Vipshop Holdings Ltd (VIPS) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and good day, everyone, and welcome to Vipshop Holdings Limited's third-quarter 2015 earnings conference call. At this point, I would like to turn the call to Ms. Millicent Tu. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining Vipshop's third-quarter 2015 Earnings Conference Call. Before we begin, I will 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/are likely 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 and 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 Mr. Eric Shen, [Shen-dong].

Good morning and good evening, everyone. Welcome to our third-quarter 2015 earnings conference call. We are disappointed that we missed our top-line guidance due to unexpected seasonal patterns, over-optimistic forecasts and conservative marketing investments. Donghao will discuss this in more detail shortly.

After the close of the quarter, we strengthened our effort to spur user growth and buying activity. On the famous Single Day, November 11, we achieved a GMV three times over last year's Single Day. New active customers for this event also tripled year over year. This gave a strong boost to our platform and helped us improve new customer growth momentum. With the success of our Single Day sales event and the new marketing efforts, in the fourth quarter so far, we believe we are back on the right track to drive further customer -- to drive future customer and revenue growth.

A good aspect of our Company is that our flash sales model is very suitable for mobile devices. In the third quarter, the GMV from mobile rose to 79%, up from 57% one year ago, and the total active customers on mobile in our cold flash sale business increased by 137% year over year.

We are also excited about our new cross-border offering, which allows foreign brands to test into the Chinese market and bring our customers a wider range of international products. Strategically, it provides us with good cross-selling opportunities. During the third quarter, revenues from the cross-border business grew by over 164% quarter over quarter, and we expect to start seeing fast growth in the coming quarter.

With our continued growth, we remain confident in the strong fundamentals and the market opportunities for our Company.

At this point, let me turn over the call to our CFO, Donghao Yang, so that he may discuss our operations and financial results.

Thanks, Eric, and hello, everyone. As Eric mentioned, unfortunately, we missed our top-line guidance for the first time in the 12 quarters since we became a publicly listed company.

In hindsight, our third-quarter guidance was over-optimistic to begin with, and additionally, we didn't invest enough in marketing. Seeing traffic acquisition costs increasing at a rate faster than we anticipated, we were a bit slow to adjust to this new market condition. Our total marketing spend for the third quarter was less than that for the second quarter.

Lastly, we saw different seasonal patterns this year, especially late into the quarter, impacting customers' purchasing behavior, which further hindered our top-line growth.

Despite this miss, we continued to have solid revenue growth of 63% year over year and made strong operational progress during the third quarter. In the last quarter, we added more than 5m new active customers to our platform, bringing our total active customers to nearly 15m. These customers placed nearly 45m orders in the third quarter, up from 28m one year ago.

Excluding the impact of the group-buy business and Lefeng, the number of total active customers and total orders for Vipshop's core flash sales business increased by 71% and 75%, year over year, respectively.

Our customers remain sticky and loyal to our platform. The number of repeat customers grew to over 11m in the last quarter, and these repeat customers contributed 92.5% of our total orders. In the third quarter, our average active customer made 3.1 purchases and spent RMB595 on the platform, up from 2.9 purchases and RMB541 in the prior-year period.

Furthermore, our operating margins further expanded to 5% from 2.4% in the prior-year period, driven by a decline in our operating expenses as a percentage of total revenue. The growing size of our platform, stronger customer loyalty, increased buying activity and strengthening operating leverage brings us many opportunities to offer more products, provide better service and reduce costs.

On the logistics side, we have continued to build out a strong infrastructure of warehouses and networks of invested delivery companies to support and enhance our order fulfillment capabilities. By the close of the third quarter, our warehouse capacity reached 1.6m square meters, and we also started automation products in some of our warehouses.

On the last-mile side, through our network of in-house and invested couriers, we're now delivering 80% of our total orders across almost all provinces in Mainland China. Our logistical enhancements enable us to reduce delivery time, provide more coordinated and friendly delivery service, reduce costs and ultimately provide a more consistent and pleasant customer experience.

For example, leveraging our last-mile capabilities, we're now able to return orders more promptly and cost-effectively utilizing our own logistics infrastructure. Overall, it is our unique and proven offering, as well as the exemplary beginning-to-end customer experience we provide which sets us apart in the market.

We're confident that by continuing to leverage our proven model, improve our operations and deliver the best experience possible to our loyal customers, we are very well positioned to further expand our platform and build our brand globally.

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 third quarter of 2015 increased by 63% to RMB8.67b, primarily driven by continued robust growth in the number of total active customers and total orders, as well as the increasing revenue contribution from our mobile platform. On the mobile platform, the number of total active customers and total orders for Vipshop's core flash sales business increased by 137% and 141%, year over year, respectively.

Gross profit for the third quarter of 2015 increased by 63% to RMB2.16b, primarily driven by the expanding scale of the business. Gross margin for this quarter remained stable at 24.9%, as compared with the prior-year period.

Fulfillment expenses for the third quarter of 2015 were RMB778m, as compared with RMB509m in the prior-year period, primarily reflecting the increase in sales volume and number of orders fulfilled. As a percentage of total net revenue, fulfillment expenses decreased to 9% from 9.6% in the prior-year period, primarily reflecting the scale effect associated with our growth in total net revenue and the increase in average ticket size.

Marketing expenses for the third quarter of 2015 were RMB470m, as compared with RMB284m in the prior-year period, reflecting our strategy to drive long-term growth through increasing investments and strengthening our brand awareness, particularly for our mobile application, attracting new users and expanding our market share. As a percentage of total net revenue, marketing expenses were 5.4%, as compared to 5.3% in the prior-year period.

Technology and content expenses for the third quarter of 2015 were RMB253m as compared with RMB190m in the prior-year period, reflecting our continued effort to invest in human capital and the best technologies, such as data analytics, which can help improve the ability to predict consumer behavior and further enhance user experience.

As a percentage of total net revenue, technology and content expenses decreased to 2.9% from 3.6% in the prior-year period, primarily reflecting the scale effect associated with the growth in total net revenue.

General and administrative expenses for the third quarter of 2015 were RMB297m, as compared with RMB259m in the prior year period. As a percentage of total net revenue, general and administrative expenses decreased to 3.4% from 4.9% in the prior-year period, primarily reflecting the scale effect associated with our growth in total net revenue.

Driven by the growing scale of our Company's operations and decreasing fulfillment, technology and content, and general and administrative expenses as a percentage of total net revenue, our income from operations increased by 241% to RMB436m for the third quarter of 2015. Operating income margin increased to 5% from 2.4% in the prior-year period.

Non-GAAP income from operations, which excludes share-based compensation expenses and amortization of intangible assets resulting from a business acquisition, increased by 131% to RMB587m from RMB254m in the prior-year period. Non-GAAP operating income margin increased to 6.8% from 4.8% in the prior-year period.

Exchange loss was RMB57m, as compared to an exchange gain of RMB21m in the prior-year period, primarily driven by the weakening value of the RMB relative to the US dollar.

Our net income attributable to Vipshop shareholders for the third quarter of 2015 increased by 90% to RMB317m, from RMB167m in the prior-year period. Net income margin attributable to Vipshop's shareholders increased to 3.7% from 3.1% in the prior-year period. Net income per diluted ADS increased to RMB0.53 from RMB0.28 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 a business acquisition and equity method investment increased by 62% to RMB453m from RMB279m in the prior-year period.

Non-GAAP net income margin remained stable at 5.2% as compared to the prior-year period. The [sudden] growth in non-GAAP net income margin was primarily attributable to the relatively large exchange loss in the period. Non-GAAP net income per diluted ADS increased to RMB0.76 from RMB0.47 in the prior-year period.

As of September 30, 2015, our Company has cash, cash equivalents and restricted cash of RMB3.54b and held-to-maturity securities of RMB2.58b.

For the third quarter of 2015, net cash from operating activities was RMB285m. As we discussed last quarter, this was primarily due to Vipshop's substantially speeding up our payments to suppliers in order to support their growth and create an ecosystem that will strengthen our competitive advantages. We also continued to significantly increase our supplier financing, and this was one of the large cash outflow items in the quarter.

Looking at our business outlook for the fourth quarter of 2015, we expect our total net revenue to be between RMB12b and RMB12.5b, representing a year-over-year growth rate of approximately 43% to 49%. In order to secure the necessary land for the future office space in the Pazhou Internet innovation zone, Vipshop incurred a capital expenditure of RMB837m in the third quarter of 2015.

Lastly, the Board of Directors has approved a share repurchase program whereby we may purchase up to $300m of our ADS over the next 24-month period. We expect to fund the repurchase from our existing cash balance, including cash generated from operations.

With that, I would now like to open the call to Q&A.

(Operator Instructions). George Meng, Goldman Sachs.

Hi. Good evening, everyone. Thank you very much for taking my question. I have two questions. The first one is related to your other revenue. I see that didn't grow that much in the third quarter sequentially. Can you help us understand that? Is that the net GMV from marketplace as a percentage of total net GMV decreasing? Or is it the commission rate actually decreased? And also, what's your view for the longer run for your marketplace business?

And then the second one is you mentioned the cross-border is growing really fast. Can you disclose how big is it as a percentage of your 1P revenue? And then how big do you think it will become in the longer run?

And also, if you can disclose some of the operating metrics, for example, the size of your bonded warehouse now and then do you have any expansion plan and any related CapEx? Any color will be very helpful. Thanks.

Well, thanks for your question. All right, in the other revenue line, you're right, Q3 is smaller than Q2, mostly because of a smaller commission revenue from our third-party marketplace business. We have told our investors that we're going to be very careful about how aggressive we want to grow our marketplace business, because there has been -- there has been some issues with other marketplace platforms, where people have complaints about quality of products and etc. So that's why we been pretty careful about how aggressive we want to do that.

So to your question about the cross-border business, now, the cross-border business is about -- it's about 5% of our total GMV, and our goal is to grow the business a bit more faster going forward, as long as the regulatory environment, or to be more specific, the import duty policy, remains stable.

(Interpreted). Okay, so, George, at the moment, we have approximately 68,000 square meters of bonded warehouses in China, and we are intending to extend that capacity in the future.

Alan Hellawell, Deutsche Bank.

Great, thank you. First question, just was noticing that DSOs have risen somewhat, payables have come up a tiny bit, but the overall cash conversion cycle has risen somewhat. Can you give us a sense -- I know you mentioned a couple initiatives, but what might be driving that, and what we should anticipate going into the end of the year and into next year?

And then my other question is, obviously, we heard about weather impacting growth for the third quarter. I was just wondering whether you could address competition, particularly in light of recent competitor comments on its own robust growth in flash sales to the point that the read-through would be that it might be even 15% of our GMV level. Any comments would be helpful. Thank you.

Alan, thank you for your questions. Let me take your first question. So, well, it has always been the -- this management's goal to help our suppliers to grow their business and then, as a result of that, we can -- they can have more products to sell, inventory to sell, through us, which will benefit our business eventually.

So we have been leveraging our large cash balance at Vipshop to first shorten the payment terms for suppliers, and second, to offer supplier financing to our suppliers. So this is critical for an established retailer to build its healthy and fast-growing ecosystem.

And this quarter, our operating cash flow situation is much better than the previous quarter, and as I explained earlier to our investors, that this -- we changed our payment policy earlier this year, and the impact on our operating cash flow would be only temporary. Going forward, in Q4, our operating cash flow will be even better, and going forward, the cash conversion cycle will return to its normal level.

(Interpreted). So, Alan, we are very specialized in discount retailing. In our specialty, we're not seeing any [track] in our business. We are always staying focused, able to grow very fast, and as you can see, the majority of our business is still on the direct third-party business model, which is very different, substantially different compared to other flash models, largely on marketplace.

In our business, it has substantial entry barriers, and we have always had competitors along the way in various -- in many forms, and we're always able to strengthen and defend our competitive advantage, mainly in merchandising, very specialized warehousing sector.

(Operator Instructions). Dick Wei, Credit Suisse.

Great. Thank you for taking my questions. I have questions -- I guess the Company has seen top-line deceleration over the past couple of quarters. I think at this point, how would management think about the growth strategy going forward? Are we focusing more on the -- try to increase the GMV growth through partnership, marketing, etc., or it's really focused more on slower growth rate but more -- higher profitability. (Spoken in Chinese).

(Spoken in Chinese).

Okay, Dick, just for the benefit of others, I'll quickly summarize what Eric just said. If we look at excluding local, excluding the global impact, if we look at the past three quarters our orders have been growing at 107%, 86% in this quarter, 75% respectively year-over-year. So judging from this growth rate it's still very healthy. It's still very fine. Of course the Company is not very sizeable, so the size is -- it's on the basis if kick in -- that it is going to be a factor to consider.

In terms of strategy, the Company will try ways and means to deepen our penetration and of course grow our market share. We are doing pretty well in our existing category, but of course we have grown to enrich into other categories. New customer acquisition, new customer growth, is still one of the top priorities. The Company, learning from the Q3 experience, will try to be a bit more aggressive in terms of getting more new users. Having said that, the Company is trying to strike a balance in terms of top-line growth and overall profitability.

Thank you. Cynthia Meng, Jeffries.

Thank you, management. I have two questions. First of all, management mentioned that you are looking to increase spending on the marketing side to increase new customers and expand into more categories. Can management give some more colors on how you look at marketing spend to sales ratio? Is this some kind of metric that you will look at to monitor how much spending you will put in next year in order to grow customer base? And then, with respect to the product category expansion, we'll appreciate some more color what type of categories and also what geographic market you are going to expand to.

Second question is with respect to the competitive environment. Management just mentioned that you will continue to focus on online direct sales versus a platform type of approach for the flash sale. Can you give us some more color on why you think this is much more effective compared to the platform approach? Thank you.

Let me take your first question. Well, when we say we're going to be a bit more aggressive in our marketing strategy to acquire new customers, it doesn't mean that we will significant increase our marketing, total marketing spend as percent of revenue. And we believe that even going forward our total marketing dollars as percent of revenue will remain relatively stable. And more importantly, we will try to optimize our channel mix or method, for our marketing strategy.

For example, currently we spend quite a significant amount of marketing dollars on branding, on TV commercials, so if the customer acquisition costs go up really, really fast, we can definitely be a bit more flexible, allocating more of our branding or our TV commercial campaign dollars to online customer acquisition channels, for example.

So, back to your question, we believe that the total marketing spend as percent of revenue won't go up significantly.

(Interpreted). So, I think the answer for your question on the category expansion, just to highlight a few, last year we did a tremendous job in improving or increasing our market share in the beauty and cosmetics category. And this year we are putting more emphasis and more effort in baby and mother, and this year is another highlight that we feel very proud, have done a very good job in achieving further growth. Next year, probably home goods is another area where we can focus, because this category still has a lot of room to grow in the future.

Three C, or electronics has not been our core categories in the past, and we believe that even in this category there should be some room to improve to diversify our product offering.

We believe that direct sales intrinsical business model is much more advanced and sophisticated compared to that of our marketplace and we will continue to be focused in this area. We believe by offering on the direct sales business model we are able to do much better merchandising and product offerings. For example, if, for a customer if they order multiple orders on the marketplace they will be expecting to receive multiple orders individually and return individually. However, by offering on the direct sales business model we're controlling the entire process whereby we can consolidate multiple items into one order, to save cost for the brands and consumers and offer integrated and consistent user experience.

(Operator Instructions) Wendy Huang.

(Spoken in Chinese). My question is the share price tanked 40% in the past one week. I think this might be partially due to the disappointing growth in the revenue in the quarter, but as you mentioned that the revenue actually, after all, is still healthy and also the growth is actually above the industry average, so I think it is probably more due to the confidence crisis the Company's facing that was caused by the [dramatic] rating and the late Q3 warning. So I wonder what does management learn from the recent experience. What will you do to actually improve on the investor communication to prevent this from happening again?

And related to this, you mentioned that Singles Day's growth is actually quite strong and the Company actually already went back to the growth track, so if this is the case, why hasn't the management actually provided a more robust Q4 guidance to recover the recently lost investor confidence? Thank you.

Well, thank you, Wendy, for your question. Your first question about our preannouncement, I believe. Well, as a publicly traded Company we, Vipshop, is required, legally, to disclose any material information to the public as soon as -- immediately. So, the reason it took so long for us to make this preannouncement was because of a few things. One, it took time for the auditors to complete their review process before we make this announcement, and secondly, we missed our guidance, you said by 6%. It's midpoint -- it's actual to midpoint of our guidance. It's less than 5% if you compare our actual number against the low end of our guidance, so, which is usually viewed as not material.

So it took the management some time to consider whether or not we should do it. We finally decided to make the preannouncement because this was the first time ever we missed our guidance during the past 12 quarters, and it might have a pretty significant impact on the market. So, going forward, Vipshop will continue to be fully compliant with all legal and the regulatory requirements and follow the highest standard of information disclosure.

And guidance, we don't believe that guidance should serve the purpose of boosting the confidence of the market. Our guidance is not intended to have any immediate or short-term impact on our stock trades. So, you mentioned that our strong, double-11 Singles Day sales, which is correct, but again, it was only just one day and we have over 90 days for Q4.

So when we give guidance there are two things that we need to consider. One is, usually when we give guidance about one half of that quarter has already passed, so we're going to give our guidance based on what actually happened.

And also, we need to consider the historical pattern, when we give guidance. So we look at all the seven years since Vipshop, day one, all Q3s were higher than Q2s, except for this year. So when we gave guidance for Q3 this year we looked at the historical pattern for the previous six years, and we had very good reason to believe that this, year seven, would follow the historical pattern, but it turned out that this time the seasonality pattern is different. So that's why we said we give an overly optimistic guidance for Q3.

(Spoken in Chinese).

So just Eric was saying, from Eric, so of course, since the IPO, 12 quarters we have done a very good job and this was the first time the management was having to deal with missing our internal guidance. So we have to say that in the whole process maybe shows some sort of inexperience and we are learning from the hard lesson. And being aggressive is not the management style, and we're not looking for the short-term return. We are working with the long-term shareholders, and hopefully to create long-term value for them. And we missed the quarter. It doesn't mean we'll keep making the same mistakes again and again. So, the quarter, let's forget about Q3 and let's look forward, and we're still very optimistic about our future outlook.

Natalie Wu, CICC.

Hi, good evening, management. Thanks for taking my questions. I have two quick questions, if I may. The first one is can you share with us the top five cities or districts ranked by sales?

And the second one is I've noticed that your fulfillment expense decelerated, declined sequentially. I can understand the shipping-related portion but why is the non-shipping handling portion also down by 20% sequentially? Could management give us some color on that? And what will be the trend, going forward? Thank you.

Sorry, Natalie, so your first question are you asking about the sales contribution by different tier cities?

Yes.

Okay, now Eric can take that question.

(Interpreted). Okay, so the geographical breakdown by different tier cities is largely very stable. Tier one, tier two combined, 52% of our business and then tier three and four about 48%. So there's no significant difference compared to that in the second quarter and that in the first quarter.

Jin Yoon.

Hi, good evening, guys. Revenues for customer growth seems to have decelerated sequentially, both when looking at active customers and core customers, and why that is, and do we know why total customer growth accelerated from 2Q to 3Q, while customer, or core customer growth decelerated? Thanks, guys.

Jin Yoon, I'm sorry, we're confused about your question. Can you please ask it again?

Yes, the first question was, sorry about that. Revenues per customer growth seems to have decelerated sequentially, when both looking at active customers and core customers. Can you give just some color why that is, and why total customer growth accelerated sequentially while core customer growth decelerated?

Well, let me take your first question. Basically I think you -- your question is about our average pick of basket size, right? Revenue per customer, or --?

Right.

So, okay, so that's why we said Q3, the seasonality of this year, the seasonality pattern is different from all of the previous years. And we mentioned weather as a reason for -- one of the reasons why we missed the guidance. And actually, in September, especially in the second half of the month, the northern part of the country, I mean, northeast, northwest, those parts of the country were warmer than expected, so our more pricey autumn and winter coats sales were slower than expected. And that was, I think, the main reason why the average basket size in Q3 was smaller than Q2. And usually, historically, our Q3 the average basket size should be higher than Q2.

And the total customer growth accelerated from Q2 to Q3, while core customer growth decelerated?

Well, Jin Yoon, we have to go back and look at the numbers that you mentioned and get back to you with the -- when we find out, figure out why.

Thank you. Ladies and gentlemen, we have no further questions at this time. I would like to turn the call back to the management. Please go ahead.

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

Thank you. Ladies and gentlemen this does conclude our conference for today. Thank you all 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.