Vipshop Holdings Ltd (VIPS) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to Vipshop Holdings Limited's first-quarter 2015 earnings conference call. At this point, I would like to turn the call to Ms. Millicent Tu, Vipshop's Director of Investor Relations. Please proceed, ma'am.

Hello, everyone, and thank you for joining Vipshop's first-quarter 2015 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 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 unlikely to, may, plan, should, will, aim, potential or other similar expressions. These forward-looking statements speak only as of the date hereof and are subject to change at any time, and we have no obligation to update these forward-looking statements.

Joining us on today's call are Eric Shen, our Chairman, Chief Executive Officer and Co-Founder, and Donghao Yang, our Chief Financial Officer.

At this time, I would like to turn the call over to Mr. Eric Shen.

Good morning and good evening, everyone. Welcome to our first-quarter 2015 earnings conference call.

We are very pleased with our first-quarter 2015 financial and operation performance, which once again shows the strong appeal of our flash sale e-commerce business model and the success of our organic expansion and operating capabilities.

Our impressive top and bottom line performance was largely driven by the strong growth in total active customers, repeat customers and total orders. The growth of our customer base shows the success of our strategy to improve the shopping experience and expand our product selection.

We believe that by improving our mobile platform and expanding logistics capabilities, we will continue to offer our customers great shopping experience that keeps them coming back and spreading the word.

Additionally, mobile continues to be a strong growth driver and we made great efforts in enhancing the shopping experience on mobile devices, our investments into use big data to offer easy-to-use and personal experience for customers over mobile devices. We saw increased returns from our investments in mobile, which accounted for 72% of our GMV, as compared to the average of 33% in the China online shopping market, according to our research.

Moreover, we have also made good and fast progress with our cross-border e-commerce business which we started in the fourth quarter last year. In just one quarter, we were able to grow this business by over 360% quarter over quarter.

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 operations and customer experience, as well as the financial results.

Thanks, Eric, and hello, everyone.

We are very pleased with the first-quarter 2015 financial results, which demonstrate how well our team continues to execute and deliver. With our expanding platform and improving operating capabilities, we are well positioned in China as we look towards the future.

There are several key metrics that we believe reflect the growth and health of our business. They are, one, our platform expansion, demonstrated by the growth in our revenues as well as total active customers and repeat customers; and, two, our operational expansion, demonstrated by our enhanced last-mile capabilities and warehousing capacity.

Further improving these metrics are our top priorities as they measure the progress of our strategic initiatives, which are to scale up the platform, increase engagement of customers and deliver a strong return for our investors.

Looking at the first-quarter results, we are very pleased that we achieved clear and tangible progress in both of these areas.

First, our spending scale. The 100% revenue growth we delivered in the first quarter is a strong foundation to build upon as we move forward in 2015. Furthermore, total active customers continued on its path of steady growth in the first quarter, increasing by 75% year over year to 12.9m. And we expect strong growth to continue in 2015, as we further expand our product offering and provide superior shopping experience to drive further customer growth.

Our total repeat customers also grew significantly, at 89% year over year to almost 10m, and the number of orders from repeat customers accounted for nearly 92% of our total order volume in the first quarter. We believe our success in this metric is intertwined with our initiatives to enhance the shopping experience for customers, especially on mobile devices.

Second is our enhanced in-house last-mile delivery capabilities. Currently, approximately 70% of our orders are delivered either through our in-house delivery team or through delivery companies in which we hold equity stakes. By the close of 2015, we expect this figure to climb to 80%. Furthermore, our last-mile infrastructure, both in-house and invested, is now able to cover 29 out of China's 31 provinces.

In addition to building out our last-mile capabilities, we also accelerated our warehouse expansion in anticipation of escalating demand for both our core business as well as strategic co-location services. Our total warehouse capacity, both leased and built, reached approximately 1.1m square meters as of March 31, 2015.

These operational initiatives to enhance delivery services and expand warehousing capacity will allow us to further diversify product collection and reduce delivery times, as we continue to improve the overall shopping experience and strengthen customer loyalty over our expanding platform.

Looking ahead, we expect that customer growth and customer engagement will continue to be the major driving force of the growth and expansion of our business. We will continue to enhance our technology platform and strengthen our operational capabilities, enabling greater scale and closer collaboration between our teams so that we can continuously deliver the best shopping experience to our customers.

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 renminbi amounts and all the percentage changes refer to year-over-year changes unless otherwise noted.

Total net revenue for the first quarter of 2015 increased by 100% to RMB8.6b, primarily driven by a 75% increase in the number of total active customers, an 88.7% increase in the number of total repeat customers, a 90% increase in the number of total orders, as well as the increasing revenue contribution from our mobile platform.

Please note that starting in this quarter we have broadened the way we define active customers, total orders and repeat customers to include the buying activity over our marketplace platforms. Details regarding the adjustments to these definitions are included in the footnotes of our earnings press release. Our decision to change the definitions is intended to include our broadening marketplace platform and further improve our comparability with industry peers on both a quarterly and annual basis.

Gross profit for the first quarter of 2015 increased by 99.6% to RMB2.1b, primarily driven by our increased bargaining power with suppliers due to the expanding scale of the Company and the growth of our marketplace platforms. Gross margin for this quarter remained stable at 24.9% as compared to the prior year period.

Fulfilment expenses for the first quarter of 2015 were RMB806m as compared with RMB457.6m in the prior year period, primarily reflecting the increase in sales volume, average ticket size and number of orders fulfilled. As a percentage of total net revenue, fulfillment expenses decreased to 9.4% from 10.6% in the prior year period, primarily reflecting the scale effect associated with our rapid growth in total net revenue.

Marketing expenses for the first quarter of 2015 were RMB402.6m as compared with RMB184.4m in the prior year period. As a percentage of total net revenue, marketing expenses were 4.7% as compared with 4.3% in the prior year period, reflecting our strategy to drive long-term growth through increasing investments in strengthening our brand awareness, attracting new users and expanding our market share, especially within product categories such as cosmetics, home goods, baby and childcare products.

Technology and content expenses for the first quarter of 2015 were RMB256.1m as compared with RMB114.5m in the prior year period. As a percentage of total net revenue, technology and content expenses were 3% as compared with 2.7% 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 for the first quarter of 2015 were RMB296.7m as compared with RMB148.1m in the prior year period. As a percentage of total net revenue, general and administrative expenses remained stable at 3.4% in the prior year period.

Driven by the growing scale of our Company's operations and decrease in fulfillment expenses and general and administrative expenses as a percentage of total net revenue, our net income from operations -- our income from operations increased by 112.9% to RMB395m for the first quarter of 2015. Operating income margin increased to 4.6% from 4.3% 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 96.9% to RMB517.3m from RMB262.7m in the prior year period. Non-GAAP operating income margin was 6%, as compared with 6.1% in the prior year period.

Our net income attributable to Vipshop's shareholders for the first quarter of 2015 increased by 125.3% to RMB367.5m from RMB163.2m in the prior year period. Net income margin attributable to Vipshop's shareholders increased to 4.3% from 3.8% in the prior year period. Net income from diluted EPS -- per diluted EPS increased to RMB0.61 from RMB0.27 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 106% to RMB477.1m from RMB231.5m in the prior year period. Non-GAAP net income margin increased to 5.5% from 5.4% in the prior year period. Non-GAAP net income per diluted EPS increased to RMB0.80 in the first quarter of 2015, from RMB0.39 in the prior year period.

As of March 31, 2015, our Company had cash, cash equivalents and restricted cash of RMB6.6b and held-to-maturity securities of RMB1.8b.

For the first quarter of 2015, net cash from operating activities was RMB493.3m.

Looking at our business outlook for the second quarter of 2015, we expect our total net revenue to be between RMB8.7b and RMB8.9b, representing a year-over-year growth rate of approximately 71% to 75%. 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). Wendy Huang, Macquarie.

Sure. Thanks, management, and congratulations on the solid results. I have a few questions. The first one is about your warehouse expansion. Can you give us an update on your warehouse expansion target by the end of this year? I think previously you guided this to expanded to 1.6m square meters.

And second, in terms of the cross-border e-commerce, we're seeing lots of other peers doing very aggressively on this front. Can you provide your thoughts on that front?

And lastly, if you can provide a GMV contribution breakdown by cosmetics, home goods and baby and maternity, that would be helpful. Thank you very much.

(Spoken in Chinese).

So, Wendy, the first question is simple and short. So we remain to achieve 1.6m square meters of warehouse capacity by the end of this year.

(Spoken in Chinese).

As you know, that cross-border e-commerce is very popular here in China, and Vipshop is well prepared and the categories that we're engaged in is very beautiful for the business. We started the cross-border e-commerce May last year, and we have already made meaningful and rapid progress in the first quarter of 2015.

Eric was saying that we're already partnered with more [custom sports] and negotiated partnerships with brands overseas, and he expects to have a meaningful and rapid growth in the not too long future.

(Spoken in Chinese).

So, Wendy, we do not disclose the GMV from baby and children's wear, but we can tell you that cosmetics GMV is around $265m, up from $249m in the fourth quarter of last year.

(Operator Instructions). Cynthia Meng, Jefferies.

Thank you, management, and congratulations for a solid result. I've one question for either Donghao or Eric. The third-party marketplace business is margin enhancing for your type of business model. How big can management envision this business will become for Vipshop in the long term, maybe three years and three to five years, how big this business can be? Will that be still for inventory disposal kind of flash sale third-party business model, or would you also be expanding into in season?

And then, if yes, how do you envision would be the differentiating competitive edge when compared to other e-commerce players like Alibaba and JD? Thank you.

(Spoken in Chinese).

So I think that maybe to answer the first part of the question, Eric is saying we are not intentionally controlling the revenue contribution as a percentage to the GMV. In the past few quarters, it's been hovering around 10%. This is primarily to consider the user experience, which is less ideal compared to that from the principal business.

And as you have observed, the Company has been investing very aggressively to expand our warehouse capacity, our last-mile capability, all of which leads to improve the user experience overall. And imagining into the next three to five years, we anticipate our marketplace percentage to be around 10%.

(Spoken in Chinese).

The majority of the categories on the marketplace are still primarily focused on bulky home goods, some highly standardized SKUs like [in the child], and we stock both in season and out of season across the platform. The margin, obviously, from the marketplace is almost 100% contributing to profit, but we're trying to strike a balance between profitability improvement and the user experience.

Alicia Yap, Barclays.

Hi. Good morning and good evening, Eric, Donghao and Millicent. Thanks for taking my questions. I have a question. In your view, can you share with us how far are we in terms of penetration to the addressable user base as we grow further into the lower-tier cities?

Any impact on the consumer behavior, in terms of their knowledge on using smartphones for shopping, for navigating the page? So have we seen any change on user behavior in general as well for the demand for flash sale product? Thank you.

(Spoken in Chinese).

So, Alicia, Eric just mentioned that the entire online shopping population is now around 400m, and given that we just have accumulated just a few -- 30m accumulating users, so there's a lot of room for us to capture this opportunity.

And user behavior on the mobile, we have seen some changes too. In particular, a flash sale is more suitable for the mobile devices in terms of update frequency in terms of shopping, average ticket size and conversion rates. We're seeing some -- we're seeing better ratio on the mobile side compared to the PC.

Evan Zhou, Credit Suisse.

Hi. Good evening, Shen-zong, Yang-zong, Millicent. Thanks for taking my questions. My question is regarding the order size. I'm wondering, I saw this quarter the order size actually has been growing pretty well. Wondering if it's due to any category mix change or any impact from our user base that's causing it, and how should we expect the trend going forward?

And secondly, I think [online] reporting, I think recently there's some third-party report citing the differences between some reported numbers to the local SAIC versus the GAAP number. I wonder if you can share any colors and thoughts on that. That would be very helpful. Thank you.

Evan, this is Donghao. Thank you very much for coming to this call and asking questions. Well, your first question was about average order size. Yes, you're right. Our average order size went up pretty significantly in the past several quarters compared to 12 months ago, for several reasons.

One is the optimization of our customer mix. Starting from Q3 last year, we deemphasized our Group by business where we had less than ideal quality of our customers. By doing that, we have been able to improve the overall quality of our customer behavior, including order size, frequency of purchases, as Eric has just mentioned.

And another reason was the growth of our mobile business. As of the end of Q1 this year, 72% of our business was actually coming from mobile users. And mobile users tend to have better consumer behavior, including, again, a higher order size.

Your second question about the short-seller report from a firm called J Capital, regarding financial discrepancies between VIP and SEC financials. Well, we've noted that report, and that recent J Capital report contains various surprisingly groundless accusations of our Company. In particular, we note that the J Capital report allegedly cites to publically available VIP financial files.

But the alleged low consolidated VIP financial numbers as provided by J Capital actually deviates significantly from our public VIP files in all of the cited reasons in the report. Because the J Capital report appears to have used data of questionable, unreliable or perhaps untrue sources that may confuse the public, we would usually not consider it justified with a response.

Binnie Wong, Merrill Lynch.

Hi, Eric, Donghao and Millicent. Thank you for taking my question. My question comes on the active customer growth. If we see this quarter, it's actually lighter than our topline growth versus like, as we've sometimes seen in the past quarters, active customer growth tends to be stronger than our topline growth. Does that mean like competition intensifies?

And also, as we look at the marketing cost per new customer, that's also increasing. So how should we expect these two, like active customer growth and marketing cost for new customer, to trend into 2015? Thank you.

(Spoken in Chinese).

So, Binnie, just to summarize what Eric just said, as you mentioned, that this quarter and year over year the total active customer growth rate decelerated a little bit. This is largely due to the impact from the group buy channel.

I think the group buy -- the percentage of group buy this quarter was much less compared to the same period last year. And as you can imagine, group buy tends to have a lower ticket size, which is easier to acquire new customers. And however, not all the qualities of new customers are the same.

But our main channel is very important for us, and the customers on that channel tend to have high value. So we decided to deemphasize the group buy business. But if we exclude the impact from the group buying from our main channel net revenues, orders, customers, year over growth is very, very strong, which is similar -- which is almost in line with our overall net revenue growth.

So we're not too concerned about the growth rate of new active customers, because our main channel is the most important channel for Vipshop. And one thing to add is that deemphasizing the group buy business drives up the ARPU, the average ticket size per customer, which is very -- it's very good.

(Spoken in Chinese).

In fact, the new active customer acquisition cost did not go up much compared to last quarter. And going forward, we intend to aggressively invest in our marketing, and in particular target marketing to drive the overall user growth.

Jin Yoon, Mizuho.

Good evening, guys. Donghao, in your prepared remarks you mentioned expanding capacity, investing in IT and obviously the last mile, and the operational efficiency that comes with that. Can you quantify in any way or anyhow how these investments have led to certain operational efficiencies, for example like shortening inventory period times or faster fill times or faster delivery to the end user? Can you quantify in how the transition over the last two years, the amount of money that you've spent has improved the lead time into the final delivery process?

Well, thank you, Jin, for the question. Yes, you're right. We've done a lot of things in the past several years to try to reduce the fulfilment expenses, especially as a percent of revenue, so including warehouse expansion, acquiring last-mile delivery capability and shortening the delivery time, and etc., and including the co-location initiatives and all that.

Well, and the impact of those efforts and initiatives has been obvious. If you look at our fulfilment expenses as a percent of revenue, it has been consistently coming down in the past several years. But it would be pretty difficult for us to quantify the impact of each individual effort or initiative, but the total impact has been pretty obvious.

Chi Tsang, HSBC.

Good evening. Thanks very much for taking my question. I just have one question. I'm wondering if you can you give a perspective on just your plans on consolidating some of the investing couriers, and relatedly what the impact might be on margins after you do that. Thank you so much.

Sorry, we actually can't hear you. Can you repeat your question?

Sorry. My question was in the past you've mentioned that you're interested and you have plans to consolidate some of the investing couriers in all your networks. I'm wondering if you can give us an update on that and also what the impact on margins might be after you do consolidate the investing couriers. Thanks.

Okay. Well, essentially since early 2014, we have been pretty aggressive in acquiring regional courier companies across the country. So, so far, over 70% of our packages are being delivered by either our own delivery teams or local courier companies where we have equity stakes. And also, we're covering 29 provinces out of the total 31 provinces in China, so we've made very significant progress in that regard.

The impact on our margin or profitability from those acquisitions is very, very insignificant, because a lot of the courier companies that we have acquired have been our long-term courier partners even before the acquisitions took place. So the cost -- the overall cost that we actually saw hasn't changed much, simply because of the acquisitions.

(Operator Instructions). Tian Hou, TH Capital.

Good evening, management. My question is related to your promotions. Normally in April 19, since your IPO, you would have those store-wide annual promotion which made a big deal in the past times, and however, in 2014 you were like 400% year-on-year growth. However, this year, we observed that April 14 promotion seems like it really didn't happen, and as an e-commerce company I do think promotion is important. So I wonder, do you have -- how do you see this? Is there any new strategy to put in place regarding your promotion strategy? So what is the rationale behind these changes?

(Spoken in Chinese).

Okay, Tian. As you mentioned, last year, April 19 was a huge and successful promotion for us, and this year we ran small promotions here and there, but did not spend marketing to drive these promotions. The rationale being with these super promotions, it does hurt the profitability, and the Company is after high quality growth and high quality health -- and a healthy margin. So obviously the Company is balancing and trying to strike a good compromise between growth and profitability.

And going forward, in terms of big promotions, when and how to do it, I think we'll set our own pace we deem appropriate.

Just a few things to add in terms of the benefits of logistics and warehousing investments, a few tangible things to share with our analysts and investors. In terms of the delivery speed, obviously it's much faster compared to what it was when outsourcing to a third-party company. And the level of engagement between our own staff with end consumers has been enhanced, with more personal greeting.

And we even now offer collection for the returned goods on the doorstep and in the past, when customers shipped their products back to our warehouses, usually the lead time is longer. But now, with the at the doorstep return policy, we can refund the cash back to the customers then and there. So overall the user experience has been much improved.

Chao Wang, Nomura.

Hi. Good evening. Thanks for taking my question. I just wonder, if I look at your PC revenues, it seems it's down year over year. I just wonder if it's a normal industry trend or you intentionally deemphasize the PC business.

And also, of the new users, how much is from mobile versus from PC? Thank you.

(Spoken in Chinese).

So, Chao, yes, you're right. The PC growth rate is decelerating, but overall it's pretty much in line with what's happening in the entire industry, apart from maybe a few of number two or three companies which are able to maintain a stable growth rate.

Specifically, Eric thinks this fall is -- this is primarily due to the rapid migration from mobile -- from PC to mobile. We still have a large number of customers on the PC side. And in terms of the customer break -- new customer breakdown between PC and mobile, it's probably 25% from PC and 75% from the mobile devices.

Ida Yu, CICC.

Hi. Thank you for taking my questions. I just have one follow-up question in regard of your warehouse. As your new warehouse in Zhaoqing just opened in February, can management share with us any operating data in terms of the size or average daily order processed or some value-added services that you can provide to your brand partners going forward? And is there any impact on the margin going forwards? Thanks.

(Spoken in Chinese).

So, Ida, the new warehouse in Zhaoqing was recently -- it was recently opened, and we relocated the majority of the activities from Foshan to Zhaoqing. At the moment, it has around 200,000 square meters which are in use and the daily average order is between 120,000 to 140,000. In some cases, we can do better or can achieve a higher number.

We do -- in other locations of our warehouses, we do offer some co-location or 3PL services, yes. So we try our best to offer whatever value-added services possible to our brand partners.

The third-party logistics services that we are providing to our brand partners are actually not happening in the Zhaoqing warehouse, but instead the original Foshan warehouse, which is also located near our Guangzhou headquarters.

Sean Zhang, 86Research.

Good evening, Shen-zong, Yang-zong and Millicent. Thank you for taking my question. My question is regarding your growth driver in the next three to five years. According to my model, I do see your cosmetics only growing at 59% year over year. That means our apparel growing much faster than our total revenue, over -- probably over triple digit. So can I assume, going forward in the near future, apparel will still be our main growth driver or growth leader in all the categories?

What's your percentage target in the long term? I remember you telling us before that cosmetic will account for 15% to 20%, while apparel will account for 50% in the future. Has that target changed when you look at the result?

A small follow-up on your CapEx plan. Can you share with us your number on your CapEx plan for the future? Thank you.

Okay. Let me take that question. Thank you very much, Sean, for coming to join our call. Well, the next three, five years, we do believe that still the biggest growth driver will be apparel. As of today, about 60% of our total revenue is apparel, and of course cosmetics is also growing very fast. But we don't give guidance as to how fast each of the product categories will be growing in the future.

Your second question, CapEx plan, for this year and probably next year, our plan is to spend around $200m to $250m on our CapEx, and most of the money will be spent on warehouse expansion, further warehouse expansion.

Piyush Mubayi, Goldman Sachs.

Thank you, Eric, Donghao, Millicent, for the opportunity to ask a question. With the broadening of the definition of active customers, how does that impact the relative customer adds on a sequential basis, please?

Also, what is the split in active customer between tier one and tier two China at this point? Is it close to the revenue split that you talked about a quarter ago?

A second question, if I might ask, is on your tax spend, where you've written in this presentation about the fact that it's increased. Spending is increasing this quarter, as you're trying to improve predictive customer behavior. Could you shed color on how this -- how you envisage this developing in the next couple of quarters?

Okay. Sorry about that. We're trying to calculate our numbers to get to the answer to your question.

To your first question, without the broadening of our definition of our active customers, our Q1 2015 -- in Q1 2015 our total active number -- number of active customers actually increased by 4.1% compared to Q4 2014. That's the Q-over-Q growth rate.

And your second question, the answer is yes. The customer mix between different tiers of cities is roughly very similar to the revenue mix among different tiers of cities.

And your third question is about our -- sorry, can you repeat your third question? Is it about our development in our technology, the improvement? Sorry?

(Operator Instructions).

The last question.

(Operator Instructions).

Hi. It's the data analytics that you've been spending money on in this quarter on the technology, to improve predictive consumer behavior. I wanted to understand what sort of changes we could expect, the quantum of investment potentially and any other color that you could add in that area. Thank you.

(Spoken in Chinese).

So on the hardware side, we have been investing in servers. But on the personalization, customization front, we have spent quite a lot of energy in this front and we have seen some progress in terms of improvement due to this effort.

At the moment, improvement is up by single digits, and going down -- going in the future it will be from single digit to double digit. We're expecting that kind of trend to continue. Obviously, for us, it's more suitable for personalization because we're having different brands, we have a diversified customer base which we have decided and will continue to invest more aggressively in this regard.

Thank you, ladies and gentlemen. We have run out of time for any further questions. I would now like to hand the conference back to the management team for closing remarks.

Thank you for taking the time to join us and we look forward to speaking with you next quarter. Thank you.

Thank you.

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