Vipshop Holdings Ltd (VIPS) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to Vipshop Holdings fourth quarter and full-year 2013 earnings conference call. At this point, I would like to turn the call to Miss Millicent Tu, Vipshop's Director of Investor Relations. Please proceed, ma'am.

Thank you, operator. Hi, everyone, and thank you for joining Vipshop's fourth quarter 2013 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 Litigations Reforms 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, that we may make during this call are forward-looking statements. In some cases, these forward-looking statements can be identified by words and phrases, such as anticipate, believe, continue, estimate, expect, intend, is unlikely to, may, plans, 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. We have no obligation to update these forward-looking statements.

Joining us on today's call are Mr. Eric Shen, Chairman, the Company's CEO and co-founder; and Mr. Donghao Yang, the Company's Chief Financial Officer. At this point, would like to turn over the call to Mr. Eric Shen.

Hello, everyone. Welcome to our fourth quarter and full-year 2013 earnings conference call.

We are very proud and excited to have ended 2013 with four quarters of profitability and a strong momentum heading into 2014. This success was driven by our solid year-over-year financial growth, which remained in triple-digit percentage for both the top line and the bottom line quarterly results through the year.

For the 2013 full year, our total revenues grew by 145% to over $1.7 billion and the net income grew to $52.3 million, compared with a net loss of $9.4 million in 2012.

Behind our impressive financial performance was a dedicated focus on stressing our core operations. During the past year, we focused on expanding and improving our product offering, ramping up warehousing capabilities and enhancing our merchandising and IT infrastructure. We believe that this effort has laid the foundations for the continued growth of our unique online flash sales business.

Earlier this month, we announced our acquisition of a controlling stake in Lefeng and the strategic investment in Ovation. These partnerships have solidified our position as China's leading cosmetic e-commerce platform, which is one of the fast growing e-commerce sectors in China.

In addition, this acquisition provides us huge selling cross-selling opportunities, allowing us to benefit from combining our operational expertise and the marketing resources. We look forward to working with [Li Xing] and her team to further expand also our offering together.

With a successful year of strong growth combining with our acquisition of Lefeng, we are very excited to further expand and solidify our leadership in China's discount regional market as we head into 2014.

At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss some new growth strategies as well as this quarter's financial achievements.

Thanks, Eric, and hello, everyone. We're pleased with our result for the fourth quarter and full-year 2013, which demonstrate continually improving scale effect associated with our growing business. Over the course of 2013, the total number of our customers and orders increased by 129.8% and 124.1% year over year respectively.

As we built Vipshop into a much larger business than it was a year ago, we established a more powerful and virtuous cycle of business, which will help propel and accelerate our revenue growth going forward.

Moving on, I would like to update you regarding our progress in some key growth areas and initiatives.

Heading into 2014, we're committed to further scaling our platform by growing our brand, broadening our product offering and enlarging our warehousing and logistics capabilities. Enhancing our warehousing and logistics capabilities remains one of our top priorities for 2014.

In recent years, we invested heavily in the build out of warehouse capabilities, which are well equipped to effectively manage the overwhelming sales volume associated with the flash sales model, in order to gain an advantage in driving incremental sales, improving customer experience, as well as strengthening our competitive position.

With our warehouse capacity reaching approximately 290,000 square meters at the end of 2013, we are very confident in our ability to better accommodate surging customer orders and demand. We're also on track to expand our total capacity to over 700,000 square meters by 2016.

We continue to progress well on mobile monetization. Mobile revenues further increased in the fourth quarter, representing a strong quarter-over-quarter growth of 122%. We see the growing prevalence of mobile Internet as representing one of the most transformational and disruptive technology shifts in China's e-commerce sector and leaving many opportunities in its wake.

We will capitalize on these opportunities through continuing to invest in strengthening our mobile and IT capabilities. We believe these initiatives will optimally position us to capitalize on the opportunities in China's dynamic evolving e-commerce market.

Now, moving onto our quarterly financial highlights. Before I get started, I'd like to clarify that all the financial numbers we're presenting today are in US dollar amounts and all the percentage changes refer to year-over-year changes, unless otherwise noted.

Total revenues for the fourth quarter of 2013 increased by 117.3% to $651 million. This tremendous growth was primarily driven by a 119.5% increase in the number of total active customers to 5.7 million, and a 102.4% increase in the number of total orders to 17.7 million.

Gross margin for this quarter further expanded to 24.5% from 22.9% in the prior-year period and gross profit increased by 131.9% to $159.4 million.

This improvement was driven by the increased scale of our business, leading to greater bargaining power with our suppliers. Moreover, as we discussed earlier, we continued to see improvement in operating margins as a result of improved economies of scale and increased operational leverage.

More specifically, fulfillment expenses increased by 95.7% to $73.2 million for the fourth quarter of 2013. As a percentage of total net revenues, fulfillment expenses decreased to 11.2% from 12.5% in the prior-year period.

The cost reduction was primarily due to the successful implementation of our distributed warehouse strategy, as well as our ongoing shift to high-quality regional and local couriers, both lowering our fulfillment cost and shortening delivery times to our end customers.

Marketing expenses increased by 131.3% to $28.9 million. As a percentage of total net revenues, marketing expenses remained stable at 4.4% compared with 4.2% in the prior-year period.

Technology and content expenses increased by 123.6% to $14.2 million. As a percentage of total net revenues, technology and content expenses remained stable at 2.2% compared with 2.1% in the prior-year period.

General and administrative expenses increased by 121.4% to $17.5 million. As a percentage of total net revenues, general and administrative expenses were 2.7% compared with 2.6% in the prior-year period.

Driven by the growing scale of our Company's operations, improved gross margin and cost control, income from operations increased by 445% to $29.6 million for the fourth quarter of 2013 from $5.4 million in the prior-year period. Operating income margin increased to 4.5% from 1.8% in the prior-year period.

Non-GAAP income from operations, which excludes share-based compensation expenses, increased by 357% to $33 million from $7.2 million in the prior-year period. Non-GAAP operating income margin increased to 5.1% from 2.4% in the prior-year period.

Our net income for the fourth quarter of 2013 increased by 300% to $25.4 million from $6.3 million in the prior-year period. Net income margin increased to 3.9% from 2.1% in the prior-year period. Net income per diluted ADS increased to $0.43 from $0.12 in the prior-year period.

Non-GAAP net income increased by 253.9% to $28.8 million from $8.1 million in the prior-year period. Non-GAAP net income margin increased to 4.4% from 2.7% in the prior-year period. Non-GAAP net income per diluted ADS increased to $0.49 in the fourth quarter of 2013 from the $0.16 in the prior-year period.

As of December 31, 2013, our Company had cash and cash equivalents of $334.7 million and held-to-maturity securities of $385.8 million.

For the fourth quarter and full year of 2013, net cash from operating activities were $255.8 million and $437.1 million respectively.

Looking at our business outlook, for the first quarter of 2014 we expect our total net revenues to be between $640 million and $650 million, representing a year-over-year growth rate of approximately 106% to 109%. These forecasts reflect our current and preliminary view of 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). Alan Hellawell, Deutsche Bank.

Congratulations, guys, on another very impressive quarter. Two questions. Can you give us a little more color behind the very impressively strong first quarter 2014 guide? What might we have been overlooking in our assumptions for that first quarter? So that would be my first question. And maybe you can answer that first.

Our top line guidance for the first quarter 2014 is between $640 million and $650 million, which is flat compared to Q4 last year. I think it's a very reasonable guidance. And usually if you look at the historical numbers in the past two years, Q1 top line was always about flat compared to the previous Q4.

Got it. Yes, I completely understand that. I just would have thought that maybe the large numbers might represent a little bit of sequential deceleration. But obviously we're now already well into the first quarter, so great.

Actually my second question is more of a big-picture question. I think we can adequately describe Vipshop right now as China's leading flash sales site. Will we be looking at more of a hybrid player one or two years from now? And some of your recent acquisitions and investments have brought you a little more into retail, B2C, e-commerce. And I'm just wondering whether we'll see much more of a hybrid model, whether it's next year or the following year. Thank you.

(interpreted) So two key messages. The recent acquisition on Lefeng and the strategic investment in Ovation actually enabled us to solidify our leading position as a major player in the cosmetic and skincare sector. And our cosmetic and skincare business has grown very fast over the past few quarters and, after the acquisition of Lefeng, it will enable us to grow even quicker.

And we have made our market leadership in doing discount retailing on core categories, including apparel, handbags and shoes. And, going forward, we'll be focusing on our core categories and becoming bigger and deeper penetration. Category-wise we might consider expansion going forward.

But one thing that I want to emphasize is that we will be focused on doing what we are doing, and are good at doing, and then to help the Company to capture more strategic long-term growth.

Thank you.

(interpreted) So a quick answer is on the model of Vipshop, and we'll be dedicated into a flash sales business model. So, as you might be aware, Lefeng's business model is actually not in flash sales, but Vipshop will continue this model. And perhaps for any other strategic investments going forward, we'll be still focused on flash sales business model.

Gene Munster, Piper Jaffray.

My congratulations on the results and the guidance. Could you talk a little bit -- you mentioned the mobile trends, the [effective] trends in mobile. Tell us how you think about mobile acquisition customers versus desk top. If you talk about any dynamics between a mobile customer in terms of profitability, order size, any trends that could impact the business if that continues to escalate over the next few quarters, that would be helpful in terms of our modeling. Thank you.

(interpreted) We have made rapid progress on our mobile. Mobile contributed approximately 23% of the total net revenues in Q4 2013. So you can remember that was up from 8% in Q1 2013. And we're seeing strong momentum, and I give an example that. In the most recent month, in February 2014, mobile generated more than 30% to our monthly sales.

So we still have a lot of expectations on mobiles and we expect that sales contribution to continue to increase over time. (multiple speakers)

So in terms of the repeat purchase rate, the average ticket size, on the mobile it's pretty much similar compared to that of from the PCs. However, for the weekends -- sorry, in the evenings mobile has contributed a much bigger portion of our sales compared to that from PCs.

And, in terms of the (multiple speakers) -- sorry, just one more thing. In terms of the new added customer acquisition cost of mobile, it's definitely lower compared to that on the PC side.

Okay. And then that's what you said about order size, mobile versus desk top.

Yes, the order size for our mobile is pretty much similar compared to that on the PC.

Excellent. Thank you and congratulations.

Alex Yao, JPMorgan.

Joy Wang for Alex. Congratulations on a very strong quarter. I have two questions. The first one is a follow up on your recent investment in Lefeng. I'm just wondering how shall we look at -- think about the short-term and long-term margin impact?

And my second question is on your strong Q1 guidance. Can you break it out into the organic growth of your core business and also the contribution from Lefeng? Thanks.

The impact -- Lefeng's acquisition, its impact on our profitability is going to be insignificant in the short term, because, compared to our Vipshop business, Lefeng is positively small.

But, in the long term, as we continue to achieve the synergies between the two companies, as we combine these two companies to take a more dominant leading position in the cosmetic's e-commerce market segment, we do believe that Lefeng's business it's going to have a very significant positive impact, both on our top line and bottom line in the long run.

And you asked about the breakdown of the Q1 2014 top line guidance. Well, unfortunately, we are not disclosing that information but, again, Lefeng's business in that guidance is going to be pretty insignificant.

First of all, it's relatively small compared to our business and, secondly, we only closed Lefeng's deal on February 14. So there is only about one-half month's business or revenue that we will consolidate in our Q1 numbers, so it's going to be pretty insignificant.

Got it. Thanks very much.

Jiong Shao, Macquarie.

My first question is about your marketplace business. The revenue went up, I think, almost four times quarter over quarter. I think at the beginning, early on, a couple of quarters ago, you tried to not grow this business too fast because you wanted to maintain certain level customer service level.

So I was wondering what were some of the drivers behind the rapid growth in the marketplace business in Q4 and how many merchants you have on the platform. What's your plan for this part of the business for the next couple of years? That's my first question. Thank you.

(spoken in Chinese).

Well, our third-party business, our marketplace, only accounts for a very small portion of our net revenues. But we will grow this business in an orderly and controlled manner.

Our core categories, include apparel, leather handbags, cosmetics and shoes, we will continue to handle by ourselves. For certain heavy, bulky, expensive items that are difficult to transport, such as home goods, we allow the brand to ship directly to the customers.

We will keep monitoring customers' changing needs and consider whether or not to expand product categories to include more baby and maternity products, for example, and other categories.

Okay. Great. Thanks, Donghao Yang, for the color.

My second question is about the self-branded products or the brands that make for Vipshops. I think, as you know, some of your peer companies in the world, like ASOS in UK, etc., they make very decent profits from these type of products for their whole business; disproportionately more profits from this type of product than from the discounted or the third-party brands.

Could you share with us your thoughts on over time adding more and more of these types of brands onto your platform to drive your continued improvement on margins?

So, Jiong, if I understand your question correctly --

(spoken in Chinese).

(interpreted) So Vipshop in the short term does not have plans to develop our private label because we primarily sell branded third-party products to our consumers in China and we do offer very steep discounts and very attractive pricing to customers.

So, although the private label offers higher gross margin but, in the medium term, if we launched now, in the near future it might cause confusion among our consumers. So we certainly do not have any tangible plans to do that in the short term.

Okay. (spoken in Chinese).

[Lin Tang], Goldman Sachs.

We are very glad to see Vipshop's strong growth momentum. I'm just wondering, as our orders and customers are doubling, in terms of the average fill scale on each round of flash sales now, how is the growth? Or are we offering more brands? This is my first question for vip.com.

(interpreted) Although we might add new brands under our portfolio going forwards, but our key focus or our top priority is to increase the sales volume per sales event. In other words, what we're aiming to do is doubling the sales volume, say, for this year compared to that of last year.

So, Lin, it might not be easy to generalize the average sales volume per sales event, given that some brands can have extremely high sales volume and whereas we have other lower performing brands. So how we look at it is, for a brand, for example, if last year we did RMB50 million and this year we aim for RMB100 million, doubling the size.

Thanks. And my second question is in terms of lefeng.com. Although it's only going to be very meaningful in a few years, I'm just wondering our plan to have resources to invest in it to achieve our synergy with lefeng.com.

(interpreted) We announced our acquisition of a controlling stake in Lefeng because Lefeng, as everyone knows, is a leading online cosmetic e-commerce company. Cosmetics is one of the fastest growing sectors and, after acquisition of Lefeng, it enabled us to [consolify] our position as China's leading cosmetic and skincare online retailer.

And there will be a lot of synergies because we are going to allocate more resources to capture on the significant cross-selling opportunities, after-sales service capability, supply chain management, marketing resources, etc., etc.

Would you please elaborate more on the resources and the investments to achieve these synergies?

(interpreted) So, first of all, we have a new CEO in (inaudible) in lefeng.com. And Vipshop has strong capabilities in operations and execution. So, with our expertise in this area, we aim to generate more sales in the website and, more importantly, to lower the cost, based on our capabilities.

We expect, within a few months, we'll be able to see some progress in this regard and direct Lefeng to the right direction for longer term sustainable growth.

(spoken in Chinese).

Eric Wen, China Renaissance.

I have just two housekeeping questions. The first one is, can you comment on the gross margin trend of the product revenues going forward this year?

And the second is, can you give us the repeat purchase rate for both customers and for orders for Q4? Thanks. (spoken in Chinese).

Let me take your first question and Eric will take your next one.

Gross margin for this year, 2014. I'm sorry, we don't give guidance on this year's gross margin trend. But, in general, we are still very confident that there is still room for us to improve the gross margin going forward, as our business continues to grow very fast and we're going to have greater negotiation power with our suppliers. And, also, we can achieve economy of scale and operational leverages in almost each -- well, that's about bottom line.

So back to your question, gross margin, yes, we're still confident that there's going to be room for improvement, going forward.

(interpreted) We have (inaudible) high repeat purchase rate, perhaps the highest in the industry. Q4, our repeat purchase rate is above 70% and orders placed by repeat customers exceeding 90%.

Thomas Chong, BOCI.

Congratulations on a very strong quarter. I have a couple of questions. The first question is regarding any product categories, apart from cosmetics, which you think can generate synergies and you will consider further strategic investment going forward.

And my second question is about the mobile Internet competitive landscape. Given that we see Tencent [we have seen[ has recently launched flash sales, would you consider any partnership or how do you think about the competitive landscape in mobile flash sales going forward? Thanks.

(interpreted) So we don't have any tangible plans to acquire other categories. But in the future, even if we have a target, we will carefully assess the pros and cons to arrive on a good decision.

So sorry, Thomas, your second question was?

My second question is about the mobile flash sales competitive landscape. We have seen that Tencent (inaudible) platform has recently launched the flash sales channel. So how would Vipshop think about the competitive landscape? And are there any opportunities that Vipshop will partner with Tencent in this regard? Thanks.

(interpreted) So we have made a lot of progress on the mobile sales over the past few quarters, perhaps one of the highest in the industry. We will continue to further expand our cooperation with Tencent. Hopefully, in the not too long future, you see Vipshop operates on that channel.

Thanks, [Shen-Jung], thanks, [Yang-Jung], and thanks for the detailed answer.

Evan Zhou, Credit Suisse.

Two follow-up questions on Lefeng. The first one is, could you maybe give us some more color on the user overlap between Vipshop and Lefeng? And, to our understanding, maybe Lefeng is primarily focused on higher tier cities, versus (inaudible) maybe in tier 2, tier 3 cities. So we can attribute some contribution, incremental contribution for (inaudible) user base (inaudible).

And second question is that, in terms of our huge cooperation with Ovation, I'm wondering, because Ovation is pretty famous for its resources in terms of the production, as well as the marketing. So I'm wondering, any specific plans that we may have in the future on that front, in terms of our marketing stance? (spoken in Chinese).

(interpreted) Lefeng's customer base is small compared to that of Vipshop. There's little overlap in terms of customer base because, if you take Lefeng's customers, they're primarily from the first and second tier cities, while Vipshop's very strong in the second tier cities and very expensive in the third and fourth tier cities here in China. So there's a lot of benefit in terms of customer base (inaudible).

And, as to your second question, you're right. Ovation's expertise in media, branding and marketing will benefit Vipshop's brand, providing assess not only to a consistent supply of Ovation's branded cosmetics products, but also enable Vipshop to capture the increasing trend of consumers seeking personalized fashion products.

So we believe with the strategic relationship with Ovation we'll be well positioned to expand full force into the fast-growing cosmetic domain in China and enhance our competitive advantage.

So, in terms of marketing spending, one thing for sure is, as a percentage to total net revenues, it will be lower compared to that of 2013. But, having said that, as our scale has expanded so much the marketing spend in absolute dollars will be increased in 2014.

(spoken in Chinese).

John Choi, Daiwa.

Congratulations on a great quarter. I have two questions. My first question is regarding the business model. Right now Vipshop obviously -- majority of the products is more or less through a consignment business model. Does that then have any plans to extend, I guess it's a follow-on question from the first -- one of the questions before, but have any plans to become more -- doing more principal owners of the inventory, like more of traditional B2C products by offering more diverse products to the customers at a more reasonable price? But on the other hand they also have to bear the inventory risk.

My second question is with regards to the operating expense, especially on the fulfillment expense and also the marketing expenses. Going forward in FY14 should we be expecting also a more operating leverage, in terms of the speed of what we have seen over the course of time on the past few years? Thanks.

Our business model now, you're right, we don't purchase the inventory up front, which enables us to use very little working capital to support such a fast top line growth. And going forward I don't think that we're going to increase the amount of inventory that we purchase than the current level. So meaning we don't want to become the principal owner of the inventory unless we have to.

For example, currently only about 10% of the inventory in our warehouse has to be purchased from the supplier and, understandably, those suppliers are big suppliers, like Nike.

But going forward, as we become bigger and with greater bargaining power, we believe that more and more suppliers will allow us to take their inventory without having to purchase upfront. So that is your first question.

And second question, operating expenses, yes, you're right. We believe that there is still going to be operating leverage going forward as our top line continues to grow very fast. But, again, if you look at the current level of our fulfillment and marketing expenses as percentages of revenues they are already at a pretty low level. So, again, back to your question, there is still room but the room is going to be limited.

Okay, thanks guys.

Sean Zhang, 86Research Limited.

Congratulations on the strong quarter. So, first of all, a follow-up question on the WeChat Corporation. Can management share with us some more color on the -- in terms of product category or in terms of what kind of business model you are thinking about to operate on the WeChat. And what's the percentage in terms of mobile revenue this year? That's my first question. (spoken in Chinese).

(interpreted) Yes, we will deepen our cooperation with WeChat and then -- you probably see Vipshops has this channel and website channel there. In terms of product category, primarily focused on our core products, our core categories, including apparel, ladies handbags and shoes.

My follow-up question on this is what's the coverage with WeChat? Are you sharing revenue? Or is it commission-based business model? Or are you just purely using the WeChat pay and you pay a service fee? (spoken in Chinese).

(spoken in Chinese)

Okay, thank you very much.

(interpreted) We work in this way. So say, for example, if a merchant has sold, say for example, 200 (inaudible) and we give WeChat a very small percentage of that commission and secondly we might pay some fees on the WeChat payment.

Thank you, everyone. For closing remarks I now hand it over to the Company's CFO, Mr. Donghao Yang.

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

Ladies and gentlemen, that does conclude our conference call 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.