Vipshop Holdings Ltd (VIPS) 2014 Q1 法說會逐字稿

Good day, everyone, and welcome to Vipshop Holdings first quarter 2014 earnings conference call. At this point, I'd like to turn the call over to Miss Millicent Tu, Vipshop's Director of Investor Relations. Please proceed.

Thank you, operator. Hi, everyone, and thank you for joining Vipshop's first quarter 2014 earnings conference call. Before we begin, I'll read the Safe Harbor 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 that we 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 unlikely to, may, plan, should, will, aim, potential, or other similar expressions.

These forward-looking statements be only as of 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 over to Eric Shen.

Hello, everyone. Welcome to our first quarter 2014 earnings conference call. We are very excited to report robust first quarter 2014 financial results. Our continued strong growth momentum and the increasing operational efficiencies were supported by our 126% year-over-year growth in net revenues to $702 million, and gross margin expansion to 24.9%.

Just as impressive was our operational performance. Our total active customers increased by 165% to 7.4 million; and the total orders increased by 129% to 20.2 million.

Moving on to our core platform, we continued to upgrade our brand mix and improve selection. We continued to do well on mobile. Mobile revenues grew by 71% quarter over quarter, and now account for 36% of our earnings, up from only 8% in the first quarter last year, our strong mobile growth proving that our flash-sale model is well suited for the on-the-go shopper.

In 2014, we think to continue to stay on top of the technical and user behavior trends. We will focus on further improving the customer experience for viewing and purchasing products across both the PC and the mobile phone platforms.

Last, our integration with Lefeng is on track, and there will be a strengthened focus in 2014. The integration will [allow us] the benefits of, 1, streamlining our cosmetic offerings; 2, reducing our combined fulfillment and the marketing expenses; and, 3, cross selling between Lefeng and Vipshop's user bases.

At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss some new growth strategies, as well as this quarter's financial achievements.

Thanks, Eric; and hello, everyone. We are proud of our first-quarter financial performance. I would like to highlight that our number of sales events, including 7,900 events from our main channels and 6,300 events from our [group-buy] channel, exceeded 14,000 in the last quarter, up 63.4% from a year ago. This compares to the 39,300 total events we held during the full year 2013, which included 20,100 events from our main channels, and 19,200 group-buy events, indicating the fast-growing output per event.

Going forward in 2014, we continue to focus on strengthening our fulfillment abilities, as well as other operational efficiencies. Warehousing expansion is key to lowering our fulfillment expenses and enhancing our ability to serve our customers. Our warehouse capacity reached approximately 350,000 square meters at the end of the last quarter, and is on track to expand to over 700,000 square meters by 2016.

Having already broken ground on two new warehouses this year, we are aggressively ramping up our warehousing capacity in order to keep up with customer demand and expand our product offering.

We are committed to further growing our product portfolio, both organically and through acquisitions, when appropriate. Our strategic [full force] expansion into cosmetics is a key element in this strategy. For us, cosmetics is an important vertical to expand into, but we also seek to cautiously expand organically, or through acquisitions into other verticals.

As we continue to invest in our growth, both internally and externally, we require additional capital to support our expansion. In March, we conducted a follow-on and convertible senior offering which raised over $632 million. The proceeds have been used to pay for the Lefeng acquisition and fund future growth initiatives.

Now moving on to our quarterly financial highlights. Before I get started, I would like to clarify that all the financial numbers presented today are in US dollar amounts; and all the percentage changes refer to year-over-year changes unless otherwise noted.

Second, I would also like to note that with our acquisition of Lefeng last quarter, we incurred additional amortization expenses. These expenses will have a downward impact on both our GAAP operating income and GAAP net income over the next few years.

Total net revenues for the first quarter of 2014 increased by 125.9% to $701.9 million, the growth of which was primarily driven by 165.1% increase in the number of total active customers, and a 129.3% increase in the number of total orders.

Gross margin for this quarter further expanded to 24.9% from 23.4% in the prior-year period; and gross profit increased by 140.3% to $174.9 million (sic - see press release, "$174.8 million"). This improvement was driven by the increased scale of our business, leading to greater bargaining power with our suppliers, as well as the development of our marketplace business. Moreover, we continued to see improvement in operating margins as a result of improved economies of scale and increased operational leverage.

More specifically, fulfillment expenses increased by 97.8% to $74.6 million for the first quarter of 2014. As a percentage of total net revenues, fulfillment expenses decreased to 10.6% from 12.1% in the prior-year period. The cost reduction was primarily due to our efforts to reduce warehousing and personnel costs and negotiate better courier rates.

Marketing expenses increased by 129% to $30.1 million. As a percentage of total net revenues, marketing expenses remained stable at 4.3% compared with 4.2% in the prior-year period.

Technology and content expenses increased by 134.8% to $18.7 million. As a percentage of total net revenues, technology and content expenses remained stable at 2.7% compared with 2.6% in the prior-year period.

General and administrative expenses increased by 146.1% to $24.1 million. As a percentage of total net revenues, general and administrative expenses were 3.4% compared with 3.2% in the prior-year period.

Driven by the growing scale of our Company's operations, improved gross margin and cost control, income from operations increased by 452% to $30.2 million for the first quarter of 2014, from $5.5 million in the prior-year period.

Operating income margin increased to 4.3% from 1.8% in the prior-year period.

Non-GAAP income from operations, which excludes share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, increased by 394.3% to $42.8 million from $8.7 million in the prior-year period.

Non-GAAP operating income margin increased to 6.1% from 2.8% in the prior-year period.

Our net income attributable to Vipshop shareholders for the first quarter of 2014 increased by 355.3% to $26.6 million from $5.8 million in the prior-year period.

Net income margin attributable to Vipshop shareholders increased to 3.8% from 1.9% in the prior-year period.

Net income for diluted ADS increased to $0.46 from $0.11 in the prior-year period.

Non-GAAP net income attributable to Vipshop shareholders, which excludes share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, increased by 318.2% to $37.7 million from $9 million in the prior-year period.

Non-GAAP net income margin increased to 5.4% from 2.9% in the prior-year period.

Non-GAAP net income for diluted ADS increased to $0.63 in the first quarter of 2014 from $0.17 in the prior-year period.

As of March 31, 2014, our Company had cash and cash equivalents of $871.8 million, restricted securities $179.1 million, and held-to-maturity securities of $332.5 million.

For the first quarter of 2014, net cash from operating activities were $84.1 million.

Looking at our business outlook for the second quarter of 2014, we expect our total net revenues to be between $780 million and $790 million, representing a year-over-year growth rate of approximately 122% to 125%. 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.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions). And we would appreciate each and every guest to limit down to one question per asking request. (Operator Instructions).

Alan Hellawell, Deutsche Bank.

Congratulations on another fantastic quarter. First quarter active customers and orders again saw phenomenal year-on-year growth. I just want to know within the 7.4 million active customers and the 20 million orders, what would Lefeng's contribution be? And perhaps, how much would come from the platform business?

And just related to that, our math suggests a sequential decline in average order size. Is that due to the lower unit price of Lefeng product, or is there any other specific reason?

Thank you.

Thank you very much, Alan, for your question. Okay. Of the total number of active customers that we had in Q1, about 1 million came from Lefeng. And of the total number of orders in Q1 that we had, about 1.3 million actually came from Lefeng.

And the -- you're right, the average ticket size in Q1 was actually lower than the previous quarter, primarily because cosmetics customers -- cosmetics orders tend to have lower dollar amount.

Alex Yao, JPMorgan.

It's Joe Wong calling for Alex. Congratulations on a very strong quarter. Actually, my question is on your strategy of future products portfolio expansion. In your prepared remarks, you mentioned that you were first growing product portfolio organically, also acquisitions. And we also noticed that in March, you actually tested the auto flash-sales model. So I'm just wondering what's the product categories or strategic areas we are focusing on.

Thanks.

(spoken in Chinese)

So to answer your question, Eric emphasized therefore our future strategy, we would still remain focused in our core categories; for example, apparel, handbags, shoes, cosmetics and home goods. And these are very important for our continuous growth and success.

We wouldn't extend into other non-core categories as yet. But for the auto sales, it's just testing the market, because we know that the majority of our customers are female and would be a good campaign to attract some males' attention.

We will consider our future category expansion based our business development stage.

Jiong Shao, Macquarie.

I'd like to follow up on cosmetics. Could you please elaborate a bit on how much is cosmetics as a percentage of the revenue now? What's its gross margin/operating margin profile currently?

And in addition, I think from the numbers you mentioned earlier, there's 1 million customers for cosmetics and 1.2 million orders. It sounds like cosmetic customers order, or any [local] customers order a bit over 1 time one quarter compared to on average 3 times for the traditional Vipshop's customers. Is that not correct? And do you have a plan to somehow make them more repeat buyer? Just some elaboration on cosmetics would be great.

Thank you.

Well, thanks, Joe, for your questions. First of all, the 1 million active customers, the 1.3 million orders were not for the first quarter -- were not for the full quarter first quarter. It was actually 1.5 months starting from the time we closed the transaction with Lefeng which was February 14 'til the end of Q1. So it's rather 1.5 months.

And you're right. The repeat purchase rates for cosmetics is lower than our core customers for apparel, and we're going to make real efforts to increase the repeat purchase rate primarily by improving by -- improving our operational capabilities.

And also, for the relevant contribution from Lefeng to the total in Q1, well, it's not -- it's pretty insignificant, less than 5% of our total, so that's why we didn't disclose that number. But I think what you're trying to understand is how big the combined cosmetics business at Vipshop is and what does that mean in terms of the competitive landscape in the cosmetics market.

And what I can tell you is for the full quarter, the first quarter 2014, the combined GMV, cosmetics GMV of Lefeng and Vipshop, was $167 million. And as far as we know, we are the second largest player in that segment and we are pretty confident that we can become the -- we can take the leadership position pretty soon, even in that vertical.

Binnie Wong, Bank of America Merrill Lynch.

I have two questions here. On the gross margin improvement seen in this quarter, would that mostly be driven by product mix optimization, or better negotiation power with supplier as our scale grows? And how should we expect the margin to trend?

And the next question is more on the technology side. Given that we have -- there's a new hire of the Vice President of Technology Company has made, could you talk a little bit more about any update on Company's R&D plan to, say, enhance product recommendation when the user log in; or any plan Company in mind to use technology to drive up the repeat customer ratio?

And lastly, just a housekeeping question on the particularly high tax rate this quarter.

Thank you.

Well, okay. Let me take your first question about the gross margin improvement. Well, it was certainly because of the growing economy of scale, the fast-growing top line, which resulted in greater bargaining power with our suppliers. And also, it was because of the growth or development in our marketplace business.

And I will leave your second question to Eric on technology.

(spoken in Chinese)

So to summarize Eric's answer, so obviously, where we have invested a lot in IT and content, we now have altogether 850 people in our IT department; and by the end of this year, we expect it to go to approximately 1,500 people.

So we have invested quite a lot in the human resources in this regard because we believe that going forward, technology competitive advantage is going to be huge in order to continue to capture success in our business.

We also invested quite a bit in [BIS data] and we have launched our effort in personalized recommendation and customer profiling. And in Q2 this year, we already started to test the different user interface for male and female customers based on their shopping pattern and purchase history, all in all that kind of data.

So hopefully, as we continue to make more progress, this is going to be a crucial asset to improve our customer loyalty and our customers' continued -- therefore increasing customer repeat purchase rate.

Ella Ji, Oppenheimer.

First question is relating to Lefeng as well. So I wonder within that 1 million active customers, how many are -- are you able to cross sell between Lefeng and the Vipshop already? And if you can share some colors on your strategy of cross selling, that would be helpful.

(interpreted) Okay. So, Ella, at this particular moment, you know that we just acquired Lefeng not long ago, and at the moment, they're still independently operating in terms of a different website, two different websites and two different systems. And ultimately, hopefully, we can have other opportunities to --

This is actually not the top priority at this particular stage, so hopefully going forwards, we'll be able to make more progress in cross selling these two sets of customers.

(Operator Instructions). Sean Zhang, 86Research.

Congratulations on the very strong result. My question is regarding the future growth. You mentioned that we were focused on our organic growth as well as acquisitions. I was just wondering, in terms of organic growth, can you give us a little bit of color of additional merchants in the first quarter, how many merchants we have now, how many brands we have now?

Also, maybe you can give us a little bit of color into the top maybe 20 or 30 brands, how much they count for our [general] revenue.

Secondly, regarding acquisitions, [Shen-Jung] mentioned that we are focused on categories such as apparel, home goods and baby and maternal products. Can we assume if there is suitable acquisition target, [Vipshop] will continue to focus on this area, or are we looking at other verticals instead of our current core area?

Thank you.

(interpreted) Okay. So, yes. So the future strategy actually to achieve more growth organically, so we wouldn't be making a great plan to do more acquisitions going forward. And as of now, we have over 9,900 [clients] that we're working with. For the top 20 suppliers, it accounts for about 12% to our revenue. For the top 10, it accounts for about less than 10% of our total net revenue.

(interpreted) So all any future acquisitions going to be strategic and supplement to our [core business]. And the purpose is to focus on our core customers, to continue to attract more loyal and sticky customers to our business.

Erica Werkun, UBS.

This is Angela calling on behalf of Erica Werkun. My question is regarding the margin. So we know the expense, the fulfillment expense as percentage of revenues continued declining over the past quarters. So what is management's [agenda] of the fulfillment expense?

Is the current level sustainable? Or do you foresee any upside or downside given the ongoing extension of the warehouse and logistics, capacity?

Well, thank you for your question. Well, fulfillment expenses, we're still pretty confident that there will be some room to improve going forward. As you mentioned, we're being very aggressive in expanding our Company warehouse space in the next three years. And by owning the warehouses instead of leasing the warehouses, we're going to be able to save some rental dollars. So that's going to be one area we can achieve some cost savings.

And also, we're going to be investing in automation systems in our own warehouses which will help us improve efficiency and reduce headcount in the warehouses.

So we believe that there is still some room to improve in fulfillment expenses, but that being said, we don't think that there is a huge room for improvement, because -- and if you look at the cost of labor, and cost of gasoline, and almost all of the costs are going up, so we're going to have some headwind going forward. So that's why there is some improvement, but not much.

Eric Wen, China Renaissance.

I've a question regarding your working capital management. It seems to me you continue to enjoy a good level of [linearity], even at the bigger and bigger size of the Company. Can you elaborate to us how scalable to do you expect this linearity to hold as your business site is getting bigger and bigger, and also your categories are getting into new areas?

Thanks.

Well, thank you, Eric, for your question, and we believe that the current working capital situation is going to be sustainable going forward, because as a retailer, we almost get paid immediately from the customers. But again -- but we have some time, sometimes one month, sometimes 45 days, before we have to pay our suppliers. So the working capital situation is going to remain favorable to us as long as we can keep growing our business.

Evan Zhou, Credit Suisse.

Congrats on a very, very strong quarter. My question was a quick follow-up on the point that we just -- which was just discussed right [there]. I think [Shen-Jung] mentioned that, I think, we will still be focusing on our key categories like female categories of apparel, cosmetics, and stuff, etc. But my question was about if we looked at our growth trajectory going forward, we're probably going to look at the actual customer size of more than 10 million.

You're close to 20 million in probably next six/seven quarters. So I'd like to know that from that point of view, with that scale, how do you see the male contribution into that kind of customer size say? And what are the specific categories that we'd like to consider to attract more male customers [down the road], maybe more like long term? I'd like to pick some of your brain on that front.

(spoken in Chinese)

So I will just for the benefit for others, I'll just quickly summarize what Eric just said.

So as you know, about 75% of our customers are female; about 25% male. But given that over the last few years the Company's cover has grown so much, actually, the absolute number of male customers has increased very significantly over time.

So our business model obviously is more [a costume beloved] by female customers, but having said that, we're not saying that we would like to exclude our male customers.

At the moment, we have categories that cater for this customer type. So we have male apparel, we have 3C, we have home goods. And going forward, we may be looking at other niche but sizeable markets, sizeable segments that might be adored by our male customers.

Chao Wang, Nomura.

My question is on the cooperation with Tencent or with WeChat. So could you share with us some data points [a program] for conversion of revenue from that source? And how does that compare to your expectation?

And also, given Tencent's investment into JD, how should we think of the partnership going forward?

And secondly, a very quick one on tax rate. It seems pretty high this quarter. I wonder if it's because the Lefeng [lot] is not -- cannot be deducted from the profit. And how should we think about the tax rate trend for future quarters?

Thank you.

(interpreted) So Chao, we launched our WeChat channel under the bank payment page, on [chat]. And at the moment, we just started the corporation with chat, and currently it's a very small, tiny percent of our business, and it's at the very early stage of the commercialization.

And with that endorsement of WeChat, we're not in a position to discuss very specific financial numbers. But as you can imagine, WeChat is an open platform and we very welcome the quality players to join. So we do foresee a lot of opportunities to pursue going forwards.

And the cooperation, or the partnership between Tencent and JD doesn't put pressure on us, because again, it's an open platform and we really need to exercise our development on mobile. And just give you some reference points for Q1, 2014, mobile sales already contributed 36% to our top line. And in the month of April alone, it reached 43.6%, so it's growing very fast.

Well, let me answer and take your second question about the high tax rate for Q1. Actually, the high taxes in Q1 had a lot to do with the adjustments required by GAAP. So that's why every quarter, in addition to the GAAP numbers, we offer you guys, to the capital markets, the non-GAAP numbers which is a much more accurate reflection on how much tax we're paying in the real operations.

Ling Tang, Goldman Sachs.

So I'm wondering about our revenue recognition. May I confirm that the 4%/5% of revenue is in terms of GMV and fully recognized in product revenue?

And another thing is that would you please give a rough breakdown of other revenue in terms of advertizing income and marketplace?

Thank you.

Okay. Well, the revenue recognition for Lefeng is actually a mix of net basis and gross basis, so it's not like we're recognizing 100% of Lefeng's GMV to revenue. No, it's actually a mix. But since it's pretty insignificant, we don't disclose that number.

And your second question, I'm sorry, can you please say it again?

On the revenue.

On the revenue. Okay, the breakdown. Okay. So in the roughly $10 million revenue line, about 70% of that revenue actually came from the marketplace, and about 30% came from the advertizing revenue.

[Wong Sing Yu], CICC China International.

Hello. Can you hear me?

Yes. I can hear you.

This [major] line seems to be experiencing some technical difficulty. Let's move on to the next question. Chi Tsang, HSBC.

This is [Joyce] calling on behalf of Chi Tsang. I think I have two questions. The first question is could the management walk through your expectations for the business over the next three years? And how it will progressive over like year 1/year 2/year 3.

My second question is could you please also give us some color on the warehouse capacity currently, the Company's view? Are there capacity constraints? Is there any specific timing for the next warehouse opening?

Thank you very much.

Okay. Thanks for asking the questions. Let me take your question/ First question is on our forecast for the next three years. Unfortunately, we don't give guidance beyond the next quarter's top line. And the reason is the business is growing very fast and it's very hard to give -- for us to give accurate forecast or guidance for the long run. And I'm sorry for that.

And your second question, warehouse capacity. Well, the current plan we've communicated to the capital market is very clear. We're going to spend $200 million to actually double the warehouse space in the next three years from the current 350,000 square meters to 700,000 square meters by the end of 2016. And our first company-owned warehouse is going to be up and running before the end of this year.

Joyce, I think Eric has a few more comments to add to your first question for the next three years' growth.

(spoken in Chinese)

Joyce, Donghao was saying that we are not in a position to give a forecast because we haven't provided any formal guidance, but just to add some more color, Eric is saying for -- to fund our future growth, we will be focused on three things.

First is to extend our customer base. At the moment, it's still very tiny, the customer penetration is very low.

And second is to continue to improve the customer shopping experience so we have happy customers and high repeat purchase rate.

And then thirdly is to use technology and mobile to driving more business.

Thomas Chong, BOCI.

I have two questions. The first question is about the second-quarter guidance. Can management give some color about how much is coming from Lefeng? And when should we expect Lefeng revenue to become meaningful? Do you think we are talking about the third or the fourth quarter?

And my second question is about the revenue growth rate. Should we expect Lefeng to grow faster than your organic business?

Thanks.

Okay. Thanks for your question, Thomas. So in our Q2 guidance, again, the revenue contribution from Lefeng will not be over 5%. So I don't think it's going to be meaningful if that's what you meant.

And when will Lefeng be meaningful? Well, we hope that it will become meaningful as quickly as possible. And actually, Lefeng's business is growing not as fast as Vipshop's core business, which is apparel, but after the acquisition, after we fully integrate Lefeng's business, hopefully we can help Lefeng catch up with Vipshop's core business in terms of growth rate as quickly as possible.

Fawne Jiang, Brean Capital.

My question actually focus on your regional penetration. I just wonder what's the current adding GMV contribution from, say, second tier and above versus below, and whether do you see -- where do you see I guess the regional penetration shift over time, and what's the I guess a rough -- [can you share] your top line growth versus your margin trend associated with that going forward? Any color would be helpful.

(spoken in Chinese)

Just to quickly summarize Eric's answer, so a lot of the people had the misconception that the majority of our revenue has been coming from tier 3 and tier 4 cities, countries. That's not true. The combination revenue from tier 1 and tier 2 is actually bigger compared to that from tier 3 and tier 4. For example, tier 2 and tier 3, we have tier 1 12% and then tier 2 almost up 40%.

We actually are facing the entire nation. I'm not specifically saying that we [cater] for tier 1 or lower tier cities; we are actually facing the entire country. So all tiers are very important for us and we'll continue to optimize our brand portfolio to improve our operations and to cater for the entire online shopping population in China.

Thank you. At this time, I'd like to hand the conference back to Mr. Donghao Yang for the closing comment. Sir.

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

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.