Vipshop Holdings Ltd (VIPS) 2014 Q4 法說會逐字稿

Good day everyone and welcome to the Vipshop Holdings' fourth-quarter and full-year 2014 earnings conference call. At this point I would like to turn the call over to Miss. Millicent Tu, Vipshop's Director of Investor Relations. Thank you, please proceed.

Thank you, operator. Hello everyone and thank you for joining Vipshop's fourth-quarter and full-year 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 industries.

All statements, other than statements of historical fact that 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 made only as 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 Mr. Eric Shen, Chairman, our Chief Executive Officer and Co-Founder, and Donghao Yang, our Chief Financial Officer. At this point I would like to turn the call over to Eric Shen. (Spoken in Chinese).

Hello everyone and happy Chinese New Year to all of you. Welcome to our fourth-quarter and full-year 2014 earnings conference call. We are very pleased to have closed out 2014 with four quarters of strong financial performance and operational expansion.

Our impressive top line -- top- and bottom-line performance was driven by the expansion of our customer base. During 2014 we added nearly 17m new active customers, closing out the year with almost 24m total active customers, a 150% increase from last year.

2014 also saw strong growth in the number of orders from repeat customers as well as continued strong growth in total orders, which more than doubled to over 107m.

A key theme in 2014 both in the market and for us was mobile expansion. According to Info Disk the number of mobile shoppers in China reached over 300m in 2014, a 35% year-over-year growth, outpacing the 25% growth of PC online shoppers. During 2014 almost 53% of our GMV came from mobile devices and, looking at the fourth quarter, the number was nearly 66%.

As mobile is becoming the ideal solution for e-commerce users we believe our flash-sale model, which offers new events daily with a careful selection of popular branded products in limited quantities during limited time period, is well suited for mobile shopping. It allows shoppers to act on the events for their favorite brand any time, anywhere.

As we head into 2015 with strong growth momentum we will continue to invest in using big data to study customer behavior, enhancing shopping experience for users and expanding market share. We are very confident that our mobile platform has the potential to offer better user experience.

At this point let me hand over the call to our CFO, Donghao Yang, so that he may discuss our plans to improve our operations and the customer experience as well as the financial results.

Thanks Eric and hello there everyone. We are very pleased with the fourth-quarter and full-year 2014 financial results, which exceeded our prior expectations across the board.

For the full year we grew our total net revenue by 122%, to $3.77b, and our net income attributable to shareholders by 162%, to $137m, as compared to the full-year 2013.

Our quarterly results also continued to impress, with net revenue reaching $1.36b, a 109% year-over-year increase, and net income attributable to shareholders reaching $57m, a 123% year-over-year increase.

In addition to the impressive growth and financial metrics we also greatly improved our logistics systems, with our [line-haul] delivery services coming online in many new localities. As of the year end our line-haul infrastructure could support approximately 50% of our total orders and we expect that by the end of 2015 we can extend these capabilities to cover 70% of our order volume.

We firmly believe that by developing our line-haul delivery capacities we are able to significantly improve the end users' experience and ultimately reduce delivery costs as we continue to grow order volume.

In anticipation of escalating demand, for both our core business as well as offering strategic co-location capabilities we have been accelerating our warehouse expansion. As of the end of 2014 our total warehouse capacity had reached 1m square meters, exceeding our original target.

Moreover, supported by our initiatives in other areas such as marketing, as well as by the scale effect of our business, on a cumulative basis we closed 2014 with over 7,000 suppliers, more than 13,000 brands, of which more than 1,600 are exclusive.

This powerful ecosystem that we have built allows us flexibility to explore new ways of co-operating with brands and optimizing our product offering for customers. And we believe that by providing our customers with a broader product selection and improving supply chain efficiency for our brand partners we can continue to strengthen the relationships in our ecosystem and deepen the competitive moat that's around us.

Looking ahead, we expect that user growth will continue to be the major driving force of the expansion of our business and the growth of sales revenue. As our business continues to scale we are keen to evolve and grow our operational capabilities such as warehousing and logistics, and strengthen our merchandising prowess and relationships with brands, to support this overall business 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 fourth quarter of 2014 increased by 108.9%, to $1.36b, primarily driven by a 114.2% increase in the number of total active customers and a 99.6% increase in the number of total orders.

Gross profit for the fourth quarter of 2014 increased by 112.2%, to $338.2m, primarily driven by our increased marketing power with suppliers due to the expanding scale of the Company and the growth of our marketplace business.

Gross margin for this quarter increased to 24.9% from 24.5% in the prior-year period. More specifically, fulfillment expenses increased by 73.9% to $127.3m for the fourth quarter of 2014, primarily reflecting the increase in sales volume and number of orders fulfilled.

As a percentage of total net revenues fulfillment expenses decreased to 9.4% from 11.2% in the prior-year period, primarily reflecting the scale effect associated with our rapid top-line growth as well as the increase in our average order size as compared with the prior-year period.

Marketing expenses increased by 135.5% to $68.1m. As a percentage of total net revenues marketing expenses increased to 5%, from 4.4% in the prior-year period, reflecting our strategy to drive long-term growth through increasing investments in strengthening our brand awareness, attracting more mobile users and expanding our market share especially within product categories such as cosmetics, home goods, baby and childcare products.

Technology and content expenses increased by 168.9% to $38.1m. As a percentage of total net revenues technology and content expenses increased to 2.8%, from 2.2% in the prior-year period, primarily reflecting our continued effort to expand headcount to better support future growth, as well as our investments in data analytics, which can help improve the ability to predict consumer behavior and further enhance user experience.

General and administrative expenses increased by 209.2%, to $54m. As a percentage of total net revenues general and administrative expenses increased to 4%, from 2.7% in the prior-year period, primarily due to headcount expansion associated with the growth in our overall business, the amortization of intangible assets resulting from the Lefeng acquisition, as well as the increase in online payment expenses.

Driven by the growing scale of our Company's operations, and decrease in fulfillment expenses, as a percentage of total net revenues our income from operations increased by 105.7%, to $60.8m for the fourth quarter of 2014. Operating income margin remained stable, at 4.5%, as compared with the prior-year period.

Non-GAAP income from operations, which excludes share-based compensation expenses and amortization of the intangible assets resulting from the business acquisitions, increased by 141.5%, to $79.6m. Non-GAAP operating income margin increased to 5.9%, from 5.1% in the prior-year period.

Our net income attributable to Vipshop's shareholders for the fourth quarter of 2014 increased by 122.8%, to $56.6m. Net income margin attributable to Vipshop's shareholders increased to 4.2%, from 3.9% in the prior-year period. Net income per diluted ADS increased to $0.09, from $0.04 in the prior-year period.

Non-GAAP net income attributable to Vipshop's shareholders, which excludes share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, increased by 154.6%, to $73.4m.

Non-GAAP net income margin increased to 5.4%, from 4.4% in the prior-year period. Non-GAAP net income per diluted ADS increased to $0.12 in the fourth quarter of 2014, from $0.05 in the prior-year period.

As of December 31, 2014 our Company had cash, cash equivalents and restricted cash of $772.2m and held-to-maturity securities of $607.3m. For the fourth quarter of 2014 net cash from operating activities was $311.2m.

Looking at our business outlook for the first quarter of 2015 we expect our total net revenues to be between $1.25b and $1.3b, representing a year-over-year growth rate of approximately 78% to 85%.

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 for Q&A.

(Operator Instructions). Alan Hellawell, Deutsche Bank.

Thank you very much. Congratulations on yet another strong quarter.

I would love to get some more detail on your in-season sales offering, this, in contrast to your classic one- to two-year-old aged inventory flash sales. How does it impact the P&L? What percent of GMV does it represent now? And what level are we likely to hit by the end of the year? Thank you very much.

(Interpreted). Okay. So, Alan, to answer your question, we have started to pursue more value -- volume for brands that are selling in-season, slow-moving inventories and custom-made products, and that percentage is continuing to increase, although we didn't -- we don't provide specific number.

Well, Alan, let me take your other question about the impact of this increase in in-season product sales on our P&L.

Actually, the impact on our P&L is very limited because we charge a very similar take rate for the in-season product as our all-season access inventory. So the impact on our P&L is very limited.

Thank you. [Yun Wang], JPMorgan.

Hi, it's Yun calling in for Alex. Thanks very much for taking my question and congratulations on a very strong quarter.

So my question is on the cross-border e-commerce. It has been a rising trend and Vipshop has also launched the cross-border e-commerce channel in September last year. So just wanted to get your view on the overall cross-border e-commerce market in China and how Vipshop will be positioned in the market.

And also could you share with us some of the metrics of your cross-border channel in Q4 in terms of [GMV] contribution take rates and margin profile? Thanks.

(Interpreted). Cross-border e-commerce or cross-border transaction [is going] to be taken up initially in 2015 and Vipshop in accordance to that has launched our platform in October last year. And based on the current development it has been progressing very well.

Ella Ji, Oppenheimer.

Yes, congratulations on a strong quarter. I actually have two questions. The first one is relating to your active customers. It is up almost 3m in this quarter, which is the quickest expansion you have ever had.

Could you share with us some colors? Where are these new customers from? What do you think is the most effective channel to continue to attract new customers?

And then my second question is relating to 1Q guidance. It's reflecting a sequential decline from 4Q, but in the past two years we are seeing a sequential increase on 1Q versus last year's 4Q. So could you also share with us some colors? Thank you.

(Interpreted). So, Ella, in terms of the geographic breakdown or the source of new customers in Q4, it doesn't differ compared to what it was in the past.

And in terms of the traffic -- in terms of effective channel to acquire the new users as what we discussed in the past, so we're primarily relying on navigation search, [a bit of] (inaudible) marketing and now, more importantly, the app stores to promote Vipshop's [app]. And in the most recent quarter we have seen that our mobile new users have been added very fast.

Ella, let me take your other question about the Q1 guidance. Actually, our Q1 guidance is $1.25b to $1.3b in revenue and compared to $1.36b in Q4 I think it's actually relatively stable.

If we look at our past several years, each Q1 is actually up or down 3%, within that 3% range compared to the previous Q4. So I think this Q1 guidance that we have just given is within the reasonable seasonality range compared to the historical pattern.

(Operator Instructions). Chi Tsang, HSBC.

Good evening. Thank you very much for taking my question. I just had a housekeeping question first of all. Can you share with us the GMV from the marketplace please?

And, secondly, if you can give us any type of commentary for operating margins for 2015 that would be helpful, thank you.

(Interpreted). So, Chi, the percentage [coming down from] marketplace in Q4 was around 10%. We primarily rely on our first (inaudible) principal business model and we are growing that marketplace business very cautiously and steadily.

About the operating margin outlook for 2015, we actually don't provide guidance for that number. But what I can tell you is the Company's current strategy is to focus more on growing top line faster and gaining more market share.

So the goal is actually to maintain the current operating margin level for the near future and the strategic focus will be on top-line growth.

Cynthia Meng, Jefferies.

Thank you. I have a -- also a housekeeping question. Can management give us the number of repeat customers and orders placed by repeat customers for the quarter?

And also there is a -- secondly, I have a more bigger-picture question. Can management give us some comment on your mobile traffic? How much is coming from your own app? And what do you see the conversion rate of the traffic coming from Tencent, the conversion from traffic into revenue? Thank you.

(Interpreted). So, Cynthia, so the repeat purchase rate in the fourth quarter was almost 50%, and that number is 8.6m.

About 70% of the traffic is coming from our app. About 30% is from the Web browser. And in terms of conversion rate, although we don't provide a specific number, but what we can tell you is that the conversion rate is actually higher compared to PC.

We have some traffic directing from WeChat, but looking at the current performance the conversion rate isn't all that high yet.

Alicia Yap, Barclays.

Hi, good evening, Shen [Jong], Donghao and Millicent. Thanks for taking my questions. Also, congratulations on a strong set of results.

So my question is actually related to the first-quarter guidance. So can you help us understand a bit whether the relatively late Chinese New Year this year is it more a positive or negative to your business?

And given this late event will that also have some impact for -- for example, like the spring season promotional event such as the March 8 female day? Thank you.

Well, thanks, Alicia, for your question. Well, I don't think the spring festival when that's going -- the timing of the Spring festival won't have any significant impact on our business.

Because in the past several years, if you looked back, we had some years where -- when we had earlier spring festivals and some others, late spring festivals, and the Q1 seasonality didn't seem to fluctuate based upon that. So we don't see that's going to happen this year.

Can I follow up a little bit in terms of the purchasing behavior? So is it usually people tend to buy more [or have] after New Year, or people will buy more post the New Year after they get their pocket money? Thank you.

Well, people do buy more before and after the Chinese spring festival than during the Chinese spring festival, because you know China, a lot of Chinese people they want to go back to their home during spring festival and a lot of them are constantly on the road.

And also the -- if you look at the courier industry, a lot of the courier guys go home too. So usually our business -- I think this -- the same holds true for most other e-commerce companies. Our business is the lowest during the Chinese New Year period of time.

(Operator Instructions). Wendy Huang, Macquarie.

Good evening, everyone. Congratulations for the great results in the [terms of whole] year.

Could you maybe provide some color on the investment focus in 2015? In particular, what's your plan on the warehousing expansion last month delivering network as versus sales marketing, and how should we expect this investment to drive the user growth in the coming year? Thank you.

(Interpreted). So, Wendy, for 2015 it's going to be another investment year for Vipshop. We're going to continue to invest into our infrastructure.

In particular, our warehouse capacity it is anticipated to reach around 1.6m square meters by the end of 2015. And last mile is another area that we're focusing and we are expecting that by the end of this year we would have around -- more than 75% of the orders to be covered by our in-house delivery team, or through the companies we have equity investments.

And 2015 we are going to continue to focus on marketing and sales to promote our branding for driving new customers through the regular channels by acquiring more traffic. We noticed that the online shopping population is increasing and there's still a lot more potential [opportunities] to grow our new user base. These are the areas that we'll continue to focus in 2015.

Binnie Wong, Merrill Lynch.

Hi, thank you for taking my question and congrats on a strong quarter.

Given there is a new competitor entering the flash sales of apparel using a merchandising model, basically, they also have their own procurement team similar to -- very much similar to what Vipshop is doing, how does management see that will change the competitive landscape?

Could management share with us some of the strategies we have to drive user growth for 2015?

(Interpreted). So, Binnie, the competitive landscape hasn't changed much. We have had competitors along the way and we have built high-entry barriers in the discount retail market. We are by far the biggest in this category and now scale is another factor to add to our high-entry barrier.

In particular, we are proud to continue to expand our merchandising team and further expanding our warehousing capacity. And now we are entering into the last mile, which is another initiative that we are doing to improve user experience. So overall we haven't seen anything that is posing direct competition to Vipshop's business model.

In terms of new user growth and where to drive the users, again, branding is another area that we're working on, marketing to acquire traffic both on the PC and app and mobile platforms. Another thing that we have always been reliant on is word of mouth by improving user experience.

Tian Hou, TH Capital.

Hi. Good evening, management. I have a question related to your mobile. In Q4 there was a rapid development in mobile GMV. It took about 44% of total GMV in Q4, which is about six times of that in 3Q. And at the same time the [TC] GMV was almost flat -- it seemed flat compared with Q3. So I wonder what's the trend going forward.

And some e-commerce companies saw the lower monetization rate on PC -- in mobile versus PC. [Do] you see the difference between the two models for the flash sale model? That is all my questions.

Thanks for your question. I think the general trend is very clear. Mobile traffic will continue to grow very fast and account for a bigger portion of our business.

And a lower monetization for mobile users, we actually don't see that at all, because as an e-commerce company our customers come to our website with the only purpose of buying something, so it's a natural monetization process, almost the same if you compare PC to mobile.

And I think the companies that you're talking about are probably trying to monetize from their mobile users through other ways. For example, advertisement is probably harder, but in our case it's -- we don't see the difference.

Thomas Chong, Citigroup.

Hi, thanks for taking my questions. I have a couple of questions. The first question is can management share about the GMV for cosmetics in the fourth quarter?

And secondly is about the GMV by geography. Can management give some color about what's the contribution from tier-two and tier-three cities?

And thirdly is about the headcount expansion plan. Can management provide some color about the headcount in 2014 and your expectation in 2015?

And my last question is about the CapEx guidance. Any color about the CapEx in 2015 and 2016 would be great. Thanks.

(Interpreted). The combined cosmetics GMV from Vipshop and Lefeng was $249m.

In Q3 we mentioned that the GMV in tier one and tier two was around 51%. In Q4 that number went up to 52%, so there isn't [too] much change in that regard.

Okay. Well, our CapEx for 2015, maybe 2016, is going to be about $200m to $250m, but that's a very rough estimate.

Chao Wang, Nomura.

Hi and good evening. Thanks for taking my question. I have a question on the user growth. It seems that some third-party tracking are saying that your mobile activities are declining in January. I just wonder do you think those trackings reliable and what do you see the user trend into January?

And also if you could comment on the user acquisition cost when your user base becomes even bigger and bigger?

Thanks for your question. I also noticed the article that you mention from one sell-side analyst. I think the tracking was not correct because it was only about the PC traffic, the traffic from PC.

And, as we said earlier in the conference call, our mobile business or traffic is about 66%, almost two-thirds of our total traffic or business, so the tracking PC traffic is not representative at all of our overall business trend.

Evan Zhou, Credit Suisse.

Hi, good evening, Shen Jon, Donghao and Millicent. Thanks for taking my question. Congrats on the excellent set of results.

My question is regarding the -- your co-location plans, so I'm wondering if Shen Jong cam share [with us some] thoughts on (inaudible) next two years how do you see the co-location fits into your strategic planning? And how do you foresee that to help us [attain our stickiness] into the supplier side?

And also a related question regarding the last-mile delivery there. Can you remind us how much percentage of the last-mile delivery team has been brought onto our balance sheet by fourth quarter? Thank you.

(Interpreted). So, Evan, as of now the majority of the warehouse capacity are for [our self usage]. And in anticipation of the escalating growth of our business we want to be in a position whereby we have enough warehouse capacity to support our top line.

And in terms of the co-location we do -- we have been approached by a few suppliers which -- who have shown enthusiasm in using some of our warehouses to deepen the co-operation. So this is an initiative that we welcome in order to help both parties to have further room to co-operate.

Sorry. Well, the financials of our last-mile delivery are -- most of the revenue are not consolidated because we've only acquired minority stakes for now in most of the last-mile delivery companies.

But hopefully in the next year or so, when we have the absolute control, the majority stake of those companies we'll be able to consolidate those numbers into our financials.

Xiaoyan Wang, 86Research.

Hi, good evening, Shen Jon, Donghao and Millicent. Congratulations on a strong quarter.

My question is, when we look at the active user growth this year, actually, it's an acceleration from last year, 150% year-on-year growth, last year 130%. I just want to know [the issue is that] how VIPS drives such a high growth this year and what's your target to achieve by the end of 2015?

And a smaller question is I saw that the third-party marketplace GMV percentage has actually decreased, from 12% to 13% last quarter to 10% this quarter. I just want to know why.

Is this the proactive approach pursued by the management to drive mainly the first P business, your core business? Or this is just a natural fallback of the third-party marketplace in the peak season? Thank you.

(Interpreted). So, Xiaoyan, we are not in a position to disclose the specific number in terms of the user accounts for 2015. But 2015 is another year of rapid growth for Vipshop, although the growth rate year over year might be slower compared to the previous year, given that the size is becoming much bigger now.

We will continue to focus on our first P principal business model because there's so much room to grow down the road. And we also understand that for marketplace the user experience is less ideal compared to that for the first P business model in terms of the speed and the delivery services and user experience. So from that regard we will continue to make a good balance between the two.

Muzhi Li, Arete Research.

Hello, thanks for taking my question. My first question is regarding the fulfillment order expenses. We saw the year-over-year fulfillment-per-order cost decline, but a little bit edged up from the third quarter, so I would like to have the management explain what's the driver of this small increase and what we might see from the next quarter.

And the second question is a follow up from the previous one regarding the balance sheet impact from the investment in the logistic companies, where we can find these numbers from the balance sheet instead of from the P&L. Thanks very much.

Well, Muzhi, thank you very much for your question. Well, the fulfilling expenses declined year over year largely because of, first, due to our growing scale. We have greater bargaining power so that we can have a lower rate with most of the courier partners that we work with. Technically, our average ticket size went up significantly year over year and that also helped drive down the fulfillment costs per order.

John Choi, Daiwa.

Yes, my question is I was wondering if you guys could share some more color on your product category expansion, especially on the new [maternity], baby and also [on] products, [because I] realized that we are seeing more and more of those kind of products.

What is the rough contribution to the GMV? And in terms of the margin contribution can you give us more color compared to your accessories or apparel products? Thanks.

(Interpreted). So, John, in terms of product category expansion we will continue to focus on our existing product category portfolio. So the tier one would be apparel, handbags, shoes and beauty products and the next tier of categories that we continue to focus would be home goods and baby and children's wear. And in Q4 2014 the apparel, handbags and shoes contribution is more than 60% to our GMV.

[Wanting Yu], CICC.

Hi, thank you for taking my question and congratulations for a great quarter. I just have a follow-up question on the product category expansion strategy.

As we are going to have some new categories expansion in 2015, such as cosmetics and baby and mother care, or home goods, so what is the contribution or impact to the P&L going forward? Thank you.

Well, I don't think there's going to be a negative impact on our P&L, because still the fastest-growing and the most profitable category is -- for Vipshop is still apparel. So we want to be more aggressive in growing our other categories, but please keep in mind that our apparel business is still our strongest, most-profitable and fastest-growing business.

Wendy Huang, Macquarie.

Thank you. I have two follow-up questions. One is about your strategy towards the baby and the maternity product category. What's your strategy out there? Will you pursue the expansion mainly through the organic growth, or will you try to make a milestone operation like what you did with the cosmetics on the Lefeng a year ago?

And also, related to that, what are your major competitors in the baby and the maternity product category? And also I think historically there were some big players up there, like the Red Baby. What kind of lessons do you learn from those existing players? And also what challenges are you seeing in expanding the baby and the maternity category?

I also have another follow up. Thank you.

(Interpreted). So, Wendy, to develop or expand our baby and children's wear, maternity products we will grow primarily through -- in an organic way and not through acquisitions, because we haven't had any targets. The good thing is with these products we share the same customer base, which is females who have high engagement and loyalty on our website.

We are not able to -- haven't found any single competitor in this category because each of the companies out there has -- or each of the companies -- the e-commerce out there has its own characteristics.

Thank you. There are no further questions at this time. I would like to turn the call to Miss. Millicent Tu, Vipshop's Director of Investor Relations, for her closing remarks. Please continue.

Thank you all for taking the time to join us and we look forward to speaking with you next quarter. Happy Chinese New Year.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now 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.