Vipshop Holdings Ltd (VIPS) 2012 Q3 法說會逐字稿

Thank you for standing by and welcome to the Vipshop Holdings third-quarter 2012 earnings conference call. (Operator Instructions) Please be advised that this conference is being recorded today, Wednesday, November 14, 2012.

I would now like to hand the conference over to your speaker today, Ms. Millicent Tu, Investor Relations Director. You may begin.

Thank you, operator. Hi everyone and thank you for joining Vipshop's third-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 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, is/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 obligation to update these forward-looking statements.

Joining us on today's call are Eric Shen, Chairman, 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 to Mr. Eric Shen.

We are very excited to announce that we have achieved net income profitability on a non-GAAP basis for the first time in our Company's history. Our success was led by our exceptional financial and operational results across the board, validating the value proposition we provided to our both consumers and brand partners.

During this quarter we continue to deliver robust operational growth, with total orders growing by over 158% year-over-year to $5.4 million and active customers growing by over 174% to over 1.7 million. This tremendous growth in our two key metrics continues to demonstrate the network and the scale effects inherent in our flash sale model. As we continue to increase our sales events and product selections, we are able to attract more brands which want to partner with the biggest player, which in turn further drives user traffic towards our sites.

Moreover, we believe that this achievement is a testament to our proven execution capability of not only rapidly expanding our business scale but also of consistently improving our bottom line. Through growing leverage in our business model and the improved operational efficiencies, we continue to expand our gross margin and reduce operating expenses as a percentage of revenues, even during this quarter which is our seasonally low quarter. Donghao will give more details on this later.

As China's e-commerce ecosystem continues its rapid expansion, we remain focused on providing our retail partners efficient and top-notch experience in monetizing their merchandise while preserving the brand identity. As of October 2012 we have increased the number of brands in our sites to over 5,000, from around 3,400 at the end of June.

Having succeeded in emerging out of China's competitive e-commerce industry, Vipshop has become one of the premier sales channels for brands in China. Building upon our expanding business scale, which in turn is increasing the barrier to compete against us, we believe that Vipshop is poised to become China's premier e-commerce destination for Chinese shoppers seeking branded products at attractive prices.

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, our expanding leadership position in China's evolving e-commerce industry. Secondly, our solid results for the quarter and improved operational leverage. And lastly, our logistics expansion strategy going forward.

As Eric highlighted earlier, we reached a major milestone in achieving profitability this quarter, a rarity in China's competitive e-commerce space. During the summer, which is our seasonally low quarter, not only did our revenue growth exceed our expectations, but we were also able to further expand our gross margin to 22.3% and reduce fulfillment expenses as a percent of revenues to 13.9%.

This growth has further demonstrated the strength and scalability of our business model. As the brand-savvy shoppers increasingly search for good deals on products from their favorite brands, Vipshop has increasingly become the default shopping destination for 1.7 million customers.

To give you an example, according to iResearch for the first half of 2012 Vipshop had the highest monthly repeat purchase rate among all the e-commerce companies in China, at 82.4%. This is far ahead of the industry average and our closest competitors. Defined as the number of repeat customers as a percentage of total active customers, this metric clearly showcases the growing loyalty and satisfaction customers have towards our website.

In addition, the strong growth in traffic and sales volume has enabled us to continue to realize economic benefits, as our business scales rapidly. With the right strategies in place we continue to garner increased bargaining power with brand partners and logistics partners, as well as enhanced utilization of our warehouse capacity, resulting in further improvement in margins across the board.

As China's retail and e-commerce industries continue to expand alongside its growing middle-class, we remain well positioned to benefit from these long-term secular growth trends. By providing the increasingly affluent Chinese with their desired retail products at attractive prices, as well as being a viable option for leading labels to quickly monetize their inventories, we are confident our market leadership will continue to strengthen.

Moving on to our quarterly financial highlights, net revenues for the third quarter of 2012 increased by 197% to $155.9 million from $52.5 million in the prior year. As Eric discussed earlier, this tremendous growth was led by the strength in our two key metrics.

Specifically, total active customers increased by 174% to 1.7 million and the number of total orders increased by 158% to 5.4 million over the quarter. This increase was primarily due to the Company's addition of several regional subsites in 2011, as well as continued efforts to optimize brand and product selection, increase the number of sales events, and increase the number of SKUs available on our website.

In addition the Company's regional warehouse expansion into Shanghai, Chengdu, and Beijing has enhanced our ability to accommodate increased demand from end-customers. With our distributed logistics facility and regional websites targeting specific markets, we have significantly improved our ability to access many underserved second- and third-tier cities, greatly increasing our market scale and footprint.

Like Eric highlighted earlier, this growth continues to demonstrate the network and scale effects associated with the value we provide for our growing base of brand partners and customers. 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 margins further improving to 22.3% from 19% in the third quarter last year and gross profit increasing by almost 250% to $34.8 million. As you can see, our top-line 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 39% year-over-year to $38 million.

More specifically, fulfillment expenses increased by 90% to $21.7 million for the third quarter of 2012 from $11.4 million in the prior-year period. This is primarily reflecting the increase in sales volume and number of orders fulfilled.

As a percentage of net revenues fulfillment expenses decreased to 13.9% from 21.8% in the prior-year period and 15.2% in the second quarter of 2012. As we discussed 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 cost while improving delivery times to our end-customers.

Marketing expenses increased to $7.3 million from $4.6 million in the third quarter last year. As a percentage of net revenues, marketing expenses decreased to 4.7% from 8.7% in the third quarter last year and 4.9% in the second quarter of 2012. We believe this further proves the effectiveness of our marketing strategy in driving sales and traffic through a disciplined marketing spend approach.

As Eric highlighted earlier, by maintaining customer satisfaction we were able to realize the significant cost benefit of word-of-mouth referrals. This has allowed us to grow our customer base with limited investment in sales and marketing, while enhancing our brand reputation at the same time.

In addition we have been diligently evaluating the effectiveness of our various promotional measures to optimize our advertising ROI, whereas many of our China's largest e-commerce companies have to spend aggressively, eroding profitability in order to sustain their user traffic growth.

Technology and content expenses increased to $3.2 million from $1.2 million in the prior-year period. As a percentage of net revenues, technology and content expenses remained stable at 2.1%, compared with 2.3% in the prior-year period and 2% in the second quarter of 2012. This is a part of our continued efforts to invest in our website and IT system to better support future growth.

General and administrative expenses decreased to $6.3 million from $10.4 million in the prior-year period primarily due to decreased stock-based compensation expenses. As a percentage of net revenues, general and administrative expenses were 4.1%, compared with 19.7% in the prior-year period and 4.1% in the second quarter of 2012. The cost reduction reflected our Company's continued cost control efforts and increased operational leverage.

Moving on, our loss from operations for the third quarter of 2012 was $3.3 million compared to a loss from operations of $17.4 million in the prior-year period, reflecting the growing scale of our Company's operations, improved gross margin, and cost controls. Operating loss margin improved to only 2.1% from 33.2% in the prior-year period and 4% in the second quarter of 2012.

Non-GAAP loss from operations, which excludes the impact of share-based compensation expenses, for the third quarter of 2012 decreased to $1.2 million from $10.7 million in the third quarter of 2011. Non-GAAP operating loss margin improved to only 0.7% from 20.3% in the prior-year period and 2.8% in the second quarter of 2012.

Our net loss attributable to ordinary shareholders for the third quarter of 2012 decreased to $1.5 million from $17.5 million in the third quarter of 2012. Net loss margin improved to only 0.9% from 33.4% in the prior-year period and from 4.3% from the second quarter of 2012. Net loss attributable to ordinary shareholders per diluted ADS was $0.03 compared to $0.76 in the prior-year period. Non-GAAP operating loss margin improved to only 0.7% from 20.3% in the prior-year period and 2.8% in the second quarter of 2012.

Our net loss attributable to ordinary shareholders for the third quarter of 2012 decreased to $1.5 million from $17.5 million in the third quarter of 2012. Net loss margin improved to only 0.9% from 33.4% in the prior-year period and from 4.3% from the second quarter of 2012. Net loss attributable to ordinary shareholders per diluted ADS was $0.03 compared to $0.76 in the prior-year period.

Non-GAAP net income attributable to ordinary shareholders, which excludes share-based compensation expenses, was a positive $641,000 compared to a non-GAAP net loss of $10.8 million in the third quarter of 2012. Non-GAAP net margin was 0.4% compared with a non-GAAP net loss margin of 20.6% in the third quarter of 2011 and a non-GAAP net loss margin of 3.1% from the second quarter of 2012. Non-GAAP net income attributable to ordinary shareholders per diluted ADS was $0.01 compared to a non-GAAP net loss of $0.47 in the prior-year period.

As of September 30, 2012 the Company had cash and cash equivalents of $91.9 million and short-term investments of $40.1 million. For the third quarter of 2012, net cash from operating activities was $17 million.

Lastly, I'd also like to update you on our warehouse capacity expansion strategy. We are already in the process of moving into the 80,000-square-meter leased facility in Guangzhou, which more than doubles the size of our current warehouse in South China.

In addition to meet our growing demand in Eastern China we currently planning to lease a 100,000-square-meter warehouse in Shanghai, instead of building our own facility as we initially planned. At this stage of our expansion, we believe this is the most expedient and prudent way to obtain the large warehouse capacity we require in a short time period.

Looking at our business outlook, for the fourth quarter of 2012 we expect our net revenues to be between $235 million and $240 million, representing a year-over-year growth rate of approximately 123% to 128%. As a result, for the full-year of 2012 we expect our net revenues to be between $627 million and $632 million, representing a year-over-year growth rate of approximately 176% to 178%.

These forecasts reflect our current and preliminary view on the market and operational conditions, which are subject to change. With that, I would now like to open the call to Q&A.

(Operator Instructions) Alex Yao, Deutsche Bank.

Hi; good evening, everyone, and congratulations on a strong quarter; and thank you very much for taking my question. I have two questions. Number one is: can you talk about the driver behind the strong traffic growth during the quarter? And have you felt any impact from Taobao's recent November 11 events?

A related question is: how are you going to implement your marketing strategy in the next few quarters?

And the second question is on the logistics side. The logistics expense as a percentage of total revenue is trending nicely down over the past several quarters. Where do you see this ratio will stabilize, and when will that take place? Thank you.

(spoken in Chinese)

(spoken in Chinese)

Alex, just to answer your questions quickly, for Vipshop our marketing strategy is primarily based on a word-of-mouth and referral strategy. And during the past quarter the traffic was primarily driven by referral and also our personalized marketing strategy.

As for the Taobao's super sales on Double 11, Taobao has spent a lot of effort and energy to boost their sales. But on that day we haven't launched very aggressive marketing or promotion, but we recorded approximately 15% sales increase on that day, because for Vipshop we offer a value proposition to customers and brand partners.

And going forward I think for the marketing strategy we will continue to use our word-of-mouth referral plus performance-based marketing strategy. Donghao, would you like to take the second question, which is the logistics expense?

Yes, sure. Hi, Alex. Thank you very much for the question. Well, you are right. If you look at the past several quarters, our logistics costs as a percentage of revenue have trended down pretty consistently; and we believe that there is still room that we can further reduce our logistics expenses as a percent of revenue through primarily two operational strategies.

One is the expansion of our warehouses and warehouse space. As of today we have four locations across the country, with a total of 120,000 square meters; and we do have a pretty aggressive plan to expand our warehouse space to 400,000 square meters by the end of next year.

By the expansion of our warehouse facilities we can further improve the operational efficiencies in our warehouse and implement automation systems that will help us further reduce our labor cost. Secondly, we are going to shift more towards less-expensive local courier companies, rather than large but more expensive national courier companies that will help us further reduce our fulfillment expenses.

Thank you. If I may follow up with one housekeeping question, what is the return rate for the quarter? And where do you see this trending? Thank you.

(spoken in Chinese)

(spoken in Chinese)

Okay, Alex, Eric just mentioned that for the third quarter of this year the return rate is 19.2%, down from 20.8% in the second quarter this year. And Eric would like to point out that, compared with that of international players, our return rate is not high at all. For many overseas apparel e-commerce players their return rate is between 25% and 30%.

And another thing is we should also recognize that if we make it hard for customers to return unsatisfied purchases, it will negatively impact our customers' shopping experience, which may jeopardize our sales.

Got it. Thank you very much. Very helpful. Congratulations again on a strong quarter.

(Operator Instructions) Gene Munster, Piper Jaffray.

Good evening, good morning, and congratulations. I will add my congratulations. Two questions.

One is, you mentioned some of the strength in the growth came from adding some regional domains in 2011. I guess, are there potential other ones you could add?

And separately, you talked about increase in the number of sales events. How many more sales events can potentially be added? And how should we think about that impacting overall growth going forward? Thanks.

Sorry, Gene. We didn't hear quite clear on the first question. Could you please repeat that?

Yes, I'm sorry about that. I was just saying that you mentioned some regional sites were added in 2011. I thought you had mentioned regional sites were added in 2011. And I wanted to see if there is other sites that could be added.

And separately is, in terms of sales, the number of sales events, you said that that had increased in the quarter. Is there a metric around that?

And how is that trend going to go forward? I mean is there -- potentially how many sales events could you add over time? That may be helpful for just thinking about growth longer-term.

Okay, sure. (spoken in Chinese)

(spoken in Chinese)

Okay. Gene, you are right; we launched three regional websites last year, and at the moment we have four. Eric just said for this year and then going forward for next year we do not have tangible plans to add more regional subsites at this moment.

As for your question on sales events, in the third quarter this year we totally conducted about 7,400 sales events, up from 5,300 in the second quarter this year, and up from 1,900 in the third quarter of last year. Obviously our top priority is to -- we will continue to add sales events, but that will not be endlessly. Because we want to prioritize our product selection to make sure that they meet customer demand and the fact that they offer the premium product selections for our customers.

Okay. Just to make sure I got that straight, so in the next year we shouldn't expect another step increase in the number of sales events? It's more or less going to be consistent with this 7,000-plus number; is that safe to say?

(spoken in Chinese)

(spoken in Chinese)

Okay. So just to give you an idea, Gene, in the third quarter this year we had 7,500. Say for the last quarter of this year we expect that number to increase to 8,000 to 9,000. What we are saying is we will not overnight or at a very short period of time increase our sales events significantly.

Okay, great. Then just I guess one final question, just in terms of the pricing environment and the competitive environment. How has -- has anything shifted on that front, as far as competition getting more price aggressive, that may impact your business? And I will leave it at that; thank you.

(spoken in Chinese)

(spoken in Chinese)

Okay. Gene, our gross margins, obviously the bargaining power will be increased as our sales increase. To give you an example, typically for one sales event it lasts for five days. If we can help suppliers to monetize 1 million versus 8 million within five days, the pay rate that we can negotiate or we can secure is quite different.

Obviously the gross margin will benefit from the economic scale. But going forward we do think that we are going to keep our gross margin in a healthy ecosystem to be in a reasonable range.

We expect that to be in the range of 26% to 28%. We say this because for T.J. Maxx, as a reference, their normalized gross margin is between 27% to 28%. So we think our longer-term actual gross margin will be in line with that figure.

Okay, great. Thank you. Congratulations.

Gene, I want to add something back to your question. Our sales revenue and top line is not dependent on the number of sales events, but rather on the sales amount per event. So going forward we are primarily going to focus on how to increase the sales amount per sales event, instead of increasing the sheer number of events.

Okay. That's helpful. Thank you and congratulations.

Thank you.

(Operator Instructions) Ming Zhao, 86Research.

Thank you for taking my questions. I have got two questions here.

The first question, on your fourth-quarter guidance, you continue to show a big quarter-over-quarter increase. So my question is, this typical seasonality -- or would you say this typical seasonality would lead to operating margin turning positive for the quarter; and then into Q1 next year you are going to see another negative seasonality; then you are back to the negative operating margin?

So just want to understand the seasonality's impact on the margin here. That is my first question, and I have a follow-up.

Thank you very much for your question. Well, there is seasonality in our business. And you are right; Q4 is typically our peak season in the year. But -- and Q1 is relatively a low season compared to Q4 because of the impact of the Chinese Spring Festival holidays.

But -- and if you look at the financials of this year, our Q1 this year had a total revenue of $101 million compared to $103 million at Q4 last year. So there is some seasonality, but if you compared Q1 to Q4 the difference is not that significant. So I wouldn't say the seasonality will have that much of an impact on our profitability Q-over-Q.

Okay. So second question is really about the mix of the products that are sold on your platform. What is the percentage of the sales are for those, let's say the proprietary -- you act as the principal? And what is the percentage that you actually act as the agency? Meaning the percentage of the sales coming from you take a take rate?

Well, we work with our partners in terms of our gross margin in primarily two ways. One is we buy upfront the inventory from the brand partner; and then we put a markup on top of our cost.

And the other way is we take a take rate from the gross sales amount of the sales event on our website. As of today -- go ahead.

Yes, my question is actually exactly what you are talking about, the breakdown of those two segments and their impact on the gross margin going forward, because one may go faster than the other. I just want to get a color on that.

Well, it really depends. Sometimes we have more business on the markup base; and some other times we have more business on the take-rate base.

But if you compare these two business models, the gross margins are pretty much the same. We have a minimum requirement on a gross margin in doing business with our brand partners. So we don't see a significant difference in terms of gross margin in the two pricing methods.

Okay. So you're basically saying the two segments are roughly at a similar level for the past three quarters. Is that understanding correct?

No, I wouldn't say this. In the past few quarters we don't -- for the majority of our inventory we don't pay upfront, which means we charge our brand partners on a take-rate basis. And that is actually one of our advantages for our business model: a very light working capital business model, and that also leads to a very favorable cash flow position in our business.

Okay, thank you.

Thank you.

Andy Yeung, Oppenheimer.

Hi, good evening. Thank you for taking my questions. My first question is about your expense level.

Looking at fulfillment expense this quarter, as a percentage of revenues it definitely has declined both on a year-over-year basis and on a sequential basis. So just a question about what is driving the lower fulfillment expenses in terms of your revenues?

And also how should we think about, in the longer run, fulfillment expense as a percentage of revenues beyond 2012, perhaps into 2013? How should we think about that?

Well, you are right. In the past quarters our fulfillment expenses have come down pretty significantly and consistently as a percentage of revenue. And there are two main drivers behind that: one is expansion of warehouse space, and the other one is our shift from large, expensive, national courier companies to smaller but high-quality and less-expensive local courier companies.

Going forward we do believe that there is room for us to further reduce the fulfillment expenses as a percentage of revenue. As I said earlier we do have a very aggressive plan to expand our warehouse space from the current 120,000 square meters to 400,000 square meters by the end of next year; and we are going to continue to shift more of our deliveries from expensive national couriers to local courier companies.

So going forward we are very confident that we will be able to further decrease the fulfillment expenses as a percentage of revenue from the current level.

Okay, great. Okay, got it. Then my next question is just overall about the competitive landscape. I think in China if you look around, some of the e-commerce space, as a segment of the e-commerce space we are seeing some industry consolidation. Or perhaps some companies are closing their door because of lack of funding.

In terms of in your space, in this Web sales subsegment, have you seen any change in your competitive landscape? And if there's any impact from other e-commerce companies on your overall sales and/or expansion plans?

(spoken in Chinese)

(spoken in Chinese)

Andy, I just would like to summarize what Eric just said. Obviously, you are right; there is some early consolidation in the industry, and the competitive landscape there is severe. We are facing two major types of competitors.

First it's from the flash sales players, such as FClub, [i-hash], all of which we have grown to be multiple times larger. And secondly, we have competitors such as large e-commerce platforms, as Tmall, which we do not compete with them directly, however our customers have overlaps.

But along the way we do have competitors, but we have not grown out of a greenhouse. In fact we have always had competitors, and we have further distanced our distance between the second-largest player in the flash sales segment.

And in terms of the price war, we have not -- it has not affected us because our products are quite unique, and we are primarily focused on flash sales which makes it hard for consumers to do price comparison.

Great. Thank you. Again, congratulations on good quarterly results.

Thank you.

Thank you, Andy.

At this time there are no further questions. I would like to turn the call back over to Mr. Donghao Yang.

Well thanks, everyone, for coming to our earnings conference call and looking forward to speak with you again next quarter. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.