Vipshop Holdings Ltd (VIPS) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to Vipshop Holdings' second-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 Vip's second-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 of our Vipshop Holdings Limited and its industry.

All statements other than statements of historical fact we may make during this call 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, if, are likely to, may, plan, should, will, aim, potential, or other similar expressions. These forward-looking statements speak only as of the date hereof and are subject to change at any time, and we have no obligations to update these forward-looking statements.

Joining us on today's call are Eric Shen, Chairman and the Company's CEO and Co-Founder, and Donghao Yang, the Company's Chief Financial Officer. At this point, I would like to turn the call over to Eric Shen.

We're very pleased to announce our strong second-quarter 2012 financial results. Total orders grew by over 242% year over year to $4.7 million and [exeo] custom grew by over 227% to over $1.5 million as shoppers searched for bargain deals on products from their favorite brands.

Operationally, we also delivered a [loberd] improvement as our strong operational expertise and bargaining leverage with brands continued to grow, and as a result, our margin continued to improve across the board. Donghao will give you more details on this later, but this clearly shows both the scalability of our platform, as well as our ability to cement our lead [sheet] in China's e-commerce market for these content-branded products.

Our strategy of loading [out regionals] to the side last year have proven to be extremely effective in driving growth in both user traffic and sales volume. This strong growth in sales volume has enabled us to become the preferred partner for brands looking to monetize this excess inventory.

Looking ahead, we will leverage our increasing scale, extend our relationships with brand partners, and focus on further streamlining for [human] operations, which we believe will lead us to further improvements in our bottom-line performance. We believe it will further bring forth our market leadership in China's e-commerce markets and growth capability over the long rim.

At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss this quarter's achievements in greater detail.

Thanks, Eric, and hello, everyone.

Today, I would like to share with you three highlights as we discuss the quarter in greater detail. Firstly, China's evolving e-commerce industry and how Vipshop stands out. Secondly, our solid results for the quarter and improving operational leverage. Lastly, Vipshop's focus going forward.

As many of you know, growth of retailer e-commerce in China is being driven by two things shoppers love, branded products and attractive prices. Vipshop provides shoppers the perfect combination, branded products at discounted prices.

Chinese shoppers' increasing acceptance and comfort with shopping online are the basis of why many research houses are forecasting China's e-commerce sector will exceed the US and Japan over the next couple of years. This exponential growth has resulted in an intensely competitive market space as companies seek to benefit from the industry's rapid growth. Even though economic growth in China continued to slow during the second quarter and competition among online retailers continued to intensify, the demand for discounted branded products on our platform grew quite strong, demonstrating the countercyclical nature of our business.

Over the past quarter, we continued to witness price wars among many leading B2C e-commerce players as they attempt to build more market share. In addition, several high-profile companies are being forced to restructure or close their doors as their business models prove unsustainable.

For Vipshop, not only have we established our leadership in [flag] sales since our IPO, we have been able to pull far ahead of any direct competitors. More importantly, we are proving the viability and sustainability of our business model and operational expertise. This is evidenced very clearly through our financial performance, which I will discuss shortly. Our ability to dramatically expand revenue and margin is quite remarkable, especially in the booming yet highly competitive e-commerce market in China.

Moving on to our quarterly financial highlights, net revenues for the second quarter of 2012 increased by 233.5% to $135.3 million from $40.6 million in the prior year. As Eric discussed earlier, we achieved this tremendous growth because of the strength in our two key metrics, total active customers and total orders, both of which increased by well over 200% over the quarter.

One thing I would like to point out, too, is that on a sequential basis, net revenue grew 33.6% in the second quarter of 2012. This was primarily due to seasonality associated with the pent-up demand following the Chinese holiday season in the first quarter. This growth continues to demonstrate the network and scale effect associated with the value we provide to our brand partners and customers.

As we continue to attract more shoppers, our negotiating position with our brand partners improves. Brands want to partner with the biggest player. This means that as the market leader and a partner with a history of strong performance, Vipshop is able to negotiate gradually larger discounts, further decreasing product acquisition costs. As a result, this led to gross margin further improving to 21.8% from 18.3% in the second quarter last year and gross profit increasing by almost 300% to $29.6 million.

As you can see, our topline growth has been quite strong, but at the same time, we have been able to tightly control our total operating expenses, which increased by only 31% year over year to $35 million. More specifically, fulfillment expenses increased year over year by 143.7% to $20.5 million from $8.4 million in the second 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 15.2% in the second quarter of 2012 from 20.8% in the prior-year period and 16.7% in the first quarter of 2012.

As (multiple speakers) last quarter, 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 times to our end customers.

Marketing expenses increased to $6.6 million from $2.3 million in the second quarter last year. As a percentage of net revenues, marketing expenses decreased to 4.9% from 5.7% in the second quarter last year and 5.8% in the first quarter of 2012. This demonstrates our Company's disciplined approach in controlling marketing expenses by focusing on word-of-mouth referrals.

This type of advertising is inherent to the online flash sales model in China and 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. This is in stark contrast to many of China's largest e-commerce companies, which have spent heavily on various marketing campaigns during the past quarter to continue trying to attract customers.

Technology and content expenses increased to $2.7 million from $0.9 million in the prior-year period. As a percentage of net revenues, technology and content expenses decreased slightly to 2% from 2.1% in the prior-year period and 2.4% in the first quarter of 2012. This is a part of our continued effort to invest in our website and IT system to better support future growth.

General and administrative expenses decreased to $5.6 million from $15.2 million in the prior-year period. As a percentage of net revenues, general and administrative expenses decreased to 4.1% from 37.5% in the prior-year period and 5.7% in the first quarter of 2012. So cost reduction was primarily due to decreased stock-based compensation expenses compared to the prior-year period, as well as our continued cost-control efforts and increased operational leverage.

Moving on, our loss from operations for the second quarter of 2012 was $5.4 million, compared to a loss from operations of $19.3 million in the second quarter of 2011, reflecting the growing scale of our Company's operation. Operating loss margin improved to only 4%, down substantially from 47.6% in the prior-year period and 8.6% in the first quarter of 2012. Non-GAAP loss from operations, which excludes the impact of share-based compensation expense, for the second quarter of 2012 was $3.8 million, compared to $6.9 million in the second quarter of 2011.

Non-GAAP operating loss margin improved to 2.8%, down from 17.1% in the prior-year period and 6.5% in the first quarter of 2012. Our net loss attributable to ordinary shareholders for the second quarter of 2012 was $5.8 million, compared to $19.5 million in the second quarter of 2011. Net loss margin improved to 4.3% from 48.1% in the prior-year period and from 8.5% in the first quarter of 2012.

Net loss attributable to ordinary shareholders per diluted EPS was $0.11, compared to $0.85 in the prior-year period.

Non-GAAP net loss attributable to ordinary shareholders, which excludes share-based compensation, was 4.2% -- $4.2 million, compared to $7.1 million in the second quarter of 2012. Non-GAAP net loss margin improved to 3.1%, from 17.6% in the second quarter last year and 6.4% from the first quarter of 2012.

As of June 30, 2012, the Company had cash and cash equivalents of $115.6 million. For the second quarter of 2012, net cash from operating activities was $17 million.

Lastly, I'd also like to update you on our warehouse [with past] expansion strategy. We are on track to expand our logistics capacity with our planned move into an 80,000-square-meter leased facility in Guangzhou in Q4 2012. In addition, we are in negotiations with the government to secure a piece of land where we plan to build a 100,000-square-meter warehouse in Shanghai, and it is likely that we will begin construction sometime next year.

Looking at our business outlook, for the third quarter of 2012, we're expecting our net revenues to be between $145 million and $150 million. We are presenting year-over-year growth of approximately 176% to 186%.

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

(Operator Instructions). [Katherine Wong], Goldman Sachs.

Hi, good evening. I have two questions. Firstly, can you discuss the gross margin trends for the rest of the year, given we've seen pretty continuous improvement in the first half?

And secondly, could you discuss your price discounting philosophy and whether it's been affected by some of the intensified price competition we've seen generally in the e-commerce industry, understanding, of course, I think that the price competition has been focused mostly on the non-apparel category? Thank you.

All right, I'll take the first question. It's about our gross margin improvement trend.

And you're right. If you look at the past six quarters, including the four quarters in 2011 and the first two quarters in 2012, our gross margin has been steadily improving from 17% in Q1 2011 to 21.8% in the second quarter of 2012.

And the main driver behind the improvement in our gross margin has been the volume, the increased volume of our business. As our topline grew by over 200% year over year, we have been able to achieve greater bargaining power with our suppliers, and that's the primary reason behind the gross margin improvement.

And as to your second question, I'd like to have our -- ask our Chairman, Eric, to answer.

(Spoken in Chinese).

(Spoken in Chinese).

So just to summarize what Eric said just now, in terms of whether the price war among other e-commerce players will have any impact on our pricing philosophy, the answer is no.

There's no significant changes in terms of pricing policy and philosophy because for Vipshop, our product offering is quite unique because we are mainly offering apparel products. And for the apparel products are fashion oriented and it's not easy for shoppers -- it's not easy for others to launch a price war on items like this.

Another thing is for our apparel product, we sell both off-season inventory items and also in-season products, and also we find it's good contrast with our brand partners, so it's not easy for shoppers to shop around and compare prices with other e-commerce providers. This is illustrated in our Q2 gross margin trend, and we also made significant changes in terms of gross margin quarter over quarter and also year over year. In looking into Q3 this year, we don't think there will be any significant impact on that in terms of a pricing strategy for Vipshop.

Okay, thank you.

Alex Yao, Deutsche Bank.

I have two questions. Number one, can you talk about the utilization of your original logistics centers in Guangzhou, Shanghai, Chengdu, and Beijing, respectively? And can you talk about the investment plan, the CapEx over the next 12 months? I know you guys talked about direction of the CapEx plan in your prepared remarks. Can you talk about that quantitatively?

And the second question is now that you guys are approaching to the breakeven point, what extra effort do you need in order to break even? And when do you expect that that will be? And how would you envision the normalized operating margins will be in the longer term? Thank you.

Thanks, Alex, for the question. The first question, the utilization rate of our full warehouses, for our Guangzhou warehouse, the utilization rate is about 80% to 90%, depending on the seasonality of our business.

And for the other three warehouses, now the current utilization rate is about 50%, with Shanghai being slightly higher than that and Chengdu and Beijing slightly lower than that, also depending on the seasonality of the business.

And you asked about our CapEx plan in the next 12 months. We are currently in negotiations with the local government in Shanghai to secure a piece of land to build our own warehouses -- to build our own warehouse. And so, the CapEx -- the specific amount of the CapEx will depend on what kind of price we can get from the local government in terms of the land that we're going to acquire. If we currently estimate for a 100,000-square-meter warehouse facility in Shanghai, it's going to cost roughly about $50 million.

So for your second question, you're right that both our gross margin and net margin have been steadily improving in the past quarters, but we're not -- I'm sorry we're not giving -- providing guidance as to when we're going to break even or become profitable. But I can tell you that we're going to continue to try to leverage our volume growth to get better pricing and better price terms from our suppliers to improve our gross margin, and also we're going to make continuous efforts to control our operating costs so that we can get to the breakeven point as quickly as possible.

(Operator Instructions). Andy Yeung, Oppenheimer.

I have two questions. The first one is about your competitive landscape. I think the flash sales market is slightly different from the overall e-commerce market, and I also noticed that recently one of your competitors have received some funding from [actg] investing in the US. But at the same time, we also hear some industry layoff. So can you give us some insight into how you look at the industry competitive landscape today and how does that compare to just six months ago?

(Spoken in Chinese).

(Spoken in Chinese).

So Andy, to answer your question, just to echo to your question, Eric confirms that over the past six months, there's a lot of changes in the flash sales industry. You're right in terms of the layoffs and in terms of the flash sales plays are having a difficult time here in China.

But Eric thinks that -- because -- and they are also, your layoffs for [mattery] e-commerce players, but for us, we think this is a market -- this is a winner-takes-all market. Now that Vip has gone public with sufficient funds, we think that we are in a strong position to combat the competitive landscape challenges.

Okay. Thanks. And then, my next question is about logistics. I believe that some report that Vipshop has been applying for the courier service license. I just want to see if you can confirm that, and also just in general, what's your philosophical standpoint regarding doing the last-mile delivery versus just doing the traditional logistic and [performance] center operations.

(Interpreted). At the moment, as you know, we rely on -- the majority of our deliveries rely on third parties that is provided, and we do have a small team in Shanghai.

We have gone ahead to apply for the license. This is a strategic move. We haven't made any tangible plans to grow this out nationally because we understand that the CapEx will be -- this project or this move is going to involve a significant amount of CapEx. We continue to adopt a very conservative and cautious approach, and we do understand that China is a very huge market, but in terms of rolling out this scheme or rolling out in-house delivery -- last-mile delivery service nationally, we're still very cautious and we haven't adopted any tangible measures in this regard.

That's very helpful. Thank you so much.

Gene Munster, Piper Jaffray.

Good evening. Obviously, the results in June were spectacular for the second quarter in a row, so congratulations on that. The midpoint of the guide for September was a little bit below where analysts -- where I realize you didn't have a direct input into that. But are there any trends that are worth calling out, anything that we can associate those numbers that are slightly below for the street debt for September? Thanks.

Thank you, Gene, for the questions. Well, you're right, our topline guidance for the next quarter is probably lower than the consensus on the street, and there are a couple of reasons.

Number one, July and August, third quarter -- for the three months in the third quarter, July and August are the low seasons in the year, and the business will pick up starting from the second half of September. So overall, generally speaking, Q3 is still a low season in the year. So that's one reason.

The other reason is our strategy now is a balance between growth and profitability, and unlike the other large e-commerce platforms that have engaged in price wars in China, we have taken a very disciplined approach in terms of our marketing expenses and providing discounts -- or participating in the price war because we believe that we are in a unique position where our main product lines is apparel, unlike the other e-commerce platforms that are primarily selling commodity type of stuff, like [VC] product.

So we don't want to participate in the price war. That being said, we are not totally 100% immune from the price war, either. So some of the price wars may take some of our traffic away from us. So that's why when we provide guidance for the next quarter, we want to be conservative instead of aggressive to give the street a better and clearer idea of our topline trend.

But still, even -- for our public guidance, I guess you're right. It's slightly below the consensus, street consensus. So we can look at the numbers. Year-over-year growth is still tremendous, remarkable. It's going to be 176% to 186% year-over-year topline growth, which is much higher than the e-commerce industry average in China.

That's fair. You're not getting near the credit or even the growth on numbers that were slightly below the street, so that's a fair point. So it sounds like it's a combination of just analysts getting their handle on some of the seasonality, and separately, it's just some of the focus on profitability, so that's helpful. Thank you.

(Operator Instructions). William Huang, Barclays.

Hi, thank you for taking my call. Congratulations, you had a great quarter. Given gross margin improved nicely, can you offer the gross margin breakdown in terms of the product mix? Did you see any big changes for any particular category? Thank you.

Thank you for the question. 50% of our sales come from apparel, and the gross margin for apparel is roughly 24% to 25%. And also, we have another big category, which is sportswear. The gross margin is slightly higher than that, about 25% to 26%, and some home goods with gross margin of over 28%, and so we have some lower-margin product, like cosmetics, with gross margin around 20%.

Okay, thanks. Also, another question. Can you update the current customer churn rate? And also, how should we think about China going forward? And also, how much traffic is coming from -- is the organic traffic so far? Thank you.

(Interpreted). So the current sales rate churn [ratio] for this quarter was approximately 20.8%, which is lower than that in the Q1 of this year and Q4 of last year.

Sorry, what's your next (multiple speakers)

Yes, the question is about how many traffic is your organic traffic, assuming you will do some of the traffic coming from a [bi-door] or some other third-party website?

(Interpreted). So in terms of the traffic breakdown, about 40% of our traffic actually comes from directly in by our customers and approximately 38% from navigation. The remaining 22% comes from search engine, navigation, and other channels.

Thank you, very helpful.

(Operator Instructions). And I show no further questions. I'll now turn the call over to Mr. Yang for any closing remarks.

Well, thank you all for taking the time to join us and we look forward to speaking with you next quarter. Thank you.

Thank you.

This does conclude today's conference call. You may now all disconnect. Speakers, please hold the line.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.