Vipshop Holdings Ltd (VIPS) 2018 Q1 法說會逐字稿

Ladies and gentlemen, good day, everyone, and welcome to Vipshop Holdings Limited's First Quarter 2018 Earnings Conference Call.

At this point, I would like to turn the call to Ms. Jessie Fan, Vipshop's Senior Manager of Investor Relations. Please proceed.

Thank you, operator. Hello everyone, and thank you for joining Vipshop's First Quarter 2018 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 facts 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 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 Co-Founder, Chairman and CEO; and Donghao Yang, our CFO.

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

Good morning, and good evening, everyone. Welcome, and thank you for joining our first quarter 2018 earnings conference call.

We delivered solid operational results in the quarter. Our efforts to continue to enhance customer loyalty are bearing fruits.

During the quarter, ARPU increased by 25% year-over-year, driven by the strong improvement in shopping frequency. Further, the contribution from repeat customers and orders placed by repeat customers have shown strong improvement.

As of the end of March, nearly 1.5 million customers enrolled in our Super VIP program, which was an over 50% increase as compared to last quarter.

We continue to look for ways to offer value and quality services to our customers, including promotional events on our main app as well as through WeChat and JD.

During this year's April 19 event, our cross-border business did very well, and sales increased by 43% year-over-year.

In the coming months, we will also hold events for May 20 and June 16, continuing to bring more exciting deals to our customers.

Turning to the partnership with Tencent and JD. We are pleased with the progress we have made so far.

In March, we launched our JD flagship store and front page entry.

In April, we opened the WeChat wallet entry and did a round of promotions with red dots, encouraging users to click into our mini-program.

Our JD flagship store attracted around 0.5 million fans in just 2 months' time.

We are pleased to see most of the customers from the JD channel are new customers, and male apparel is strong. This proves that JV and Vipshop's customers are highly complementary, and there is a lot of room for us to grow together. We have also made a solid progress with our WeChat mini-program. So far, we have seen robust traffic flow, and it is very strong in acquiring new customers.

From March to the beginning of May, average daily number of customers and orders from the mini-program have more than doubled. Comparing to our app, customers from the mini-program are younger, and the share of male customers is higher.

In addition, leveraging our technological capability, merchandising know-how and national warehousing and delivery networks, we are enabling our brand partners to grow their business within the WeChat ecosystem. For example, on May 8, 2018, L'Oreal Paris launched its official WeChat mini-program, which is developed and operated by Vipshop.

Our partnerships with Tencent and JD is still in an early stage. And it will take more time before we see notable contributions from their channels. Looking ahead, we will continue to work closely with both partners in order to improve the traffic flow and the conversion rate, which we believe will help with our long-term top line and customer growth.

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. Before we begin, I would like to note that in the first quarter of 2018, we reclassified costs related to third-party logistics from fulfillment expenses into cost of revenues, which had a 0.9% impact on our gross margin and reduced our fulfillment expenses as a percentage of top line by 0.9% in the current quarter. The net impact on our operating margin was 0.

Turning to our financial results. In the first quarter, our top line increased by 25% year-over-year, which was at the high end of our guidance range. We are pleased to see continued improvement in ARPU, primarily driven by the success of our Super VIP Paid Membership Program, various promotional events and our consumer financing product. Our efforts in improving personalization and enriching our products portfolio also contributed to the positive trend.

We believe these factors are key to our future success and will fuel our long-term growth.

We continued to build out our overseas warehousing capacity during the quarter and added a warehouse in Frankfurt, Germany.

Currently, we have approximately 59,000 square meters of overseas warehousing space in 9 locations. As of March 31, 2018, we have approximately 2.8 million square meters of total warehousing space, of which around 1.8 million square meters is owned by the company.

Our delivery efficiency also improved. During the quarter, we delivered around 99% of orders through our own last-mile delivery network, up from 93% in the prior-year period. More than 81% of our customer returns were handled directly by our last-mile delivery team, up from 67% in the prior-year period.

Turning to our Internet finance business. We are currently conducting a Series A round of financing to reduce outside capital to support the cash needs of our Internet finance business. We are in discussions with a number of strategic investors and aim to close the deal in the coming quarters. Approximately 4.6 million active customers used our consumer financing in the first quarter, accounting for around 21% of GMV.

As of March 31, 2018, the total balance of credit outstanding to customers was approximately RMB 4.3 billion. And the total balance of credit outstanding to suppliers was approximately RMB 1.3 billion.

Looking ahead, we will continue to invest in our core business to grow our top line and gain market share. We will work closely with Tencent and JD in order to realize the vast amount of potential within WeChat and JD's ecosystems.

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 2018 increased by 24.6% to RMB 19.9 billion, primarily driven by the improvement in average revenue per customer. Gross profit for the first quarter of 2018 increased by 8.5% to RMB 4 billion from RMB 3.7 billion in the prior-year period. Gross margin was 20.2% as compared with 23.2% in the prior-year period, primarily attributable to our investment in promotional activities to drive growth, which is balanced by reduced spending in our broader marketing efforts.

As mentioned at the beginning of my remarks, during the quarter, we reclassified costs related to third-party logistics from fulfillment expenses into cost of revenues, which had a 0.9% impact on the gross margin for this quarter. Fulfillment expenses for the first quarter of 2018 were RMB 1.7 billion as compared with RMB 1.4 billion in the prior-year period, primarily reflecting an increase in sales volume and number of orders fulfilled. As a percentage of total net revenue, fulfillment expenses decreased to 8.7% from 9% in the prior-year period. Marketing expenses for the first quarter of 2018 were RMB 645 million as compared with RMB 730 million in the prior-year period. As a percentage of total net revenues, marketing expenses decreased to 3.2% from 4.6% in the prior-year period. Technology and content expenses for the first quarter of 2018 were RMB 466 million as compared with RMB 420 million in the prior-year period. As a percentage of total net revenue, technology and content expenses decreased to 2.3% from 2.6% in the prior-year period.

General and administrative expenses for the first quarter of 2018 were RMB 614 million as compared with RMB 542 million in the prior-year period. As a percentage of total net revenue, general and administrative expenses decreased to 3.1% from 3.4% in the prior-year period.

Our income from operations for the first quarter of 2018 was RMB 663 million as compared with RMB 737 million in the prior-year period.

Operating margin was 3.3% as compared with 4.6% 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, was RMB 878 million as compared with RMB 1 billion in the prior-year period.

Non-GAAP operating income margin was 4.4% as compared with 6.3% in the prior-year period.

Our net income attributable to Vipshop's shareholders for the first quarter of 2018 was RMB 530 million as compared with RMB 552 million in the prior-year period.

Net margin attributable to Vipshop's shareholders was 2.7% as compared with 3.5% in the prior-year period, primarily attributable to our investment in promotional activities to drive growth. Net income attributable to Vipshop's shareholders per diluted ADS was RMB 0.77 as compared with RMB 0.92 in the prior-year period.

Non-GAAP net income attributable to Vipshop's shareholders, which excludes share-based compensation expenses, impairment loss of investments and amortization of intangible assets resulting from business acquisitions and equity method investments, was RMB 728 million as compared with RMB 799 million in the prior-year period.

Non-GAAP net margin attributable to Vipshop's shareholders was 3.7% as compared with 5% in the prior-year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS was RMB 1.05 as compared with RMB 1.31 in the prior-year period. As of March 31, 2018, our company had cash and cash equivalents and restricted cash of RMB 7.4 billion and short-term investments of RMB 1.8 billion. For the first quarter of 2018, net cash from operating activities was RMB 171 million.

Looking at our business outlook for the second quarter of 2018, we expect our total net revenue to be between RMB 20.5 billion and RMB 21.3 billion, representing a year-over-year growth rate of approximately 17% to 22%.

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

(Operator Instructions) First question comes from the line of Alex Yao from JPMorgan.

(foreign language) Management, my question is about second quarter revenue guidance. To what extent have you guys baked in the financial synergy from traffic injection from JD and Tencent partnership into your second quarter revenue guidance?

And then secondly, to what extent has your first quarter revenue and second quarter revenue guidance been affected by change in accounting in revenue recognition policy?

(foreign language)

So Alex, thanks for the question. I would like to take the second one. So there have been actually 2 changes in accounting treatment. One, as I mentioned earlier in my remarks, we reclassified costs related to third-party logistics from fulfillment expenses into cost of revenues in the first quarter of 2018, which had a 0.9% impact on our gross margin, meaning our gross margin was actually brought down by 0.9%. But at the same time, our fulfillment expenses were also brought down by the same 0.9%. So the net-net impact on our operating margin or net margin was 0.

And the second change that we made was actually related to our -- the return period of 7 days.

So in May 2014, this could be a bit lumpy and technical. So in May 2014, the Financial Accounting Standard Board issued an Accounting Standard Update, ASU, amending revenue recognition guidance requiring more detailed disclosures to enable users of financial statements to understand their [needs]. Okay, to put it in short, so we actually changed the way that we account for the orders that we ship out during the last 7 days in a quarter. So the company offers customers with an unconditional right of return for a period of 7 days upon receipt of product, sales from its platforms. Under the previous revenue standard, revenue was deferred until the 7 days return period actually expired.

However, under the new revenue standard, revenue is now recognized at the point of time when the control of goods has been passed to the customers upon receipt of goods by the customers.

And the company makes accruals on the expected sales return in relation to the 7 days unconditional return policy. So you can see detailed explanations actually in our earnings release. The actual impact of this change in accounting policy in Q1 was actually a bit negative, meaning our revenue or recognized revenue for Q1 2008 would have been a bit higher without this change in our accounting policy. So without the change, the year-over-year growth, revenue growth in Q1 2018 would have been slightly over 26%, instead of the current 24.6%.

So Q2, I think a similar impact would be at in place. So using the new revenue recognition method, our revenue in Q2 may be slightly underestimated.

And Alex, to translate what Shen (foreign language) answered regarding your first question. For our guidance, we had factored in very little contribution from Tencent and JD. And that is because we only opened the JD entry in March and only opened the Tencent entry in April. So we're still working with both parties to continue to adjust the operations and also working on some of the back-end integrations and stuff. So there are different ways to operate in JD, such as their flash sales channel and we'll continue to work with them to learn about those different ways of gaining customers and pushing sales. And also within Tencent, because there is a vast amount of traffic, we also need to learn about the kind of crowds that are coming through our mini-program and to find compatible customers to convert them. So we are definitely working very hard on both fronts and we hope to be able to see a contribution coming in the second half of this year. But it's still early in the process.

Next question comes from the line of Eddie Leung from Merrill Lynch.

Two things. Number one, how we think about the comp, like the new platforms such as Pinduoduo and some of these social commerce players, which are typically address the lower tier cities? And then secondly, have you seen the industry promotions putting any pricing pressure on our orders and products? (foreign language)

(foreign language)

To translate, the first question regarding new platforms such as Pinduoduo and also the mini-programs on WeChat merchants, we did notice that Pinduoduo is doing very well, but they are actually not a direct competitor because of the low ticket size. So the customer overlap is very, very minimal. But they are very good at social e-commerce and operating within the WeChat ecosystem. So that's why we are also in that trend, working with WeChat very closely, to realize a lot of the value that is within social e-commerce. And regarding market competition on some of the promotions and marketing, in the first quarter and the current month, we actually haven't seen a whole lot of competition in terms of advertising. But we actually chose to spend more in terms of giving discounts back to our customers, therefore, spending more on gross margin instead of marketing expenses.

Next question comes from the line of Alicia Yap from Citigroup.

My question is related to the integration process with JD and Tencent. So other than taking time to build the fan interest and also translate to conversion rate over time, it will be great if management could share your thoughts and feedback from maybe perhaps, like brainstorming about the progress over the last couple of months? Was there anything that you feel or you wish your team would have done differently, such as like maybe analyzing the potential user traffic interest, respective to JD and Tencent channels or make any necessary adjustments to your SKU or the interface layout in each of the platforms? Or will you consider changing any of the curation process or the sales promotion tactics to draw more interest from users going forward? And then just related to that is that what would be the rough conversion percentage number that you would meet your internal expectation? And is there a time frame that you expect you could achieve the target?

(foreign language)

(foreign language)

To translate what Eric just said, in March, we opened our flagship store on JD. But we actually now are starting to -- we have seen that actually in JD, a lot of the apparel sales is not coming directly from the home page entry, but from different ways that our products are displayed within JD's front page, such as the flash channel, their discover channel and so on. So we are adjusting our strategy to participate more on these events with our brands going forward.

And on WeChat, at the beginning, we put all of our products, all the categories, into our mini-program.

But now, we're discovering that we need to actually have less products, but more accurately matched with the customers who are coming in through those channels to improve their conversion and how much time they spend in our mini-program and the sales contribution from that channel. And so given the above, we are going to continue to work with both partners in order to adjust how we operate within the respective ecosystems to improve results. The good news is in JD, we're already seeing a robust 0.5 million fans following our flagship store and in the future, what we need to do is to improve our operational metrics, given the learning so far. And within WeChat, we are also working actively with -- to match the user data to what we have in order to better personalize our product offerings to those customers. And so we hope to be able to see an improvement in conversion over the next 3 to 5 months and acquire new customers. But at the current stage, the conversion rate is not satisfactory for us yet.

Next question comes from the line of Wendy Huang from Macquarie.

I just want to follow up on your previous answer on the collaboration with Tencent and WeChat. So can you maybe share what's the difference you are seeing by working with the WeChat wallet and also the mini-program? And also, how is the user profile and ASP different from those 2 channels? And also, on your historical data point, it seems that the quarterly active users has been flattish on a year-over-year basis, so what's the reason behind this? And also, how should we expect the quarterly active user trend going forward?

(foreign language)

(foreign language)

So in terms of our WeChat customers, we are noticing that it's more gender balanced than the customers in our core app, meaning instead of over 80% female, we actually are seeing a heavier male contribution from the WeChat channel. And even though the ticket size is slightly lower, the ASP is lower by around 10 to low teens percentage, the quality of the customer is still very, very good. So we hope to continue to work with them to improve the customer profile and the customer repeat purchases and so on, within the WeChat channel.

In terms of our total customer growth, so starting the second half of last year, we actually had a shift in strategy to spend more marketing dollars in driving repeat purchases for existing customers instead of heavily going after new customers, which is reflected in a very robust increase in our number of repeat customers and also ARPU increase.

So we found a very sustainable way to retain our old customers and getting them to buy more. But we also realized that new customers is also key to our long-term growth. So starting in the second quarter, we will be more focused on new customer acquisition as well, not only adjusting our own marketing strategies, but also working closely with Tencent and WeChat to convert those new customers into our own. So in terms of customer acquisition in the future, we're going to see both old customers buying more and more repeat purchases, as well as new customers coming in. So both channels will help to drive our long-term growth.

The next question comes from the line of Jerry Liu from UBS.

My question is also on customer -- active customer growth. Given what management just said, should we expect customer growth to return to a positive level in the second quarter? And secondarily, if we look at the second half of the year, as the Tencent and JD partnership benefits flow through the model, what are some of the things we should see first? For example, should we expect to see customer growth accelerate, first of all, and then maybe followed by an improvement in ARPU? And then later on, followed by an improvement in net margin? I just want to get a sense of -- set the right expectations and get a sense of what are some of the initial things we can see from the partnership?

(foreign language)

(foreign language)

Tencent is fully supportive of our collaboration. And we realize that in Q2, we are going to start to do a lot more social e-commerce, not just relying on the entry point in the wallet. Because in terms of social e-commerce, there's actually a vast amount of opportunity, such as in group buy, social sharing and haggling and all of that. And we have a team experimenting in all of those areas in order to improve the performance within WeChat.

And as far as JD goes, it is very, very strong for male customers already. And they also have a very massive female customer base. So going forward, we will be working with WeChat in order to get new customers from the WeChat ecosystem. And although when they first come in, their ARPU might be lower, but we are very experienced in improving the quality of the customers over time and educating them on our platform to buy more. So we will work to improve the quality of the customers over time and we're confident about that.

As far as JD goes, because they are already a very successful e-commerce platform, they already have very high-quality e-commerce shoppers. So if the shoppers like us and we are able to get them to start buying apparel through our flagship store, then the quality is already there.

The next question comes from the line of Xiaoyan Wang from 86Research.

I think 2 questions, first on the operating expenses. So the marketing and the R&D both show leverage this quarter. I'm wondering, going forward, for the marketing, are you spending incremental dollars into new user acquisition? Or are you shifting some budget from improving the existing customers to new user acquisition? And on R&D, do you have plans to hire more technology people to work on the mini-program or data technology, et cetera? Or are you just relying on the existing IT team to work on conversion? And my second question is actually on the balance sheet. So we saw the operating cash flow is excluding impact from Internet finance's [activities] this quarter. I guess, the main reason is accounts payable shows a significant decline quarter-over-quarter. So is there any specific reason, in addition to seasonality, for that whole -- is there any significant change in your terms with suppliers?

Okay, I'll -- thanks for the questions. I'll take your questions. First off, we will most likely shift some of our resources from rebate and promotional activities to marketing. So meaning from, we're going to shift some of our resources from the existing customers to acquire new customers. So that means the total operating expenses will not -- or the impact on our operating income will not decrease significantly given that we want to shift our strategic focus more towards acquiring new customers. And R&D, I don't think we're going to need to hire more people, and in some cases, we may want to hire some really good key experts in certain areas. But I don't think we're going to hire a massive number of more people in order to drive our growth in mini-programs. So your second question on the cash flow. So in addition to the reasons you mentioned, there is one more reason that was quite unique for Q1. So starting from the second half of 2017, in payment from customer returns are deposited directly back to customers' original payment method, instead of being returned to their Vipshop wallet. This change has resulted in a decrease in our accounts receivables from third-party platforms, which impacted our operating cash flow. So this reason is mostly a regulatory reason that we have to comply with.

The next question comes from the line of Chen Bi (sic) [Natalie Wu] from CICC.

I just have a follow-up question regarding your Jingdong entry. You mentioned in your earnings release that the male apparel is currently the strongest category so far on Jingdong. But given VIPS is doing quite good at female categories and Jingdong is also developing it's apparel GMV, so could management share with us if you have any plan to promote more female products on Jingdong, like to change your current product offerings? Or to change your promotional methods, et cetera? And given Jingdong's user mix is still more male users dominated, how difficult do you think to promote female products will be on Jingdong's platform? (foreign language)

(foreign language)

So even though we mentioned in the earnings release that male apparel is strong, but that's just because JD is very, very strong in male customers. And as you might see that we're selling male customers -- male products within our channel may come first, but we are actually the strongest in female apparel, as you just mentioned. So even though male apparel is stronger than in our core app, that doesn't mean that male is bigger than female apparel within JD. Actually, when we look at the number right now, in terms of our JD sales, female apparel is still bigger than male apparel. And that's largely attributable to our efforts in operational adjustments. So going forward, we will continue to do what we're doing in order to push for more female products, and more female apparel products to customers within JD. And we think that will show more meaningful results over time as well.

(foreign language)

And in addition to what we just said, regardless of whether the customer is male or female, it's still incremental to Vipshop and they are buying apparel just as male -- female customers are and they are also contributing to our revenue growth.

The next question comes from the line of Nicky Ge from China Renaissance.

(foreign language) I have a question on the merchandising side. I just want to get your idea on the merchandising strategy going forward, especially to match the WeChat mini-program and JD users. And besides of that, we also see some progress with our [investing in] PE fund recently, and also, could management talk about our progress for [buy off-model] and private label merchandising?

(foreign language)

So in the JD and WeChat entry, we have put very high-quality products from our back-end, which is mostly apparel. But in WeChat, because of the social e-commerce ecosystem and the way shoppers like to shop within social chatting apps, we will have more standardized products compared to our core app. And since apparel is our key and our bread and butter, we're working very closely with brands to establish even deeper expertise in terms of merchandising and assortment. So we do believe that we will continue to work very closely with our suppliers and our brand partners to deepen that relationship. And in the long run, it will create a big differentiated entry barrier for us.

The next question comes from the line of Monica Chen from Crédit Suisse.

I have a question on second quarter, since second quarter is big season for promotion, and where you have 2 major events. First of all, can management share more color on the past April 19, the anniversary sale event? And what is our result and the highlights? And secondly, can management share more expectation on the upcoming June 19, the mid-year sales event, like what new strategies are we developing this year? And what preparations have we made? And what is our target? (foreign language)

(foreign language)

So April 19 is our own promotional event. We did okay, but it did not exceed expectations. However, we still have May 20 and June 16, the 2 other promotional events for the second half of this quarter, and we are preparing for that very actively. And there are 4 major promotional events that we look at every year: 2 are our own, which is April 19 and December 8; and 2 are more industry-wide promotional events, such as June 16 and also Singles' Day.

Next question comes from the line of Hans Chung from KeyBanc.

I have a question about the third-party logistics business. So can you give me some color about the currently run rate -- the revenue run rate or mix in 1Q? And also, what's the margin profile? And then how should we think about the growth trajectory or the margin impact going forward?

(foreign language)

Okay, well, let me take your questions. Well, third-party logistics services that we're providing to clients outside of Vipshop now account for roughly 10% of the total orders that our logistics team delivers. So yes, that's about 10% of our total.

We have reached the end of question-and-answer session. I would now like to hand the conference back to the management for closing remarks.

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

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