Vipshop Holdings Ltd (VIPS) 2014 Q2 法說會逐字稿

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

Thank you, operator. Ladies and gentlemen, thank you for joining Vipshop's second 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/are likely to, may, can, should, will, aim, potential or other similar expressions. These forward-looking statements be only as of they are 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 Mr. 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 second quarter 2014 earnings conference call. We are happy to share our second quarter 2014 earnings results, which show continued stellar growth, both operationally and financially.

We grew revenue by 136% year over year to $829m. And we added 4.1m new customers, closing out the quarter with 9.3m total active customers. Total orders on our platform also continued to grow in line with revenues to over $26m in the second quarter.

Our chief focus in 2014 is to gain market share. Our success in growing our customer base and total orders shows our early success for the first half of the year. Acquiring Lefeng fits into this strategy and has supported this push for greater market share. The integration with Lefeng has gone well. And Lefeng contributed near 2m total orders and more than 1.3m total active customers in the second quarter. We will continue to make careful investments in order to grow our business and market shares, both organically and through acquisition when opportunities arise.

In line with our goal of expanding market share, we remain committed to improving our mobile offering. This is our strong belief that our flash sale model is well suited for mobile.

With that in mind, we recently launched our first US R&D center in San Jose. This will allow us to tap the talent pool of mobile and data mining engineers in Silicon Valley by improving our R&D capabilities in the areas of big data, data mining and machine-to-machine learning. We can focus on better personalization of shopping experience on our mobile platform.

At this point, let me hand over the call to our CFO Donghao Yang so that he may discuss our plans to further improve our operational and the customer experience, as well as this quarter's financial achievements.

Thanks, Eric, and hello, everyone. Along with continuing to deliver strong growth in the second quarter, we have concurrently been working to further optimize our platform for customers and brands alike to support our goal of driving market share expansion in 2014. In line with our efforts of investing in R&D to optimize our mobile offering, we're also aggressively expanding headcount in our IT team. These investments reflect our strong belief that technology is key to expanding market share and scaling our business. Furthermore, we're investing heavily in improving our fulfilment capabilities from both total capacity and automation perspectives.

On the capacity side, we have reached a total warehouse capacity of 540,000 square meters and we are on track to meet our goal of reaching 700,000 square meters by the end of 2016.

As we ramp up our technology investments and expand our IT team, we are keen to improve automation, reduce labor costs and shorten our delivery inventory turnover cycle at our fulfilment centers. As part of our overall commitment to customer satisfaction, we will continue to make strides in improving delivery times, optimizing brand portfolios and ensuring a customer-friendly return policy.

This theme has been particularly evident in the way in which we have built our marketplace segment. In this new lucrative segment we have closely monitored customer feedback and accordingly increased the bar for suppliers to sell on our platform in order to guarantee a high level of satisfaction that is in line with our established market reputation in our traditional business.

Our technology investment in mobile R&D, headcount and fulfilment characterized our overall product-centric strategy of expanding market share by offering the best possible experience in order to attract and retain customers. The superior customer experience we provide continuously drives our marketing through word-of-mouth referrals. However, in order to accelerate the growth of our customer base and take more market share, we are also moderately increasing marketing spending in tandem with our technology investments as we believe that our infrastructure can now scale and support accelerated customer growth.

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.

Total net revenues for the second quarter of 2014 increased by 136.1% to $829.4m, the growth of which was primarily driven by a 167.9% increase in the number of total active customers and a 138.4% increase in the number of total orders.

Gross margin for the quarter further expanded to 24.8% from 23.5% in the prior year period and gross profit increased by 149% to $205.8m. 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, fulfilment expenses increased by 95.8% to $83.8m for the second quarter of 2014. As a percentage of total net revenues, fulfilment expenses decreased to 10.1% from 12.2% in the prior year period. The cost reduction was primarily due to our continued efforts to reduce warehousing and personnel costs and negotiate better courier rates, leveraging the growing order volume.

Marketing expenses increased by 196.7% to $44.8m. As a percentage of total net revenues, marketing expenses increased to 5.4% compared with 4.3% in the prior year period, reflecting our strategy to continuous expanding market share and building greater client awareness.

Technology and content expenses increased by 147.2% to $21.4m. As a percentage of total net revenues, technology and content expenses remained stable at 2.6% compared with 2.5% in the prior year period.

General and administrative expenses increased by 243% to $36.9m. As a percentage of total net revenues, general and administrative expenses were 4.4% compared with 3.1% in the prior year period, primarily due to headcount expansion and the amortization of intangible assets resulting from the acquisition of Lefeng.

Driven by the growing scale of our Company's operations, improved gross margin and cost control, income from operations increased by 251.3% to $23.7m for the second quarter of 2014 from $6.7m in the prior year period. Operating income margin increased to 2.9% from 1.9% in the prior year period.

Non-GAAP income from operations, which includes -- which excludes share-based compensation expenses and amortization of intangible assets resulting from business acquisitions increased by 349.4% to $42.9m from $9.5m in the prior year period. Non-GAAP operating income margin increased to 5.2% from 2.7% in the prior year period.

Our net income attributable to Vipshop shareholders for the second quarter of 2014 increased by 192.1% to $26.4m from $9m in the prior year period. Net income margin attributable to Vipshop shareholders increased to 3.2% from 2.6% in the prior year period. Net income per diluted ADS increased to $0.44 from $0.16 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 263.6% to $43m from $11.8m in the prior year period. Non-GAAP net income margin increased to 5.2% from 3.4% in the prior year period. Non-GAAP net income per diluted ADS increased to $0.72 in the second quarter 2014 from $0.20 in the prior year period.

As of June 30, 2014, our Company had cash and cash equivalents of $635.5m and held-to-maturity securities of $558.9m (sic - see press release "$558.8m"). For the second quarter of 2014, net cash from operating activities were $29.6m.

Looking at our business outlook for the third quarter of 2014, we expect our total net revenues to be between $850m and $860m, representing a year-over-year growth rate of approximately 122% to 124%. 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). Alan Hellawell, Deutsche Bank.

Thank you very much, and congratulations on yet another strong quarter. Questions really just around the marketing expense line. It seems to have cropped up maybe 1 percentage point quarter on quarter as a percentage of revenues. I would like to get a little bit more color, Donghao, as to what has driven that up. And I think you did mention in your comments that it might moderately increase. And what should we expect going through the rest of this year and next year? Thank you very much.

(Interpreted). Okay. So Alan, Eric mentioned a few things here. First of all, the marketing expenses increased sequentially, primarily due to two factors. First is marketing spending on mobile acceleration to acquire new mobile users. Secondly, to promote Vipshop's branding to increase our visibility among consumers in China.

And looking at our strategy, obviously, we think now is the right time to reinvest aggressively into mobile and to benefit the longer-term growth. We have some priority shift. We would like to put more priority on market share gains over margin expansion in the near term given that we have such low penetration in China and overall ecommerce market share.

But longer term we still remain very disciplined and expect to control marketing spending at a reasonable level. As a percentage to top line, marketing expenses will continue to come down longer term.

Another thing that Eric would like to add is that the thing -- the good thing with mobile is once you've spent some marketing spend in dollars to convert a unique visitor into an active customer you do not require to spend any further marketing to acquire the traffic from the app. So longer term, it will generate benefits to the Company.

Cynthia Meng, Jefferies.

Hi. Thank you, management. This is Karen calling on behalf of Cynthia. I have two questions here. First of all, can you share with us the breakdown of other revenue between marketplace and advertising?

Secondly, what's the current revenue contribution from Lefeng? And can you update us on progress of this integration in terms of supply chain, marketing, etc.? Thank you very much.

Okay. Well thank you for asking the question. Let me take this one. Well, from the other revenue line this quarter, about $8m were actually from the third party marketplace business. But we don't report Lefeng's revenue separately because it's less than 5% of our total revenue. It's relatively small and insignificant.

Alicia Yap, Barclays.

Hi. Good evening, Eric, Donghao and Millicent. Thanks for taking my questions. I have a couple of questions. One is regarding your announcement of the opening up the R&D center in the US. I'm just wondering, in addition to tap into more sophisticated engineer talents in the Silicon Valley, do you have -- also have a target to expanding your flash sales service into the US? And are these talents hard to find in China market so that you have to do it in the US? And what would be the incremental labor cost or the salary cost associated to that and has that reflected in the second quarter?

(Interpreted). So Alicia, we might have internationalization plan, but not at this particular stage. So we see US is at the forefront of the technology innovation. And the Vipshop really needs to embrace and adapt to that. And overall, by tapping into the deep talent pool in the US, we'll increase the overall technology to -- and move it to the next level.

And also you asked about the cost of that team. Well the team is still relatively small. There are about 10 people in that office in San Jose. So it's not a very significant cost for Vipshop. Not yet.

I see. Great. And then my second question is regarding -- recently you had these promotional events, called (spoken in Chinese) in August period. So should we see further increase in the sales and marketing expense? And can you remind us, is this event -- last year you also have this event in August?

(Interpreted). So, Alicia, to answer your question, we did three promotions last year; one in April, one in July and one in December so we didn't have any one in August last year. And we -- to be honest, we didn't have a fixed pattern as to when -- the frequency of running such promotions. We depend on our needs and based on our own pace.

In terms of our marketing spending, obviously we will have ROI within our team. So the dollars spent to acquire new customers will be measured against the top line and also the new customer growth.

Eric Wen, China Renaissance.

Thanks very much for taking my question. And good night, Shen Donghao and Millicent. I have two questions. The first question is can you give us more color on how Vipshop intends to expand on big data, as you mentioned, and how you would balance the incentives of your buyer's team with your big data capabilities?

And I have a follow-up question.

(Interpreted). So a lot of key elements here. So, obviously Vipshop is very, very on the forefront in terms of operating the big data. Flash sales obviously well suited for this concept and, over time, it will increase our efficiency. At the moment we have over 200 people in our big data team.

And the big data comes into two functions. First is to personalize web pages based on different customers, their preferences, their age and do some personalization from that end. And the other thing that we are looking at and actually use in the big data is to use the historical data to help our buyers to customize their merchandising.

When we effect -- when we give KPIs to buyers, we look at two things now. First is the experience and secondly is how the historical data can serve as a key function to improve their efficiency.

Thanks very much. It's very helpful. My second question is, Donghao, can you comment on the take rate of your marketplace revenue and the composition category -- merchant category composition of these revenues? Thanks very much.

On an average, our take rate of our marketplace business is between 10% to 12%. Well most of the product categories that we do on our marketplace are not -- are non-core -- are not our core product categories. For example, a lot of 3C products, general merchandise and a lot of the bulky stuff, heavy stuff, very bulky, big stuff, we do a lot of that on our marketplace. And for our core product categories, for example, apparel, cosmetics, baby and home goods, we do them ourselves.

Binnie Wong, Bank of America-Merrill Lynch.

Hi, Shen and Yang. Thank you for taking my questions. I have two questions here. I was wondering like for the older [VIP] customers, we notice that they have improved from 3.3 times -- 3.4 times last quarter to 3.5 times this quarter. And then the drag from Lefeng has started to get normalized and then we start improving in terms of the older [VIP] customers. So I was just wondering what is the trend going forward?

And then the second question is on the cosmetic side. What is the total cosmetics as a percentage of our total GMV now? I understand the combined Lefeng and Weipinhui's legacy cosmetics together as one segment. So I just want to understand that as a percentage of total what is that for this quarter?

(Interpreted). So, Binnie, to repeat what Eric said. So in Q2 actually in 2014, the average order for the customers actually is 2.8 times, up slightly from 2.7 in the first quarter. And Eric did mention that in Q3 and Q4 you would see some improvement there, especially -- in particular in Q4, whereby that is our key season of the whole year.

And in terms of cosmetic GM -- cosmetics' contribution to the total GMV, our overall cosmetics capital is growing rapidly. So during the second quarter both Lefeng and Vipshop's combined GMV accounts for $177m.

But that's -- sorry, well that's US dollars. $177m combined GMV for cosmetics from both Lefeng and Vipshop.

Chi Tsang, HSBC.

Hi. Good evening. Thanks for taking my question. I wanted to ask you about your operating margins and your spending. I know you guys talked about accelerating your spend for marketing. But the non-GAAP marketing expenses grew 50% Q on Q. So I'm wondering how we should think about that for the upcoming few quarters. And similarly your G&A on the non-GAAP basis also increased by a lot on a Q on Q basis. So just how should we think about spending for those -- both of those expense lines (inaudible)? Thank you.

Okay. Thanks for your question. On the marketing expenses, I think Eric has already explained our strategy. We're going to spend dollars to acquire more mobile traffic because it's the right time for us to do that. And then we're going to spend money to build greater brand awareness, which will benefit our long-term growth. But in the next few quarters and in the long run we're going to be very careful in terms of making sure that our marketing expenses will not go up too aggressively as a percent of revenue.

In Q&A -- in Q2 we actually booked a fairly large amount of amortization expense resulting from the acquisition of Lefeng, which was more than $9m. That was a big reason why our G&A expenses were a lot higher than compared to Q1. And you're going to see that amortization cost for the next few years because our amortization period is about five years.

Great. And also in line with that, adjusted operating margins were 5.2% in the second quarter. How should we be thinking about operating margins for the second half? Thanks a lot.

Well I'm sorry, we don't give guidance on operating margin for the future. But what I can tell you is currently the strategic focus for the Company is not so much on margin improvement as the -- as gaining more market share or growing our top line aggressively. So growth, especially in terms of top line and market share, is our primary focus. And if you look at our operating expenses, especially on marketing side, you're going to see the reflection of our current strategy.

Jiong Shao, Macquarie.

Thank you for taking my questions and congrats on the very strong results. Just first to follow up on what Donghao just said about the amortization cost from Lefeng acquisition. Donghao, you meant -- you said $9m in Q2, additional $9m because of the amortization. And for the next five years, is that every quarter there's going to be a $9m non-cash expenses in your P&L -- in the SG&A line?

Well $9m -- well it's slightly more than $9m. But that is only the amortization cost resulting from the acquisition of Lefeng. And if we do more transactions down the road, you're going to see more amortization cost resulting from our future acquisitions.

Okay. So for the time being, roughly a bit over $9m straight line amortization for the next five years, $9m every quarter?

Yes.

Which are non-cash. Okay. That's helpful. My first question is also on Lefeng. Would you be able to share a bit with on -- actually also for the overall cosmetics, so Vipshop plus Lefeng, you talked about $177m revenue. Are you able to share with us a bit on the margins, gross margin, operating margin, for this particular category of products?

Well, first of all, it's not revenue. It's GMV. Okay, $177m GMV. And, sorry, we don't disclose the actual margin profile for our Lefeng business because we do want our -- the capital markets or the investors to look at our total cosmetics business as a whole. That's why we only disclose the GMV for the combined cosmetics business, not so much in particular about Lefeng business.

Thomas Chong, Citigroup.

Hi. Good evening, everyone. I have two questions. The first question is can management provide some color about how much of your GMV are coming from mobile in the second quarter and how should we think about the trend in the third quarter and the fourth quarter?

And my second question is regarding the geographical mix for your GMV between the top tier and lower tier cities. Can management comment about how this is different in PC and mobile? Thanks.

(Interpreted). Our mobile business is growing very fast. In the second quarter alone mobile accounted for 46% of GMV, which compared to 12% in the same period last year. And in July alone, mobile contribution to GMV already exceeded over 52%. So the trend for Q3 and Q4, we would expect acceleration from the end. So most likely it will be a higher contribution in the second half.

The combined contribution from tier two and tier three has been increased from 50% in Q1 this year to 53% in the second quarter. And the remaining is from tier three and tier four cities. It's very similar to the overall tier city contribution for Vipshop for the mobile business, the mobile platform.

Binnie Wong, Bank of America-Merrill Lynch.

Hi. Thank you. I think my question has already been taken. Thank you.

Weibo Hu, Goldman Sachs.

Hi. Good evening, Shen, Yang and Millicent. Congratulations on such strong earnings and thank you for taking my question. My first question is in terms of the order size. We find that the second quarter order size declined 2% year on year and 9% quarter on quarter. So would you mind sharing with us how much is caused by the dilution from Lefeng and how much is due to the promotion or other factors?

And again, as Shen just mentioned, in this quarter about 53% of the orders come from the tier one and tier two cities. So it seems like that the order size in tier one and the tier two cities is lower than the tier three or tier four cities. So I just want to confirm on this question.

And then my second question is that we learn from some media news that we are recruiting some M&A talent from -- and in globally. So would you mind sharing with us our longer-term strategy on M&A and global expansion? Thank you.

(Interpreted). The decline in average ticket size is actually that in the second quarter it's the low season whereby we're selling mainly summer clothing, whereas in Q1 it's the winter season. So obviously the average ticket size is higher compared to the second quarter.

Okay. Let me take your next question about our M&A strategy. We have built a fairly small M&A team, currently with about six people. And our M&A strategy is actually very clear. Any of our -- any deals that we do must be of strategic value to Vipshop. We don't want to be a pure financial investor, meaning any deal that we do must be complementary to our existing business or supporting our long-term goal in our business.

(Interpreted). Not necessary in terms of your question on the average ticket size between the first and second tier versus that in the third and fourth tier cities. It's mainly a factor of seasonality.

Wendy Huang, Standard Chartered Bank.

Thank you. I have some housekeeping questions. Your annual guidance suggests very strong year-on-year growth. But in terms of sequential expansion, it seems to suggest less than 5% sequential growth. And in your earlier answers you seem to imply that the average order per user in Q3 actually should continue to go up sequentially. So does that mean the number of IP customers actually will start to decline in the third quarter, or this kind of the sequential growth trend is actually more driven by the seasonality rather than anything else?

Well, it's driven by more -- more by seasonality than anything else. And if you look at our historical numbers or guidance for Q3, sequential growth rate was actually always pretty low, like in the single digit.

Shall we expect the user base to continue to expand in Q3?

Slightly, yes because in Q3 we have the two hottest months in the year, July and August. And as an apparel retailer, people don't buy a lot of clothing in hot summer times.

Ella Ji, Oppenheimer.

Good evening, management. First I have a follow-up relating to your total cosmetics GMV, $177m. Could you share with us what's the year-over-year growth on a pro-forma basis and also quarter-over-quarter growth?

Well Q over Q, yes, because we disclosed last quarter our total cosmetics GMV from the combined Lefeng business and Vipshop's own business was $167m. So this quarter Q2 we did $177m. It's very easy for you to calculate the Q-over-Q growth rate. But last year was -- we can't because we didn't acquire Lefeng last year, so we can't make that comparison.

Yes. My question was on a pro-forma basis. I'm not sure if you added Lefeng's Q2 GMV last year, what year-over-year growth are we seeing?

Well. we can do -- we don't have that number right now, but we can probably do that after the call.

Sure. So you said that 1Q the cosmetics GMV is $167m. Is that right?

Yes.

Okay. So then if I do a quick calculation, the Q-on-Q growth is about 6%. That seems a little bit lower than your total sales growth. So, yes, can you give some -- give us some color? So are you continuing to see apparel sales maybe grow faster than the cosmetics?

Well some of it is seasonality in the cosmetics business. And Q2 is again the low season in the year. So 6% Q-over-Q growth may seem a bit low compared to our core apparel business, but it's still not so bad if you consider the seasonality element.

Chao Wang, Nomura.

Good evening. Thank you for taking my question. I have a question on fulfilment expense. So if we look at shipping and handling expense, it's down quite nice, even lower than the fourth quarter last year, while orders have been increasing. So in terms of per-order expense, it's down by over 35% compared to 4Q. I just wondered if you could give us more color on that. And how should we think about that trend going forward? Thank you.

Thanks for the question. But there are a few things that have been contributing to the reduction of our fulfilment expenses. We have moved to larger warehouses, where we can achieve better economy of scale. We have been working very hard to implement some automation in our warehouse, by which we can improve our efficiency and reduce cost. And also we have been pretty strict on our headcount increase in our warehouses in order to reduce cost. So we have done quite a lot of things. We have made quite a lot of efforts to drive the fulfilment expenses down.

But going forward, I don't think there's too much room, but there will be some room but not too much for us to further drive down the fulfilment expenses because, as you can see, labor cost is going up. Gas prices are going up. So there are things that are out of our control that are driving the fulfilment expenses up.

I just want to clarify, does shipping and handling expense include warehouse depreciating as well?

Yes. Yes.

Okay.

[Binbin Xi], JPMorgan. Tian Hou, TH Capital.

Management, thank you for taking my questions. One of my questions is related to the new customers. I see you were spending more marketing dollars. I wonder how do you see your new customer acquisition. How many do you have in this quarter? And do you expect your marketing dollars benefit the future new customer increase? That's number one question.

Number two is related to your self-procured business -- not self-procured business, your (inaudible) business versus marketplace. So you have expanded into a lot of different categories beyond apparel and shoes and bags. So in the apparel business, one thing is your competitive advantage is via MyShop. But in the new categories you're expanded into, so what are the key for the success in the new categories? That's the two questions.

(Interpreted). So in the second quarter we added 4.1m total new active customers. And then new active customer acquisition cost is close to $10. And obviously you need to invest before you can benefit. So if you look at the total new active customer for the first half, it's very close to what we had in 2013. So going forward, we don't think new active customer acquisition costs will go very high.

Actually there's a misunderstanding here. We always had our key categories, including apparel, home goods, cosmetics, baby and mother, shoes, handbags and accessories, etc. So obviously buyers -- we have buyers across all these categories since day one. And what we have been doing is actually to increase our market penetration in the existing categories. We have possessed a lot of data on sales events. We know exactly which event and what is selling well and what not. And that data is constantly fed back to our buyers to help them improve.

Xiaoyan Wang, 86Research.

Hi. Good evening, management, Shen, Yang and Millicent. Thank you for taking my question. My first question regarding our cash position. I see that our -- among other factors our accounts receivable increased by $12m. Does that drive down our cash flow from operations? So could you give some color on that first?

Well cash -- accounts receivable is actually a number at the end of that month. So there is some -- there's a chance that it's just a minor movement or it's just temporary movement. So it doesn't reflect our long-term cash position, especially cash from operations.

So you are saying we are expecting a recovery in terms of the cash flow from operation or a decrease in terms of accounts receivable days in the next quarter?

Yes. In the long-term we believe that our cash from operations will continue to go up. And also our account receivable days are usually very, very short because more than half of our customers do pay online. So it's basically cash advance from our customers. And only about 40% to 45% of our customers are paying on cash-on-delivery terms. But even for those customers, they typically pay within seven days. So usually our account receivable days are just one or two days right now. So it's not an issue at all.

There are no further questions at this time. I would now like to hand the conference back to Mr. Yang. Please continue.

Well thank you, everyone, for coming to our conference call. And I look forward -- we look forward to speaking with you again a quarter from now.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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.