VIPS 唯品会

Operator

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 Ms. Millicent Tu, Vipshop’s Director of Investor Relations. Please proceed, ma’am.

Millicent Tu

Thank you, operator. Hi everyone and thank you for joining Vipshop’s fourth quarter 2013 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 that we 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/are likely to,” “may,” “can,” “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, I would like to turn over the call to Mr. Eric Shen.

Eric Shen - Chairman, Chief Executive Officer and Co

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 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 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 strengthening our core operations. In the past year, we focused on expanding and improving our product offering, ramping up warehousing capabilities and enhancing our merchandising and IT infrastructure, (indiscernible) over controlling speed in platform and the strategic investment innovation. This partnership has solidified our position as China’s leading cosmetics e-commerce platform, which is one of the fast growing e-commerce centers in China. In addition, this acquisition provides us huge cross-selling opportunities allowing us to benefit from combining our operational expertise and the marketing resources. We look forward to work with Li Ching and her team to further expand also our offering to get this. With a successful year of strong growth combined with our acquisition of Lefeng, we are very excited to further expand and solidify our leadership in China’s discount retail market as we will 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 strategy as well as this quarter’s financial achievements.

Donghao Yang

Thanks Eric and hello everyone. We are pleased with our results 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 build 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 are 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 volumes 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 positioning. 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 are also on track to expand our total capacity to over 700,000 square meters by 2016. We continued 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 on to our quarterly financial highlights, before I get started I would like to clarify that all the financial numbers representing today are in U.S. 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 119.5% increase in the number of total active customers to 5.7 million and 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 (Technical Difficulty) 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, market 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 EPS increased to $0.49 in the fourth quarter of 2013 form 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 on the market and operational conditions, which are subject to change. With that, I would now like to open the call to Q&A.

Operator

(Operator Instructions) Your first question comes from the line of Alan Hellawell from Deutsche Bank. Please ask your questions.

Alan Hellawell

Thank you. Congratulations guys on another very impressive quarter. Yes, two questions. Can you give us a little more color behind the very impressively strong first quarter 2014 guide, what might we had been overlooking in our assumptions for that first quarter, so that will be my first question. Yes, if maybe you can answer that first?

Donghao Yang

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

Alan Hellawell

Got it, yes, I completely understand and I just would have got maybe large numbers might represent a little bit sequential deceleration, but obviously we are now already well into the first quarter. So actually my second question is more of a big picture question, I think we can adequately describe Vipshop right now as China’s of 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 bought you a little more into kind of retail B2C e-commerce. And I am just wondering whether we will see much more of a hybrid model, whether its next year or the following year? Thank you.

Millicent Tu

So Alan, two key just for the benefit of other just a quick transmission, so two key messages. The recent acquisition of Lefeng and the strategic investment in Ovation actually enabled us to consolidify our leading position as a major player in the cosmetics and skin care sector. And we – our cosmetics and skin care business has grown very fast over the past few quarters. And after the acquisition of Lefeng, it will be – 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 will be focusing on our core categories and becoming bigger and deeper penetration. Category wise, we might consider expansion going forward, but one thing that everyone is going to emphasize is that we will be focused in doing what we are doing and is good at doing and then have attempting to capture more strategic long-term growth.

Alan Hellawell

Thank you.

Millicent Tu

A quick question – sorry, a quick answer is on the model of Vipshop and area of saying that we will be dedicating to fast sale business model.

Alan Hellawell

Thank you.

Millicent Tu

So as you might be aware of 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 will be still focus on flash sales business model.

Operator

The next question comes from the line of Ms. Gene Munster from Piper Jaffray. Please ask your question sir.

Gene Munster

Good evening all and my congratulations on the results and the guidance. Could you talk a little bit you mentioned the mobile trends, you talked about trends in mobile how is that, how do you think about a mobile acquisition customer versus desktop, you talked about any sort of dynamics between a mobile customer in terms of profitability or order size any trends that could impact the business as that continue to escalate over the next few quarters? So it would be helpful in terms of our modeling. Thank you.

Millicent Tu

Okay. So, thanks Gene. Gene, we have made rapid progress on our mobile. Mobile contributed approximately 23% of the total net revenues in the Q4 2013. If you can remember, that was up from 8% in Q1 2013 and what’s closing that we are seeing strong momentum and it gave us an example that in the most recent months in February 2014, mobile generated more than 30% to our monthly sales. So we still have a lot of additions on mobiles and we expect that sales contribution to continue to increase over time. So Gene, in terms of the repeat purchase rate, the average ticket size on the mobile is pretty much similar compared to that from the PCs. However, Eric mentioned that we can play in the evening mobile had contributed much better portion of the sales compared to that from PC. And in terms of the….

Gene Munster

Okay. And…

Millicent Tu

Sorry, just one more thing, in terms of the new active customer acquisition cost in mobile, it’s definitely lower compared to that on the PC side.

Gene Munster

Okay. And then that’s what you said about order size mobile versus desktop?

Millicent Tu

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

Gene Munster

Excellent, thank you. Congratulations.

Operator

Your next question comes from the line of Mr. Alex Yao from JPMorgan. Please ask your question sir.

Unidentified Analyst

Hi, it’s (indiscernible) calling for Alex. Thanks very much for taking my questions and congratulations on a very strong quarter. I have two questions. The first one is follow-up on our recent investment in Lefeng, just wondering how should we look at, think about 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.

Donghao Yang

Okay, thank you for coming to the conference call. Well, 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 relatively 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 cosmetics e-commerce market segment, we do believe that Lefeng’s business is going to have 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 giving 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 it’s business or revenue that we will consolidate in our Q1 numbers. So it’s going to be pretty insignificant.

Unidentified Analyst

Thanks very much.

Operator

Our next question comes from the line of Jiong Shao from Macquarie. Please ask your question.

Jiong Shao

Thank you very much for taking my questions. 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, the early on a couple of quarters, because you tried to sort of 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 a platform? What’s your plan for this part of the business for the next couple of years? That’s my first question. Thank you.

Donghao Yang

Melissa, let me take this one. Thank you very much for coming. 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 a quarterly and controlled manner. Our core categories including – our core categories include a parallel 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 expand product categories include more baby and maternity products, for example, in other categories.

Jiong Shao

Okay, great. Thanks Donghao for the color. My second question is about the sort of the sales branded products or the brands are made for Vipshop, so I think as you know some of your peer companies in the world like ASOS in UK etcetera, they make very decent profits from this type of products for their whole business disproportionately more profits from this type of products from the – for the discount at all the third-party brands. Could you sort of share with us your thoughts on over time adding more and more these type of brands on to your platform to try your continued improvement on margins? Hello.

Millicent Tu

So, Jiong, if I understand your question correctly….

Jiong Shao

(Foreign Language)

Millicent Tu

Okay.

Jiong Shao

Okay.

Millicent Tu

Just let me quickly translate it. So we at 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 off 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.

Jiong Shao

Okay.

Operator

Our next question comes from the line of Mr. (Lin Tang) from Goldman Sachs. Please ask your question sir.

Lin Tang

Good morning. Thanks for taking my questions. And we are very glad to see Vipshop’s strong growth momentum. I am just wondering as our orders and customers are doubling in terms of the average sales scale on each round of flash sales, how is this – now how is the growth and/or are we offering more brands? This is my first question for vip.com.

Millicent Tu

So Lin, Eric was saying that although we might add new brands under our portfolio going forward that our key focus for our top priorities increased sales volume per sales events. In other words, what we are 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 Eric is trying to emphasize that. 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.

Lin Tang

Thanks. And my second question is in terms of Lefeng.com, although it’s only going to be very meaningful in the failures, I am just wondering our plan of resources to invest in it to achieve our synergy with Lefeng.com?

Millicent Tu

So we announced our acquisition of concerning stake in Lefeng, because Lefeng is a brand new – is a leading online cosmetics e-commerce company. Cosmetics is one of the fastest growing sector. And after acquisition of Lefeng enabled us to consolidify our position as China’s leading cosmetics and skin care online retailer and there will be a lot of synergy, 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, etcetera etcetera.

Lin Tang

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

Millicent Tu

Okay. So first of all, we have a new CEO and CFO on board in Lefeng.com and we at Vipshop have 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 the few months we have been able to see some progress in this regard and directing Lefeng to the right direction for longer term sustainable growth.

Operator

Our next question comes from the line of Alex Wen (sic) [Eric Wen] from China Renaissance. Please ask your question.

Eric Wen

Hi, good morning Shen and Donghao. Thanks for taking the questions. I have just two housekeeping questions. The first one is can you comment on the gross margin trend of the product revenues and 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.

Donghao Yang

Thanks Eric for your questions. Let me take your first question and Eric will take your next one. Gross margin for this year 2014, well, I am 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 are 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, actual question, gross margin, yes, we are still confident that there is going to be room for improvement going forward.

Millicent Tu

Okay. Just quickly for the benefit of others, we have very high repeat purchase rate perhaps the highest in the industry. Therefore, our repeat purchase rate is about 70% and orders placed by repeat customers exceeding 90%.

Operator

The next question comes from the line of Mr. Thomas Chong from BOCI. Please ask your question sir.

Thomas Chong

Hi, good evening (indiscernible). 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 (Penzance) 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.

Millicent Tu

So we don’t have any tangibles or plans to acquire other categories, but in the future even if we have targets we will carefully assess the pros and cons and to derive on a good decision. So sorry Thomas your question was?

Thomas Chong

My second question just about mobile flash sales competitive landscape, we have seen that Penzance (indiscernible) 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 pile up with Penzance in this regard? Thanks.

Millicent Tu

We have made a lot of progress on the mobile sales over the past few quarters, one of the highest in the industry. We will continue to further expand our cooperation with Penzance hopefully in the not too long future you see Vipshop operates on that channel.

Thomas Chong

Thanks (indiscernible) and thanks for the detailed answer.

Millicent Tu

Okay, thank you.

Operator

Next question comes from the line of Evan Zhou from Credit Suisse. Please ask your questions.

Evan Zhou

Hi good evening Eric, Donghao and Millicent. Thanks for taking my questions. I have two follow-up questions on Lefeng. First one is could you maybe provide some more color on the kind of the user overlap between Vipshop and Lefeng. And to our understanding maybe Lefeng is primarily focused on like higher tier cities where for our (indiscernible) heavy in like tier two, tier three cities was weak out there, there should be some like contributions, incremental contributions for user based on the row? And second question is that in terms of our future cooperation with Ovation, I am wondering because Ovation is pretty famous for its reports in terms of the production about the marketing, so wondering like any specific plans that we may have in the future on that front in terms of our marketing stance?

Millicent Tu

And then a lot on customer basis more competitive for Vipshop, there is a little overlap in terms of customer base which is because as you said Lefeng’s customers are primarily from the first and second tier cities, while very efficient, it’s very strong in the second tier cities and very expensive in the third and fourth tier cities here in China. So there is a lot of benefit in terms of customer based expense. And as to your second question, you are right, Ovation’s expertise in media branding and marketing will benefit to be a Vipshop’s brand providing its access not only to consistent supplier of Ovation’s branded cosmetics, but also enable Vipshop to capture the increasing trends of consumers who can personalize fashion products. So we believe with the strategic relationship with Ovation, we will be well positioned to expand full force into the fast growing cosmetics 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 the scale has expanded so much, your marketing spending absolute dollars will be increased in 2014.

Evan Zhou

Okay.

Operator

The next question comes from the line of John Choi from Daiwa. Please ask your question.

John Choi

Good evening guys. Congratulations on a great quarter and thanks again for taking my question. I have two questions. My first question is regarding the business model, right now, Vipshop obviously moved majority of the products is more or less through a consignment business model, but that didn’t have any plans to extend on I guess, it’s kind of a follow-on question for the first time one of the questions before, but have any plans to become more doing more principal owners of the inventory like more of a traditional B2C products by offering more diverged products to the customers at a more reasonable price, but on the other hand, we will also have to bear the inventory risk? My second question is regards to the operating expense, especially on the fulfillment on the expense and also the marketing expenses going forward in FY ‘14 should we be expecting also a more operating leverage in terms of the speed what we recede over the course of time in the past few years? Thanks.

Donghao Yang

Let me take this one. Thank you for coming to the call. Our business model now you are right we don’t take – we don’t purchase the inventory upfront, which enables us to use very little working capital to support such a faster top line growth. And going forward, I don’t think that we are going to increase the amount of inventory that we purchased at the current level. So meaning we don’t want to become the principal owner of the inventory unless we have to. For example, currently, about 10% of the inventory in a warehouse has to be purchased from the supplier. And understandably if those suppliers are big suppliers like Nike, but going forward as we become bigger with greater marketing power, we believe that more and more suppliers will allow us to take their inventory without having to purchase upfront. So that is the first question. And second question on operating expenses, yes, you are 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.

John Choi

Okay, thanks guys.

Operator

Next question comes from the line of Mr. Xiaoyan Wang from 86Research. Please ask your question. Xiaoyan Wang - 86Research: Thank you for taking my call. Congratulations on the strong quarter. So first of all, a follow up question on the (indiscernible) 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, you are operating on (indiscernible)? And yes, what’s the percentage in terms of mobile revenue this year? That’s my first question.

Millicent Tu

Yes, we will deepen our cooperation with WeChat and then you probably see Vipshop has a channel and in fact website channel over there. In terms of product category, primarily focused on our core product, our core categories including (indiscernible). Xiaoyan Wang - 86Research: My follow-up question on this is what’s the cooperation with (indiscernible), are you sharing the revenue or is it commission-based business model or you are just purely using the (indiscernible) pay that you pay a service fee?

Millicent Tu

I am sorry if you were in this way, so say for example if merchant is so, say for example RMB200 and we give WeChat very small percentage as commission. And secondly we might pay some fees as the WeChat payment. Xiaoyan Wang - 86Research: Okay, thank you very much.

Operator

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

Donghao Yang

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