been a significant culture for us. First of all, we successfully completed our initial public offering on the New York Stock Exchange. In addition to this important milestone, we continue to build upon our market leadership and increase the distance between Vipshop and our competitors.

Not only did we experience triple-digit year-over-year topline growth, but we also improved our bargaining power with suppliers, which resulted in continued gross margin expansion.

Operationally, we also continued to adjust our strategy to better service our custom and brand partners. We have brought down and will continue to bring down our fulfillment expenses by shifting towards [regional] delivery companies while expanding and localizing our warehouse capacity.

Financially, this lowers cost. Service-wise, this brings customers and the products they want closer together for fast, more reliable shipping. We have reduced our marketing expense as a percentage of sales, demonstrating the Company's ability to control costs and leverage word-of-mouth advertising.

At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss this quarter of achievement in great details.

Thank you, Eric, and hello, everyone. To elaborate on Eric's introduction, I would like to discuss the quarter in more detail by highlighting three key areas: first, our strong results for the first quarter of 2012; second, our evolving industry and competitive landscapes as it stands today; and third, Vipshop's focus going forward.

We truly believe that, as China's leader in the discount retail space and freshly armed with funding from our IPO, we have only begun to tap into a huge market opportunity in China's growing e-commerce market. First, let's turn our attention to our performance for the first quarter of 2012 as compared to the first quarter of 2011.

We grew revenue by over 250% to $101.5 million. We achieved this tremendous growth because of strength in two of our key metrics: total active customers, which grew over 247% to over 1 million users; and also total orders, which grew over 276% to over 3.1 million orders.

Another key highlight during the quarter was the strengthening of our gross and operating margins. In China's highly competitive e-commerce market, we were able to further expand our gross margin to 21.1% due to our strengthening leverage in negotiating with the brand partners. By offering our consumers great savings on popular brands and our brand partners an effective means of monetizing excess inventory, we believe this win-win situation will continue to deliver consistently strong returns for our shareholders over the long term.

This success, combined with our ability to continue reducing fulfillment costs, attests to both the sustainability of our model and our superior operational expertise. That leads us to our second discussion point: our evolving industry and the competitive landscape as we see it today in China.

According to the Boston Consulting Group, online retail sales in China are expected to triple to more than $350 billion by 2015. It is widely expected that by this time, China will likely become the largest online retail market in the world, even surpassing the US. This growth is driven by greater consumer acceptance of e-commerce as well as the growing numbers of Internet users.

Another key reason China's e-commerce is growing so rapidly is because the off-line discount retailing market is extremely underdeveloped. There are very few, if any, true equivalents of popular US retail channels, such as outlet malls or T.J. Maxx. Because of this underdevelopment, we believe that China's online discount retail market is developing significantly faster than that in the US. And e-commerce's overall impact on China's discount retail industry will be much greater as a result.

Now let's look at our business in more detail. We are proud to be China's leading online discount retailer for brands. We believe this leadership is based on several important factors.

We have the right model. Because of China's underdeveloped discount retail market, Vipshop's unique model fills this online retail void by providing consumers with popular brands at deep discounts while enabling brand partners to efficiently monetize excess inventory without diluting their brand allure. This has already proven to be a win-win for both our customers and our brand partners.

We have the operational expertise. Our strong brand name and growing scale continue to drive expansion of our gross margin, whereas our strategy to localize our warehouse capacity and delivery partners is helping to continuously improve our operating margins.

At Vipshop, we experience short sales cycle and large volumes being shipped in and out every day. Therefore, the demand placed on our logistics and warehousing system are more sophisticated than those of traditional B2C companies.

Our expanded warehouse capacity and integrated IT infrastructure are structured to handle these unique high traffic spikes that are characterized by the flash sales model. Over the long run, we will succeed not only because we have strong topline growth, but we also have the infrastructure to support it.

Lastly, our growth and market leadership is extremely viral in nature. The way our business works is that customers want to buy from the sites with the best selection. At the same time, brands want to partner with the sites with the most customers. That means that as the biggest site with the most customers and the most brands, we have built a self-reinforcing competitive advantage that is difficult if not impossible to replicate.

Looking forward, we believe that offering our consumers great savings on popular brands and our brand partners an effective means of monetizing excess inventory will lead to further customer and brand partner satisfaction and loyalty. We are also confident that our dual focus on strong topline growth and achieving greater operating efficiencies will lead to stronger shareholder returns over the long term.

Now let's examine the financial results of the first quarter of 2012. Vipshop experienced an exceptionally strong quarter in both revenues and margins. For the first quarter of 2012, our net revenues grew year over year by 250.7% to $101.3 million from $28.9 million in the first quarter of last year. This is primarily driven by growth in two of our key operating metrics -- specifically, the number of active customers and the number of total orders.

For the first quarter of 2012, the number of active customers increased year over year by 247.2% to 1 million from approximately 300,000 in the prior-year period. We define active customers as any registered member of vipshop.com who has purchased products from the Company at least once during a given period.

For the first quarter of 2012, the number of total orders increased year over year by 276.4% to 3.1 million from approximately 800,000 in the prior-year period. This is primarily because we have continued efforts to optimize product selection, increase the number of our sales events, and increase the number of SKUs available on our website.

Our recent regional expansion to Shanghai, Chengdu, and Beijing also contributed favorably to this growth. Furthermore, for the first quarter of 2012, the number of brands also increased to 2,723 brands with 412 exclusive brands. This compares to 1,900 brands and 360 exclusive brands at the end of 2011. As our scale grows, we have also become the increasingly preferred partner for monetizing excess inventory.

For the first quarter of 2012, our gross profit increased by 335.3% to $21.4 million. Gross margin improved to 21.2% from 17% in the first quarter last year and 20% in the fourth quarter of 2011. This margin expansion is the result of Vipshop's continued growth in brand equity and bargaining power.

Brands want to partner with the biggest player. This means that, as the market leader and a partner with a history of strong performance, we are able to negotiate gradually larger discounts, decreasing product acquisition costs.

Total operating expenses for the first quarter of 2012 increased year over year by 158.7% to $30.1 million. Fulfillment expenses increased year over year by 180.1% to $16.9 million from $6 million in the first quarter last year. This primarily reflects the increases in sales volume and number of orders fulfilled.

As a percentage of total net revenue, fulfillment expenses decreased to 16.7% in the first quarter of 2012 from 20.9% in the prior-year period and 18.6% in the fourth quarter of 2011. This improvement is very noteworthy in that fulfillment expenses are not only the largest component of our operating expenses, but also critical to the customer experience.

This cost reduction was primarily due to the successful implementation of our distributed warehouse strategy. We have expanded our capacity to four warehouses, which are strategically located in Shanghai, Beijing, Chengdu, and Guangzhou. In addition, we continue to shift more fulfillment needs to high-quality local couriers, lowering our fulfillment costs while improving delivery time to our end customers.

Marketing expenses increased to $5.9 million from $1.7 million in the first quarter of last year. As a percentage of net revenues, marketing expenses remained stable at 5.8% compared to 5.7% in the prior-year period and decreased from 6.4% in the fourth quarter of 2011. This demonstrates our Company's ability to control marketing expenses by focusing on word-of-mouth advertising.

This type of advertising has proven invaluable to us. We have needed to invest little in sales and marketing as the majority of our brand equity and consumer awareness has been built through the satisfaction of past customers.

Technology and content expenses increased to $2.4 million from $0.5 million in the prior-year period. As a percentage of net revenues, technology and content expenses were 2.4% compared to 1.7% in the prior-year period and 2.8% in the fourth quarter of 2011, primarily reflecting our continued efforts to invest in our website and IT system to better support future growth.

General and administrative expenses increased year over year to $5.8 million from $3.5 million in the first quarter last year. As a percentage of net revenues, general and administrative expenses decreased to 5.7% from 12.2% in the prior-year period and 52.8% in the fourth quarter of 2011, reflecting significant stock-based compensation expense in the certain quarters.

Moving on, our loss from operations for the first quarter of 2012 was $8.7 million compared to a loss from operations of $6.7 million in the first quarter of 2011, reflecting the growing scale of our Company's operations. Operating loss margin narrowed to 8.6% from 23.2% in the prior-year period and 60.3% in the fourth quarter of 2011.

Adjusted loss from operations, which excludes the impact of share-based compensation expense for the first quarter of 2012, was $6.6 million compared to $4.2 million in the first quarter of 2011. Adjusted operating loss margin narrowed to 6.5% from 14.6% in the prior-year period and 10.6% in the fourth quarter of 2011.

Our GAAP net loss for the first quarter of 2012 was $8.6 million compared to $6.7 million in the first quarter of 2011. Net loss margins decreased to 8.5% from 23.2% in the prior-year period. Net loss per diluted ADS was $0.33 compared to $2.40 in the prior-year period.

Adjusted net loss, which excludes share-based compensation, was $6.5 million compared to $4.2 million in the first quarter of 2011. Adjusted net loss margin improved to 6.4% from 14.6%. As of March 31, 2012, the Company had cash and cash equivalents of $98.5 million.

I'd also like to update you on our warehouse capacity expansion strategy. Currently, we are renting four warehouses which are strategically located in Shanghai, Beijing, Chengdu, and Guangzhou. These facilities total 118,000 square meters.

In 2012, we plan to build a new logistics center of approximately 100,000 square meters in Shanghai. The final construction schedule will depend on when we're able to secure a location and finalize negotiations. Furthermore, we plan to lease an 80,000-square-meter logistics center in Guangzhou and expect it to be operational by year end.

Our warehouse expansion plan will further enhance our fulfillment capabilities, reduce fulfillment expense, and improve delivery times to our end customers.

Business outlook. Lastly, looking at our business outlook, for the second quarter of 2012, we are expecting our net revenues to be between $120 million and $125 million, representing year-over-year growth of approximately 196% to 208%.

With that, I would now like to open the call up to Q&A.

(Operator Instructions) Catherine Leung, Goldman Sachs.

(technical difficulty) through your regional websites, which I believe were also launched within the recent few months. Thank you.

Hi, Catherine. Thank you for your question. But we didn't hear your first part of the question. Could you please repeat it?

Yes, so my first question was really in terms of the gross margin improvement that we've seen. Does this reflect any mix shift in terms of product categories, for example, a shift towards some higher-margin products, or does this primarily reflect your ability to negotiate better take rates from the suppliers?

Okay. Actually, our product mix hasn't changed much in the last quarter compared to the quarters in 2011. The gross margin improvement was primarily due to our greater negotiation power with our suppliers as our sales volume grows.

Okay, great.

Your second question, I'm sorry.

Yes, I think you spent a good amount of time discussing your expansion of warehouses into some other cities outside of Guangzhou, where you are headquartered. I was wondering if you could elaborate on how these regional warehouses are enabling you to drive more traffic through your regional websites and how that, in turn, is also helping you to drive more revenue growth.

Well, outside Guangzhou, we have three more warehouses in Shanghai, Beijing, and Chengdu. Those warehouses are strategically located to cover the most important economic regions in China. Shanghai for east China and Beijing for north China and Chengdu for west China.

And the expansion of our warehouses has enabled us to be able to provide more brand, more sales events, and more SKUs to our suppliers. Basically, a better selection for consumers. That helps us a lot to attract more consumers' traffic to our website and grow our topline.

Are you able to determine with detail in how are the regional websites different from each other, in terms of the product selection or the number of sales events?

Well, China is a big country. For example, in March and early April in Guangzhou, it's pretty warm. People were wearing T-shirts, but in Beijing in the northeast of China, people -- it was still snowing very heavily and people were wearing heavy coats.

So for each of our regional websites and regional warehouse, we provide products tailored to the needs of local consumers.

For example, we may offer T-shirts in Guangzhou in March or early April, but offer heavy coats in Beijing, and Shanghai, even. So the regional website and warehouses have enabled us to cater more to the local consumers' needs and to sell -- to drive more traffic and sell more product.

Okay. Just a last follow-up. In terms of the number of sales events on these regional sites, how many in total sort of unique sales events are available through these different sites?

Well, each website we offer 17 to 20 sales events a day. So for four websites, we offer roughly anywhere between 70 to 80 sales events every day.

Okay, got it. Thank you very much.

Thank you.

Alan Hellawell, Deutsche Bank.

Congratulations, guys, on the very strong results. Very, very impressive. Would love to have just a very, very general update on how return rates might trend through the rest of the year, assuming you would like to see them go down and what measures you would be taking to ensure that return rates go in the right direction?

And maybe once you answer that, I'll ask my next question, if you don't mind.

Millicent, would you please translate for Eric?

(Spoken in Chinese)

(Spoken in Chinese)

(interpreted) So the return ratio in the first quarter of 2012 was 21.8% compared to 22.3% in the last quarter of 2011. And this has already demonstrated the Company has made some improvement in this regard.

And we think that return ratio is similar to other B2C players here in China. Even if you look at some other players in developed countries like in the UK or the US, the return ratio is higher.

For example: Yuke's, their disclosed return ratio was in the range of 28%. And, of course, going forward, the Company is going to continue to take effective measures to keep the return ratio to a very reasonable level and we anticipate to keep this ratio in the range of 20% to 21% in the remaining of 2012.

Fantastic, thank very much for that very useful answer. Second and last question: I know we've discussed this in the past, but would love to get a little more color on the dynamics of negotiating price.

Donghao and Eric mentioned, with growing scale you get better terms. But is it that you've returned to the brand owner a couple quarters later and say, we can help you place twice the number -- twice the amount of product, and as a result, we would like you to legitimate a slightly higher price?

It's a critical part of the gross margin improvement, and I would love to get a good example of how that happens.

(Spoken in Chinese)

(Spoken in Chinese)

(Interpreted) Okay, so just to sum up what Eric said just now, obviously, our bargaining power with our brand partners or suppliers depends on the value of product that we can sell for them. Obviously, what these brand partners care about is how quickly we can monetize that inventory and the price to them is not all that sensitive.

So just to give you an example to demonstrate that our bargaining power has increased over time, in the last quarter of 2012 -- oh, sorry, in the last quarter 2011 -- our contract margin -- it was in the average of 23% to 25%. But in the beginning of this year, we started to see it trending up. (inaudible) 25% to 27%. So this illustrates that from a (inaudible) extent, we are able to increase our bargaining powers over our suppliers.

Fantastic. Thank you very much and congrats again on the strong quarter.

Thank you. Okay, thank you, Alan.

Gene Munster, Piper Jaffray.

Good evening and good morning, and let me just talk a little bit about the upside in the quarter. Obviously, there was a lot more than what we were expecting. Was there one or two things that you can really attribute to that upside?

Yes, well, first of all, we tend to be more conservative in our projections, and that's one reason that we beat the -- most of the analyst estimates by a pretty big margin. And secondly, we were -- we did a great job. The management team did a great job in executing our strategies, especially in terms of improvement in our operations.

If you look at our fulfillment expenses, we -- the fulfillment expenses as a percentage of sales came down from 18.6% in Q4 last year to 16.7% in Q1 this year. It was a pretty significant improvement Q over Q. And gross margin, we improved from 20% to 21.2% Q over Q.

So those metrics, if you look at those metrics, it demonstrates the ability of the management team to execute and to improve our efficiencies in our operation. That's why we were able to deliver such a great result in Q1 2012.

Okay. That's helpful. And then second, I think your results in Q1 speak for themselves about the strength of the business model, and you have a lot of open opportunity here. A lot of big markets -- a lot of that market still to capitalize on.

Some of the investor questions come around, just competition, and how do you see these results wouldn't suggest there's much of a change in the competitive dynamic. Is there any update on competition or potential competition that you think might be worth pointing out? Thank you.

(Spoken in Chinese)

(Spoken in Chinese)

(Interpreted) So just to respond to your question -- actually the Company faces two kinds of level of competition. The first is from a very -- from the industry perspective, similar type of flash sales retailer. However, if you look at our scale, we are by far distancing our competitors.

In terms of sales, we can achieve five times or eight times greater numbers compared to this type of competitor. And we are by far the number one in the online retail flash sales operation.

And then another one is the B2C competition in China. Of course, we're talking about Tmall, 360Buy, Dangdang, Suning, or Amazon. But maybe in the future we'll be facing competition from these guys, but one thing that we would like to point out is we are in a very unique niche market where we are offering branded products at very deep discount prices.

And the product that we are offering to our customers are very unique and not comparable or not in direct competition to the competitors. And of course, it enables us to avoid -- to go into the trend of the price, more of the price competition.

Okay, great. Thank you.

Thank you, Gene.

Andy Yeung, Oppenheimer.

Congratulations on a great quarter. My first question is about your warehouse expansion plan. As you expand your warehouse operations, are you also going to take on some of the last-mile logistics in-house?

And as a follow-up on that, what is your longer-term logistic plan; do you plan to incorporate more last-mile operations into your overall operations?

All right, let me translate for our CEO to answer the question. (Spoken in Chinese)

(Spoken in Chinese)

(Interpreted) So, as you may recall, we recently launched the in-house delivery in Shanghai, and it is still in the very trial periods. And obviously, from each city, the breakeven point is different and we are doing announces very carefully. And the retail in-house delivery, of course, improves the customers' experience, but we don't expect this year or early next year we're going to invest a significant amount or going to grow out to other parts of China.

We're going to adopt a very conservative approach and very cautious approach and after detailed analysis on a city -- from a city to city basis, we'll decide where we can take it from there.

Great. And my next question is about your margins and also competition. As a follow-up on the previous caller regarding your competitive landscape, obviously, you have pretty good gross margins compared to your other peers in the tradition B2C markets. Can you help us understand a little bit about the barrier to entry to flash sales markets?

And also, would you be concerned that your other peers in the traditional B2C market will be tempted to add it to your market because you have such a markedly attractive gross margin?

(Spoken in Chinese)

(Spoken in Chinese)

(Interpreted) So at Vipshop, we are very dedicated in our business, which is into online discount/sales operation. And to the brand partners, we are their preferred channel because we have the capability to monetize their inventories at a very rapid speed.

And for customers, we offer them high quality brand at very discounted price. And we -- in this industry, we have already accumulated quite a lot of experience, which is very valuable to the Company.

And the other factor to add to it -- our IT, our content and warehouse capabilities, are all designed to fit in our operation. And another thing to point out is because we provide very valuable data customer analysis feedback to the brand partners. And it makes -- all these process that Eric mentioned now make it very difficult for other players to duplicate or replicate our business model.

And obviously, we are purely into online discount/sales operations, and compared to other B2C competitors, where they might have potential conflicts between the full price and discount price, and from this respect, we are very dedicated and we are primarily into the online discount/sales business operation.

Great, thank you. Just a quick follow-up on that. Can you remind us how many brand partners do you work with now?

(Spoken in Chinese)

(Spoken in Chinese)

(Interpreted) So in terms of brand partners, we already have more than 600, but for brands alone, we have more than 2,700 brands.

Great, thank you very much.

(Operator Instructions) Mr. Donghao, do you have any closing remarks?

Again, thank you, everyone, for taking the time to join us and we look forward to speaking with you next quarter. Thank you very much.

Thank you.

Thank you.

This concludes today's call. You may now disconnect.