Vipshop Holdings Ltd (VIPS) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to the Vipshop Holdings third 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. Hi, everyone. And thank you for joining Vipshop's third quarter 2014 earnings conference call. Before we being, 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 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 likely to, may, plan, should, will, aim, potential or other similar expressions. These forward-looking statements speak 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 Mr. Eric Shen, Chairman, the Company's CEO and Co-Founder and Donghao Yang, the Company's Chief Financial Officer. At this time, I would like to turn the call over to Mr. Eric Shen.

Hello, everyone. Welcome to our third-quarter 2014 earnings conference call. We are happy to share our earnings results which show our continued strong growth, operationally and financially. First, let me give you a few highlights.

We grew our total net revenues by 130% year over year to 882% -- $882.6m. We added almost 4m new active customers, closing out the quarter with 9.5m total active customers. And the total orders on our platform also continued to grow in line with revenues to over 25m in the third quarter with close to 60% of our GMV coming from mobile.

As our fast-growing user population swaps from PC to mobile, we continue to leverage our mobile platform by improving the customer experience and (inaudible) improvements. And we are close to the end of the 2014, we will continue to make modest investments that focus on enhancing our technology and marketing capabilities. We will expand headcount in these departments and continue to invest in big data R&D. We are confident that this will enable us to improve personalization, drive repeat purchase and growth over the mobile platform and attract new active customers in the future.

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

Thanks, Eric, and hello, everyone. Along with continuing to deliver strong growth and develop our mobile offering in the third quarter, we have concurrently been working to further optimize our logistics systems in order to support our goal of increasing our order volume and market share. Since our IPO, we have continuously achieved strong sales growth which has exceeded internal and external estimates. In order to maintain this operational momentum, we are accelerating our warehouse expansion. We now expect that by end of this year, our total warehouse capacity will reach over 700,000 square meters, exceeding our original target by 200,000 square meters.

Moreover, on the delivery solutions side, we began in early 2014 to invest judiciously in several courier companies with superior services. And in some select cities, we are also proceeding to launch our own last-mile delivery services. We believe that by integrating our logistics solutions, we will enjoy greater economies of scale as we continue to grow our order volume.

Over the next two years, we aim to scale our last-mile capabilities to support 70% to 80% of total orders on our platform. Historically, we solidified our leadership position by establishing strong supply chain management systems and deepening our cooperation with logistics companies. Looking ahead, we believe strengthening these initiatives will further expand or market leadership in discount retail and improve customer experience on our platforms.

In addition, as we continue to grow our customer base, during this quarter, we have made a strategic decision to decrease our emphasis on our group-buy service whose customers tend to have lower average ticket size and lower margin. The end result is a significant increase in our average ticket size quarter on quarter but also leads to fewer orders and slower growth in new customers quarter over quarter.

Going forward, we will continue to deemphasize our group buy business and increase our focus on our core flash sales customers.

Now moving on to our quarterly financial highlights. Before I get started, I would like to clarify that all 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 third quarter of 2014 increased by 130% to $882.6m. The growth of which was primarily driven by a 136.8% increase in the number of total active customers and a 117.6% increase in the number of total orders.

Gross margin for this quarter further expanded to 24.9% from 24.2% in the prior-year period and gross profit increased by 136.1% to $219.5m. 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.

More specifically, fulfillment expenses increased by 91.5% to $84.8m for the third quarter of 2014. As a percentage of total net revenues, fulfillment expenses decreased to 9.6% from 11.5% 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 170.8% to $47.1m. As a percentage of total net revenues, marketing expenses increased to 5.3% from 4.5% in the prior-year period, reflecting our strategy to continue expanding market share and building greater brand awareness.

Technology and content expenses increased by 225.4% to $31.3m, primarily reflecting our continued effort to invest in IT systems and expand headcount to better support future growth. As a percentage of total net revenues, technology and content expenses increased to 3.5% from 2.5% in the prior-year period.

General and administrative expenses increased by 259.4% to $42.8m. As a percentage of total net revenues, general and administrative expenses increased to 4.9% from 3.1% in the prior-year period, primarily due to headcount expansion and office rentals associated with the growth in the Company's overall business, the amortization of intangible assets resulting from the Lefeng acquisition as well as the increase in payment expenses.

Driven by the growing scale of our Company's operations, improved gross margin and cost control, income from operations increased by 76.6% to $21.3m for the third quarter of 2014. Operating income margin was 2.4% compared to 3.1% 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 178.9% to $42.1m. Non-GAAP operating income margin increased to 4.8% from 3.9% in the prior-year period.

Our net income attributable to Vipshop's shareholders for the third quarter of 2014 increased by 130.3% to $27.7m. Net income margin attributable to Vipshop shareholders remains stable at 3.1% compared with the prior-year period. Net income per diluted ADS increased to $0.05 from $0.02 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 206.8% to $46.3m. Non-GAAP net income margin increased to 5.2% from 3.9% in the prior-year period. Non-GAAP per diluted ADS increased to $0.08 in the third quarter of 2014 from the $0.03 in the prior-year period.

As of September 30, 2014, our Company had cash, cash equivalents and restricted cash of $668.2m and held-to-maturity securities of $491.1m.

For the quarter ended September 30, 2014, net cash from operating activities was $80.8m.

Looking at our business outlook, for the fourth quarter of 2014, we expect our total net revenues to be between $1.20b and $1.22b, representing a year-over-year growth rate of approximately 84% to 87%. These forecasts reflect our current and preliminary view on the market and operational conditions, which are subject to change.

With that, let's open to the Q&A.

(Operator Instructions). Alan Hellawell, Deutsche Bank.

(Technical difficulty) after the numbers and otherwise, what might the trend be if we didn't have that?

And secondly, can you just give us an update on what marketplace commission revenue is and what the take rate is?

And then finally, with the heavy investment in logistics, technology and marketing, can you give us the preliminary view on 2015 margin? Thank you very much.

Well, Alan, thank you for the questions, but we didn't hear your first question very well. I think, can you please repeat?

Yes, basically, we're just trying to find out what the impact, if we strip out the reduction in group buying activities, what would the quarterly trend in order numbers and active customer numbers be if we take out group buying?

Okay.

(Spoken in Chinese).

So, Alan, to recap what Eric said just now, the market -- we substantially reduced or decreased the marketing spending on our group-buy channel which actually led to a substantial decrease in new active customers from our group-buy platform. That number had been reduced by more than half. This is because we strategically made some optimization in our operations. Eric mentioned customers on the group-buy channel tend to have lower average ticket size and lower repeat purchase rate, therefore, by making the strategic optimization in our operations, it will enable us to focus more on high-quality, high-value customers.

Okay, let me take your second question about our marketplace. In Q2 and Q3, our marketplace business grew substantially compared to Q2. In Q3, GMV from our marketplace business accounted for 12% of our total GMV whereas in Q2, it was about 7% to 8%. And commission level in -- on our marketplace remains stable at about 10% to 11%.

And your third question is about our margin outlook for the next year. We do not provide guidance for next year's margin outlook, but we are pretty confident that this is business -- that this business is a very profitable business and we will be able to maintain or improve -- continue to improve our margin going forward.

(Operator Instructions). Binnie Wong, Bank of America Merrill Lynch.

Hello. Thanks for taking my question. My question is on the geographical coverage. I just wanted to hear from management about the percentage of sales from the different tier of cities. I just want to get a sense of how the target market positioning is progressing.

And just, I guess, a quick question following up on Alan's question earlier. So we should expect in fourth quarter to normalize. So the group-buy activities shouldn't be an impact towards a gain. And then the sequential growth in the active customers and total order growth will be, basically, based the core platform, core sales platform and not from the group -- I mean -- that will be phased out, the group buy, is that right?

I think Eric can answer your first question on sales geographical breakdown.

(Interpreted). So, Binnie, continue the trend which you saw in the second quarter. The combination of sales from tier one and tier two cities is nearly to 52%. Whereas tier three and tier four have contributed more than 45% of our total net revenues.

And, Jenny, thanks for your question, let me take your second question. We have just provided revenues guidance for Q4 which is going to be roughly 40% Q-over-Q growth and 84% to 87% year-over-year growth. And I think our total customer -- the increase in our number of active customers is going to be pretty much in line with the growth rate of our revenue.

Eric Wen, China Renaissance.

Hi. Thank you very much for taking my questions. My first question is, Donghao, you mentioned that the Company intends to build up its last-mile delivery infrastructure. Does that change what kind of CapEx guidance you'll give to us for this initiative?

And the second, can you elaborate on your investment in technology and G&A expense which seems to be higher than normal trend this quarter? Where does this technology goes to? Thanks.

Okay. Thanks, Eric. Well, actually to build -- to expand our national delivery capabilities does not require a -- too much CapEx because we don't need to buy a lot of fixed assets for last-mile delivery teams. Mostly it's operating assets and headcount which is going to be covered by our revenue.

And your second question, our IT expense increase in Q3 was largely due to our increase in headcount. We're trying to build out our IT capabilities over time. So in Q3 we hired a few hundred of new IT people which drove up the technology expenses. But that kind of investment, we feel is very necessary to drive the Company's long-term growth.

Cynthia Meng, Jefferies.

Thank you, management. I have two questions. First of all, can management share any single pay promotion metric that you have so far?

And then secondly, we see -- secondly, what is the average revenue per order mobile compared to that on PC orders? Thank you very much.

(Interpreted). So this new single pay GMV has exceeded our expectations, it recorded more than three times of last year's sales. (Inaudible), as you know, is an online nationwide shopping festival promoting awareness and consumption of e-commerce which Vipshop benefit.

Average order size on mobile are similar to the PC, while shopping frequency and conversion rate are higher compared to PC.

(Operator Instructors). Jiong Shao, Macquarie.

Thank you for taking my one question. Maybe I just follow up on an earlier question on group buy to put the question to rest. Will you be able to share with us the revenue contribution and the order contribution from group buy in Q3 and in Q2?

Let me take -- thanks, Jiong, for your question. Well, the -- our GMV in Q3 group-buy channel was substantially smaller than Q2. In Q3 it was like 5%, roughly 5% of our total GMV -- no, sorry, in Q2 it was 5% of our total GMV. In Q3 it was only 3%. So it came down quite substantially.

Gene Munster, Piper Jaffray.

Thanks for taking my question. You mentioned escalating demand as being the reason for accelerating fulfillment investment. Can you guys elaborate a little bit on what you're seeing in terms of escalating demand? And how should we be thinking about 2015 GMV in sales growth? Thanks.

Sorry, could you please repeat your question, I couldn't hear it?

(Operator Instructions).

Thanks. You guys talked about escalating demand as being the reason for fulfillment investment expansion. Can you guys talk a little bit about what you're seeing in terms of escalating demand and how should we be thinking about 2015 GMV in sales growth?

What demand? What demand, sorry?

In your prepared remarks you guys talked about escalating demand being the reason for accelerating the warehouse investment, can you talk about the escalating demand that you're seeing?

Okay.

(Interpreted) Yes, the company has made substantial investments in expanding the warehouses and, of course, building our last-mile capabilities. We are actually very confident about the outlook in 2015 and beyond although we don't give specific guidance for the full year, but we do see the need to reinvest for future growth.

Just for your information we now have altogether 700,000 square meters of warehouse already and Eric also mentioned that there's another 600,000 square meters which is under construction. All in all the demand for orders and the demand for discounted branded goods, the outlook is pretty promising.

Chi Tsang, HSBC.

Hi, great, thank you very much. I wanted to ask you about how your cosmetics business is going, if you can give us an update on that, maybe the GMV contribution this quarter. Thank you so much.

(Interpreted) Okay, Lefeng is now an integrated part of Vipshop, so the combined cosmetic GMV of Lefeng and Vipshop in the third quarter this year was $191m and we still aim to be the biggest in this vertical in the near future.

Alicia Yap, Barclays.

Hi, good evening, thanks for taking my questions. My question is related to your last-mile delivery investment. So when do you actually expect to achieve the 70% to 80% of the orders covered by your own logistics? And currently, if you can share with us the percentage of orders that is being delivered by the carriers that you have invested, and also percentage of your own last-mile people. Thank you.

(Interpreted) So Alicia, by the end of this year I think we will have approximately 50% of the orders to be delivered by the companies we acquired together with our self-recruited people. And hopefully in a year or two we will have 75%, 80% of the orders to be covered by our in-house last-mile. As of now we have altogether 9,000 last-mile delivery people, whether that's through the companies that we invested or our full-time employees.

Bo Pang, Oppenheimer.

Thank you for taking my question. I'm actually asking a question on behalf of Ella Ji. So my question is a follow-up on the group-buy business. So we want to know about the margin profit of the group-buy business, is that largely under flash sales? And how will the downsize of the group-buy business affect the overall margin going forward? Thank you.

Okay, well thanks for the question. Well, as we explained earlier, group-buy business tends to have low average ticket size and a lower margin profile. For example, typically average ticket size from our group-buy orders is like only one-half, 50% of our main site. And if you think about the fulfillment costs that we have to incur to deliver the products, that order to the customers, you will understand why the margin for our group-buy orders is much lower than our main business.

So going forward if we continue the current strategy and deemphasize the group-buy business you're going to see most probably two things. One is an increase in our average ticket size and secondly the improvement, although pretty small but still there's going to be some improvement on our overall margin profile.

Ida Yu, CICC China International.

Hi, thank you for taking my questions. My question is regarding also your 2015 margin outlook. So we've seen the fulfillment cost as a percentage of revenue consistently decline this year, so could you please give us more detailed explanations and the future trend about this and what is the other operating expenses items going forward?

Thanks for the question. Well, you're right, in Q3 our fulfillment expenses as a percent of revenue came down pretty substantially compared to Q2 considering it's only quarter over quarter. There are a few things behind that reduction. One is, of course, we are trying to expand our warehouses. By having larger warehouses we can achieve greater economies of scale or operating efficiencies which will help drive down the costs.

And secondly, we've talked about our strategy to deemphasize our group-buy business. If you compare our average ticket size in Q3 with Q2 you would see about a roughly 9% increase in average ticket size and that has helped also drive down the fulfillment expenses as a percent of revenue.

Going forward, again, we don't provide any guidance for next year's profit margin but I believe we're still very confident that there is still room for us to improve on our margins.

Sean Zhang, 86 Research.

Hi good evening, management, thank you for taking my question. It seems like you're cutting down some low ticket size, low margin business such as group buy and you're focusing more on your core flash sale business. Can you share with us more color on your new initiative in terms of your biggest category, apparel, or other category in your direct flash sale business? Thank you.

(Interpreted) Just to recall our existing core categories include apparel, shoes, handbags, accessories, baby, home goods already, which we have already established a strong foothold in this market. In the near future we don't plan to immediate add any new categories rather than focus on the current ones because the existing categories that we are in already have substantial opportunities in the future.

Thomas Chong, Citigroup.

Hi, good evening. Thanks for taking my question. My question is about the competitive landscape for the online discount retail sector. Does management see any change in the competitive landscape last year compared to this year? And how should we think about the outlook in terms of the competitive landscape?

And my second question is about the CapEx guidance. Is there, because of the expansion in warehouse capacities, any color about the CapEx for this year and next year would be helpful. Thanks.

(Interpreted) We don't see any significant changes in the competitive landscape. We continue to stay focused and gain market share in the discount retail market. We don't see any direct competitors because we are focused on flash sales third party business model while most of the other general e-commerce players primarily sell apparel and other fashion goods through the marketplace model.

Okay, let me take your second question about CapEx. We're expecting to spend roughly $150m to $200m in the next couple of years, each year, and most of the CapEx will be spent on of course the warehouse expansion project.

Muzhi Li, Arete Research.

Hi, thanks for taking my questions. I'd like to ask you about the current warehouse utilizations and what you see the utilizations going from third quarter to fourth quarter.

And also if the management can give some update about the current merchandize sell-through rate, that would be very helpful. Thank you.

(Interpreted) Okay, because we are continuously adding and building more warehouse capacity, so the current utilization rate is low.

Although we don't disclose a specific ratio for the sell-through rate, but the trend has been pretty stable and healthy.

Robin Lin, Morgan Stanley.

(Spoken in Chinese). I'll use English to ask the question. I know our anniversary sales are in December beginning period, and it's probably factored into our revenue guidance already, can we provide some color in terms of GP margin? Will that be fairly stable year on year or will it be better? And I guess an addition to that would be in terms of marketing spend, will that be fairly controlled, similar to last year's percentage of revenue? If you can provide some color.

And second is [Chin in Chinye] initiative, about data leverage. We talked about that in the last quarter. We were wondering if you can provide more color when Chin in Chinye will be started in Vip next year? The timing I guess.

Hi, Robert, thanks for the question, let me take your first one. Well, again, we don't provide guidance for margin or any specific expense item for the next quarter or for next year. So what I can tell you is that this management's strategic focus right now is on top line growth, so basically we're going to reinvest some of our profit to drive top line growth at least for the near future to gain more market share. So that's about your margin question and expense question.

Millicent will just translate the next one.

(Interpreted). With the personalization effort we already started to make some pioneering tests on the mobile platform and we are still in the period of accumulating and trying the personalization efforts on the mobile channel. And we found that the initial feedback has been that, with that initiative, our average ticket size and the conversion rate will be positively impacted. And if all goes well we expect that the complete personalization launch will be carried out by the end of this year.

Evan Zhou, Credit Suisse.

Hi good evening, (inaudible) Millicent, thank you for taking my question. My question is on customer acquisition costs. So can you maybe give us some color how do you see that trend going forward? And what's kind of our sales and marketing acquisition spending strategy in the coming year? What are the main channels that we consider to invest more? Thank you.

(Interpreted) You saw that the new average customer acquisition costs for Q4 sequentially went up, whereas the marketing spending dollars as a percentage to top line trend [down] sequentially. This, again, goes back to our efforts to strategically make some operational optimizations substantially reducing the marketing spending on our group-buy channel. And we expect normalization to take place in Q4 and going forward marketing spending as a percentage will come down and as mobile continues to have a bigger portion of our top line, we expect the overall new average customer cost will come down in the longer run.

Weibo Hu, Goldman Sachs.

Good evening, management. Thank you for taking my question. So my question is on gross margin. So for the third quarter our analysis shows that our self-operation business gross margin declined about 0.8 percentage points quarter on quarter. So what's the reason behind that?

And would you mind helping us to refresh the third-quarter gross margin on the different categories, such as apparel gross margin, cosmetics gross margin and the other categories' gross margin. Thank you.

Thanks, Weibo, for your questions. Well, again, the biggest reason for the kind of decline in the gross margin of our direct business is largely due to our reinvestment of the profit back into the business to drive top line growth. In August we had our first (Spoken in Chinese), it's a very big promotional event where we offer rebates or discounts to our customers to drive more top line growth. And, again, the strategy is very clear, top line growth is our top priority and we're going to reinvest our profits, including gross profit as well as spending more on operating expenses to drive top line growth in the long run.

And your second question is about the gross margin for our main product categories right? So our cosmetics gross margin in close to 20% and our apparel gross margins is about 25% to 27%. So those are actually the two largest categories that we have.

John Choi, Daiwa Capital Markets.

Hi, thank you for taking my question. This is Alex on behalf of John. My question is on the mobile side, so could you talk a little bit about the sort of mobile contribution on your W11 promotion event to the overall GMV? And also about the source of traffic on mobile, could you talk a little bit about how much traffic is coming from your own apps and how much is from the WeChat platform. Thank you.

(Interpreted) Our mobile business is growing very fast. In the third quarter of 2014 mobile accounted for 57% of GMV compared to 15% in the same period last year. And in October 2014 mobile GMV contribution reached 65%.

In terms of the traffic breakdown, the majority of the traffic is coming from our own app. In terms of the traffic on WeChat and other social networking platforms it is very small.

At this time I would like to turn the call over to management for closing remarks.

Well, thanks, everyone, for attending our call and I'm looking forward to seeing you guys and talking to you guys again next quarter.

Thank you.

Thank you.

This conclude today's conference call. You may now 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.