Vipshop Holdings Ltd (VIPS) 2016 Q2 法說會逐字稿

Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited's second quarter 2016 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.

Thank you, operator. Hello, everyone, and thank you for joining Vipshop's second quarter 2016 earnings conference call. Before we begin, I'll read a Safe Harbor statement.

During this conference call, we'll 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 or likely to, may, plan, should, will, aim, potential and 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 Mr. Eric Shen, our Chairman and Co-Founder and Chief Executive Officer and Donghao Yang, our Chief Financial Officer. At this point, I would now like to turn the call to Mr. Eric Shen. Shen-zong?

Good morning and good evening, everyone. Welcome to our second quarter 2016 earnings conference call. Our results once again show the strength of our platform and the discount retail sector, as both active customers and total orders grew by more than 50% year over year.

Despite the challenging macro environment, we were able to successfully reaccelerate our revenue growth. In the first quarter, we added more than 8.2 million new customers, which is a 50% increase compared to the same period last year. This is exciting as customer growth by expanding our customer age range, is one of the key factors of our continued success. In doing so, we have enhanced the personalization of our product offering and the user experience on our apps and website.

Younger shoppers have smaller order size, but they are more Internet and mobile-focused and are the future of e-commerce. We expect this order size to increase as their spending power grows over time.

Looking ahead, we will continue to expand our product offerings and deliver more personalized products and service to our valued customers. We are confident that we have the right plans and teams to continue growing our business and creating value for our shareholders.

At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss our strategies in more detail and go over our operational and financial results.

Thanks, Eric, and hello, everyone. We are pleased with our second quarter 2016 operational and financial results. As Eric mentioned, during the second quarter, we reaccelerated our top-line growth and significantly strengthened our operating cash flow. On the customer side, we were able to grow our number of active customers to 23 million, a 52% increase compared to the same period a year ago, and total orders to 69 million, a 54% increase compared to the same period a year ago.

Customer satisfaction is the foundation of our success, and we are constantly looking for new ways to improve the user experience on our platform. That is why we continue to invest in the personalization of our merchandise offerings. By providing our users with product choices that are most relevant to them, we were able to increase both conversion rate and ARPU on our app.

As you know, we have recently launched a customer financing program in addition to our supplier financing program. As of June 30, 2016, the total balance of credit outstanding to customers was approximately RMB1.2 billion and the total balance of credit outstanding to suppliers was RMB390m.

At the end of the day, these programs are here to support the growth of our core business. Our plan is to expand the scale of these programs over time through balancing core growth opportunities with risk control. This is demonstrated by our recent move to hire a Chief Risk Officer for our Internet finance unit who has more than 20 years of international and domestic financial risk experiences.

Turning to logistics, we remain focused on enhancing and expanding our logistics capabilities. Over the past several quarters, we have continued to build out a strong infrastructure of warehouses and networks of both invested companies and proprietary logistics to enhance our order fulfillment capabilities. We're now able to deliver more than 90% of our orders through our last-mile network. Also, we're on track to add approximately 500,000 square meters of warehousing capacity by the end of this year.

Looking ahead, we aim to continue delivering solid top-line growth while maintaining our margins. We're confident that by continuing to leverage our proven model, improve our operations and deliver the best shopping experience possible to our loyal customers, we will continue to strive to stable growth and generate additional value for all of our stakeholders.

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 second quarter of 2016 increased by 49% to RMB13.44 billion, primarily attributable to a 62% year-over-year increase in the number of active customers, which grew to 23 million and a 54% year-over-year increase in total orders to 68.9 million.

Gross profit for the second quarter of 2016 increased by 44% to RMB3.24 billion, primarily driven by the expanding scale of the business. Gross margin for this quarter was 24.1%, as compared with 25% in the prior year period. The decrease in gross margin was primarily due to our promotional activities, which made pricing more attractive to customers.

Fulfillment expenses for the second quarter of 2016 were RMB1.15 billion, as compared with RMB820 million 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 8.6% from 9.1% in the prior-year period, primarily reflecting the scale effect associated with our growth in total net revenue and improved fulfillment efficiency.

Marketing expenses for the second quarter of 2016 were RMB672 million, as compared with RMB503 million in the prior-year period, reflecting our strategy to drive long-term growth through sustainable investments and strengthening our brand awareness, attracting new users and expanding our market share. As a percentage of total net revenue, marketing expenses decreased to 5% from 5.6% in the prior-year period, primarily reflecting our cost control efforts.

Technology and content expenses for the second quarter of 2016 were RMB392 million, as compared with RMB246 million in the prior-year period, reflecting our continued efforts to invest in human capital, advanced technologies such as data analytics, as well as new business opportunities, including our Internet finance unit. As a percentage of total net revenue, technology and content expenses were 2.9% as compared with 2.7% in the prior-year period.

General and administrative expenses for the second quarter of 2016 were RMB434 million, as compared with RMB287 million in the prior year period. As a percentage of total net revenue, general and administrative expenses were 3.2%, as compared with 3.2% in the prior-year period.

Our income from operations increased by 47.1% to RMB644 million for the second quarter of 2016. Operating margin was 4.8%, as compared with 4.9% 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 47.2% to RMB837 million from RMB569 million in the prior-year period. Non-GAAP operating income margin is 6.2% as compared with 6.3% in the prior-year period.

Our net income attributable to Vipshop's shareholders for the second quarter of 2016 increased by 13.1% to RMB452 million from RMB399 million in the prior-year period. Net margin attributable to Vipshop's shareholders was 3.4%, as compared to 4.4% in the prior year period. The decline is partially attributable to lower interest income, as well as a RMB48.6 million impairment loss of investments. Net income per diluted ADS increased to RMB0.76 from RMB0.66 in the prior-year period.

Non-GAAP net income attributable to Vipshop's shareholders, which excludes share-based compensation expenses, impairment loss of investment and amortization of intangible assets resulting from a business acquisition and equity-method investments increased by 30.9% to RMB678 million from RMB518 million in the prior year period. Non-GAAP net margin attributable to Vipshop's shareholders was 5%, as compared with 5.7% in the prior-year period. This decline is primarily due to lower interest income.

Non-GAAP income per diluted ADS increased to RMB1.12 from RMB0.86 in the prior year period.

As of June 30, 2016, our Company had cash and cash equivalents and restricted cash of RMB3.27 billion and held-to-maturity securities of RMB1.75 billion. For the second quarter of 2016, net cash from operating activities was RMB1.23 billion.

Looking at our business outlook, for the third quarter of 2016, we expect our total net revenues to be between RMB11.9 billion and RMB12.4 billion, representing a year-over-year growth rate of approximately 37% to 43%.

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

(Operator Instructions). Our first question comes from the line of Jialong Shi from Nomura. Please go ahead.

Hi. Good evening, Shen-zong, Yang-zong and Millicent. Thanks for taking my call, and first of all, congratulations on a very strong quarter. Shen-zong, you mentioned in the earning release you now have improved control of the balance of growth and profitability and that will enter into a more stabilized growth going forward. I was just wondering if Shen-zong can elaborate what kind of stable growth rate you guys now aim to achieve going forward and what sort of operating margin you will try to maintain. Thanks.

Well, Jialong, thank you very much for your question. As your question is mostly related to margin and growth rate, I'd like to take that question instead of Shen-zong.

Well, our goal is very clear. We want to drive our top-line growth as fast as possible while maintaining a steady profitability. So we're not giving any guidance to our future growth rate behind the next quarter, but our priority is very clear. We want to grow as fast as possible, but at the same time, we want to maintain a steady profitability level.

All right, thank you. Our next question comes from the line of Alan Hellawell of Deutsche Bank. Please go ahead.

Great. Thank you. I was hoping you could offer a forecast of your revenues by activity. We obviously have our incumbent inventory clearance business, and then more recent initiatives such as tailor made and in-season discounting. If my estimates serve me well, tailor made and in season as a proportion of total revenues seemed to have remained pretty constant at about 35% over the past couple of quarters. Is this likely to remain the case, and if so, are there any other new sales formats that might offer a new growth driver?

And sorry, just another related question, we do see -- we have evidence across markets that many brands have a finite role for inventory clearance. Many will leverage it up to the point that obviously it clears excess inventory, and to the point where it doesn't begin to impair their broader brand equity and pricing power.

We've obviously offered inventory clearance over the past eight years. Where's the growth going to come from going forward? Is it new brand partners with new inventory issues or somehow existing partners? Thank you.

(Spoken in Chinese).

So, Alan, just to quickly summarize what Eric just said, in the second quarter, actually the in season and tailor made or custom made accounted for approximately 35% of our business. And as far as Eric is concerned, that percentage might eventually go even higher. As far as customers are concerned, this is a natural choice, whether it's out of season, in season or tailor made.

It's not if they find a brand's popular, we'll cater for that. And in terms of new areas of business or areas for expansion, obviously Eric mentioned that apparel, handbags, shoes, are tier-one categories, coupled with beauty, cosmetics, baby and mother, etc. We are adopting an embracing approach. Anything that's welcome or popular among our shoppers, including new merchants, including new categories, including custom made and including fast fashion or even [light] forecasting, format of retailing, we'll be all open minded and explore.

All right. Thank you. Our next question comes from the line of Evan Zhou from Credit Suisse. Please go ahead.

Hi. Good evening, Shen-zong, Yang-zong and Millicent. Thanks for taking my questions. Questions regarding the old customer retention. I noticed that within our 23 million active customer base for this quarter, I think the old customers actually in this quarter seems to be contributing a lot in terms of percentage of total customers and those orders fulfilled in this quarter. So I was wondering, is there any effort that we've done to revive the activity for these customers, and how do you actually see the behavior of the old customers in our platform to migrate down the road?

(Spoken in Chinese).

Okay, so Evan, just quickly summarizing what Eric said for the benefit of others. In terms of your first question, what we have done to encourage old customers to buy more, obviously, Eric mentioned the function of CRM. We're deliberately trying to encourage our customers to cross-by into different categories. For example, a new customer for the first time for cosmetics, and the next time we try to encourage them to buy other categories, including apparel, handbags and shoes, etc.

The second question is obviously, it is shown in our numbers that we have lots of new customers, which has some small impact in terms of decline on the average ticket size or the frequency and ARPU, etc. But we're embracing that, because we knew that these younger customers indeed in their future will be the potential for our growth. And we are at the right time to expand our customer base and embrace and diversify into different customer age range.

Personalization is very important. Eric mentioned that in the first quarter, actually the contribution to top line was about 15%, and that number went up to about 17% in the second quarter. Obviously, we're able to do different customizations for different age groups and able to do customer labeling. If eventually you hear from the Company saying that personalization is contributing 30%, 40% of our revenue, that will not be too surprised in the longer run.

Thank you. Our next question comes from the line of Binnie Wong from Merrill Lynch. Please go ahead.

Hi, Shen-zong, Yang-zong, Millicent. Good evening, thank you for taking my questions. I have two questions here. I was wondering that in terms of your widening your user base to expand into younger user generation, any change in terms of our marketing strategy or in terms of personalization you mentioned earlier or maybe the brand mix that drives this to happen. And how should we expect this to trend going forward in terms of the younger user generation and what are the things that we will do more of to continue that?

And then second question is that looking at this great improvement on your operating cash flow, if you can just share with us what are the things in terms of the working capital cycle, what are the things that we have been doing that improve that? That would be great. Thank you.

(Spoken in Chinese).

Binnie, so Eric mentioned that in the second quarter, out of the 8.2 million new customers that we added, about 45% of that are coming from post-90s. The new addition of the younger customers on one hand expands our customer base. On the other hand, we recognize that there's some things to tackle in the future. For example, it could stabilize our platform, but at the same time, the average ticket size and the spending power is lower compared to the post-70s and post-80s customers.

One thing that Eric shared was that for post-90s, they rarely watch telly, which is very different compared to customers that are in the much older, much more mature age profile. For the younger demographic, we leverage on the new media, social interaction, etc., to target that.

Okay, Binnie, thanks for your question. Let me take your second question about our cash flow. Actually, in Q2, we didn't do much different than before to drive a very, very strong cash flow improvement. First of all, this is a very profitable business. We made a huge amount of profit every quarter, and secondly, and as a large retailer, we always get paid by our customers almost instantly and have at least 30 to 40 days before we pay our suppliers.

So the cash flow of this business has always been very, very strong, but there might be some seasonality in our cash flow pattern. For example, this past Q1, our operating cash flow came down temporarily because of the impact of the Chinese spring festival, but going forward, we are very confident that our cash flow will continue to be strong and solid.

All right, thank you. Our next question comes from the line of Natalie Wu from CICC. Please go ahead.

Hi, good evening, Eric, Donghao and Millicent. Thanks for taking my questions. I have a question regarding the consumer financing business. You're mentioning last quarter that those who used your consumer financing products tend to buy 30% more in each order. So just wondering if the ratio still held the same for this quarter. Also, what's the coverage ratio of your consumer financing products? That is, what's the percentage of your old customers that have used your financing products in your quarter? So have you also noticed any lift in buying times in addition to the ticket size?

(Spoken in Chinese).

Okay, all right. I'll [Canadian] speak in English. I think Eric has answered most of your questions. There are a couple of things that I want to add to that. One is about our risk control mechanism or team. We have a pretty strong and seasoned risk management and control team at Vipshop, so the default rate so far has been super low. This is a very promising business over time, and we do believe it's going to be a profitable business as well.

Secondly, we do plan to grow this business as a healthy addition to our core business or as a support to our core business over time. The financing of the business, we can also find very good solutions to that. For example, in the next few months, we're going to launch our first ABS product.

So we don't really worry about the cash or the financing of this business. So it's a very healthy and solid business.

So Natalie, I just would like to clarify, it's not the average ticket size increased by 30%. It's actually the ARPU.

All right, thank you. Our next question comes from the line of Alicia Yap from Citigroup. Please go ahead.

Hi. Good evening, Eric, Donghao and Millicent. Thanks for taking my questions. I have a follow-up question on the latest user acquisition strategies and also the customer profile. So just wanted to get a sense -- you mentioned about the younger customers, which contributes to about 30% of your new customer growth, but what are the marketing events and the channels that you have been using to successfully attract this younger group of shoppers. Have you been using, for example, the Internet celebrity type of promotional channels?

And then in relation to this young group of users, could you share with us their frequencies of the purchase and the categories? Are these younger groups of customers tend to shop more frequently than your existing older core users?

And in addition to cosmetics category, what are the categories there they are also spending their money on? Thank you.

(Spoken in Chinese).

Let me share just quickly to answer the question. Obviously, earlier on the call, Eric did mention that the younger demographics access the information quite differently, so of course we use applications like what we did in the past. Increasingly, we are adopting interesting ways to engage with the younger demographics, for example, web celebrities and web live broadcasting, etc.

In terms of their categories, obviously, they buy a lot of cosmetics, but the same time, apparel, handbags, shoes as well. Because the post-90s, in their mid-20s, 25, 26 years old, and understandably their spending is lower, but we believe that as time goes by, as we're able to measure them, their ARPU, their shopping frequency over time will improve.

All right. Thank you. Our next question comes from the line of [Julia Zhu] from Morgan Stanley. Please go ahead.

Thanks, Shen-zong, Yang-zong, and Millicent for taking my question, and congratulations on the strong quarter. I have a follow-up question regarding the ARPU. Because the management mentioned that the ARPU decline has down like 7% to 8% year on year this time. So could management help us to understand the impact from increasing customers from post-90s in ARPU decline? And if I remember correctly, last quarter, we are talking about a 3% year-on-year decline in customer spending from this millennial effect.

Also another question is regarding the category expansion, because we know there is some personnel change in our management team. For example, the merchandising team previously. Should we expect a change of merchandising strategy in the future, and how will that impact or help our category expansion plan?

And another question regarding the promotions. Could management give us some color on the performance of our promotions around April 19th and June 18th, for example, the customer additions for marketing expenses because we note and as percentage of sales declined year on year. Where shall we see the marketing efficiency gain coming from, because previously management mentioned the intention to migrate from big-scale promotional events to smaller scale, but with more times? Have we started to do so and how is the marketing efficiency gain from that? Thank you.

(Spoken in Chinese).

So the ARPU decline by 7% was mainly due to the following reasons. Number one, we had a much bigger number of new customers, so Eric mentioned in the second quarter last year we added 5.5 million new users, and in this quarter we added actually 8.2 million users.

And secondly, out of the 8.2 million new users, more than 45% will be post-90s, so post-90s, their average spend is lower because of their age profile. Also, the other factor will be coming from the increasing contribution from cosmetics. This quarter, cosmetics actually in terms of absolute dollar amount is very high. For the first order buying cosmetics, the average ticket size is lower, but we are trying different ways and means to encourage customers to cross-buy into other categories. Therefore, over time, their ARPU will increase. (Spoken in Chinese).

(Spoken in Chinese).

Maggie served the Company for more than seven years, and she has reached a stage for early retirement, which is normal. And [Susan] has taken over, so regardless who's actually in charge, merchandising strategy remains consistent, which is focused on bringing new -- sorry, bringing good brands and improving the [ROI] and the output for the existing brands.

And what's even more important at this stage is we are going after more users, going after more customers to expand our customer base. (Spoken in Chinese).

(Spoken in Chinese).

So both April 19 and the June promotion went exceptionally well. So as we mentioned a few times, we added quite a good number of new users, and the market efficiency has been improved. Overall, we're pretty satisfied with the promotion performance.

All right, thank you. Our next question comes from the line of Jin Yoon from Mizuho Securities. Please go ahead.

Hi. Good evening, guys. A couple of things. Between flash sales and in-season items, is there a meaningful GM difference? How much of the GM downturn is due to increased promos versus the continued change in revenue mix? That's the first thing.

And the second thing is, what is the retention rate of these post-90s new users? In the past, your user retention rate is about 80%. Are we seeing any evidence of that with the couponing amongst these 90s users? Thanks, guys.

(Interpreted). So, Jin, regardless whether the in season in customers [may] or out of season, the gross margins are actually the same, and our blended gross margin came down year over year, was largely because of the promotion that we did in the second quarter, which made pricing more attractive to customers. And the retention rate overall for the post-90s is lower, compared to that from post-70s or post-80s.

All right, thank you. Our next question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead.

Thank you for taking my question. On the logistics side, you talked about adding 0.5 million square meters of warehousing capacity in the year. Could you talk through your initial plans for 2017 and 2018?

And the sense of your number of last deliveries started at this point of time, and if possible, a split in CapEx for the current quarter between construction and warehouse land use, equipment and others? Thank you.

(Interpreted). Okay, so well this year, we are on track to add 0.5 million square meters of warehouses, and the capacity for next year and the year after will be largely similar, but of course the total CapEx compared to a year ago, compared to last year, would be much smaller.

All right, thank you. Our next question comes from the line of Chi Tsang from HSBC. Please go ahead.

Hi. Good evening. Thanks for taking my question, and congratulations on the nice set of results. I wanted to ask you about two things. Firstly, in terms of customers, you had 23 million customers this quarter. You had 37 million last year. Other companies, like Alibaba and JD, they have hundreds of millions of buyers. And I was wondering if you can talk about what you think your addressable market is in terms of customers and what type of customer figure might be achievable over the next couple of years?

Then secondly, I wanted to ask you about brands. You have over 17,000 brands today. What kind of changes are you seeing in the brand mix? For a typical brand, what percentage of their excess inventory do you think you handle? Thank you.

(Spoken in Chinese).

So, Chi, so we take the first question first. Yes, obviously like you mentioned, with 23 million users this quarter and this year the total annual customers for 2016 will be a much bigger one. We're pretty comfortable, pretty confident in terms of our market potential in -- as of this current stage. Compared to 400 million users in China, obviously we still a very tiny percentage of that market share.

And Eric's saying from his perspective, to have annual more than 100 million active users we'll probably need some time, but obviously we think that would be the first milestone to hit, and after that we'll have different, harder targets to achieve. But overall, he's pretty confident, pretty optimistic in terms of where we can grow to in the future.

(Spoken in Chinese).

So yes, we have cumulatively 17,000 brands that we have worked with, but the core suppliers or the core brands is actually coming down to about 4,000 to 5,000, and these core suppliers or brands generated a big amount of revenue to our overall business. Obviously, our priority and our focus is trying to maintain these brands and give them more value-added services and to strengthen our relationships with them.

Your second question is in terms of what's the percentage that we are doing in terms of the inventory clearance. That is actually very difficult to define. When we work with brands, we negotiate the -- we look at the inventories, number one, and then we go into the custom made, go into the in season, so it's very difficult to generalize in terms of that percentage. But all we can say is that in terms of inventory clearance, we are definitely number one.

All right, thank you. Our next question comes from the line of Wendy Huang from Macquarie. Please go ahead.

Thank you. I think you just mentioned earlier about the strong cosmetic sales, so can you provide the dollar amount of the cosmetic category for the quarter, and also I think historically you also provide the top-five brands on your platform, so do you have an update on the figure?

Finally, regarding the next quarter's margin trend, so should we expect the gross margin to maybe recover a little bit, given that Q3 is our low season with less promotions? And also for the OP margin, how should we expect the trend for the next quarter? Thank you.

(Spoken in Chinese).

In the second quarter, cosmetics' total GMV is exceeding $400 million, and Donghao mentioned -- sorry, Eric mentioned earlier, saying that it's actually the historic new number for us. We don't provide specific numbers in terms of top-five brands, but just to share with you on a high level, top 20 brands accounted for approximately 30% of our business.

And let me take your second question. Well, we do not give guidance on gross margin or operating margin for the future, but again, I want to emphasize our strategy. We want to drive our top-line growth as fast as possible while maintaining steady profitability level.

All right, thank you. Our next question comes from the line of Sean Zhang from 86Research. Please go ahead.

Great. Thank you for taking my questions. Congrats on the great quarter. Just want to understand a bit more of how do we maintain our old customers, the returning customers, as they still account for a majority of our contribution? Very curious to learn about for example the CRM, maybe any detail management can share, also personalization, recommendation, as well as just anything that we are doing to try to hold onto our old customers.

And also maybe just a follow up on the margins, we are seeing a -- we are generating leverage on the fulfillment line, and we understand that in terms of marketing tech, we continue to invest. Is this the trend that we are going to see in the next few quarters? Thank you.

(Spoken in Chinese).

So, Sean, CRM has actually more than one or two ways and means to maintain our customers. Just to give you one or two, for our customers, we can actually encourage them to cross-buy into other categories, which we talked about earlier. Then we can study customers' data and profile and recommend a brand that is suitable for them when these brands go live.

Sean, let me take your second question. You're right. We will continue to see operating leverages in our operations because of our rapid top-line growth. But we will most likely reinvest the incremental profit back to the business to drive top-line growth as fast as possible.

Again, our goal is to maintain a steady profitability level while prioritizing our top-line growth.

Thank you. Thank you, everyone, for your invaluable questions. This is the time we have for today. I will hand the time over to Mr. Donghao Yang for closing remarks.

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

Thank you.

Thanks.

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