VIPS 唯品会

Operator

Good day, everyone. Welcome to Vipshop Holdings’ Third Quarter 2014 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.

Millicent Tu

Thank you, operator. Hi, everyone. Thank you for joining Vipshop Third Quarter 2014 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 or 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 and 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 Donghao Yang, the Company's Chief Financial Officer. At this time, I would like to turn over the call to Eric Shen.

Eric Shen

Hello, everyone. Welcome to our third quarter 2014 earnings conference call. We are happy to share our earnings results, which show our continued strong growth operationally and financially. First, let me give you a few highlights. We grew our total net revenue by 130% year-over-year to $882.6 million. We added about 4 million new active customers closing out the quarter with 9.5 million total active customers and the total orders on our platforms also continued to grow in line with revenues to over 25 million in the third quarter. We have close to 60% GMV of our coming from mobile. As our fast growing using population flops from PC to mobile, we continue to ready our mobile platform by improving the customer experience and [indiscernible] improvements and we are close to the end of the 2014. We will continue to make more of these investments that focus on enhancing our technology and marketing capabilities. We will expand headcount in this department and continue to invest in big data Big Data R&D. We are confident that this will enable us to improve personalization drive repeat purchase and grow over the mobile headphone and attract the new active customer in the future. As this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss our trends to further improve our operations and customer experience, as well as this quarter’s financial achievements.

Donghao Yang

Thanks, Eric. Hello to everyone. Although we continued to deliver strong growth and develop our mobile offering in the quarter, we had concurrently been working to further optimize our logistics systems in order to support our goal of increasing order volume and market shares. Since our IPO, we have continuously achieved strong sales growth, which has exceeded internal and external estimates. In order to maintain this operational momentum, we are accelerating our warehouse expansion. We now expect that by the end of this year, our total warehouse capacity will reach over 700,000 square meters, exceeding our original target by 200,000 square meters. Moreover, on the delivery solution side, we began in early 2014 to invest judiciously in several courier companies with superior services. In some select cities, we are also preceding to launch our own national deliveries services. We believe that by integrating our logistics solutions, we will enjoy greater economies of scale as we continue to grow our order volume. Over the next two years, we aim to scale our last-mile capabilities to support 70% to 80% of total orders on our platform. Historically, we solidified our leadership position by establishing strong supply chain management systems and deepening our corporation with logistics companies. Looking ahead, we believe strengthening these initiatives will further expand our market leadership in discount retail and improve the customer experience on our platform. In addition, as we continue to grow our customer base, during this quarter, we have made a strategic decision to decrease our emphasis on our group buy service with customers who tend to have lower average ticket size and lower margin. The end result is a significant increase in our average ticket size quarter-on-quarter, but also leads to fewer orders and slower growth in new customers quarter-over-quarter. Going forward, we will continue to deemphasize our group buy business and increase our focus on our core operations customers. 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 U.S. dollar amounts and all the percentage changes refer to year-over-year changes unless otherwise noted. Total net revenues for the third quarter of 2014 increased by 130% to $882.6 million the growth which was primarily driven by a 136.8% increase in the number of total active customers and a 117.6% increase in the number of total orders. Gross margin for this quarter further expanded to 24.9% from 24.2% in the prior year period and gross profit increased by 136.1% to $219.5 million. This improvement was driven by the increased scale of our business leading to greater bargain power with our suppliers as well as the development of our marketplace business. More specifically fulfillment expenses increased by 91.5% to $84.4 million for the third quarter of 2014, as a percentage of total revenues, fulfillment expenses decreased to 9.6% from 11.5% in the prior year period. The cost reduction was primarily due to our continued efforts to reduce warehousing and personnel costs and negotiated better courier rates leveraging the growing order volume. Marketing expense increased by 170.8% to $47.1 million. As a percentage of total net revenues, marketing expenses increased to 5.3% from 4.5% in the prior year period, reflecting our strategy to continue expanding market share and building greater brand awareness. Technology and content expenses increased by 225.4% to $31.3 million, primarily reflecting our continued effort to invest in IT systems and expand headcounts to better support future growth. As a percentage of total revenues, technology and content expenses increased to the 3.5% from 2.5% in the prior year period. General and administrative expenses increased by 259.4% to $42.8 million. As a percentage of total net revenues, general and administrative expenses increased to 4.9% from 3.1% in the prior year period, primarily due to headcount expansion and office rentals associated with the growth in the company's overall business, the amortization of intangible assets resulting from the Lefeng acquisition as well as the increase in online payment expenses. Driven by the growing scale of the company's operations and improved gross margin and cost control, income from operations increased by 76.6% to $21.3 million for the third quarter of 2014. Operating income margin was to 2.4% compared 3.1% 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, increased by 178.9% to $42.1 million. Non-GAAP operating income margin increased to 4.8% from 3.9% in the prior year period. Net income attributable to Vipshop's shareholders for the third quarter of 2014 increased by 130.3% to $27.7 million. Net income margin attributable to Vipshop's shareholders remained stable at 3.1% compared with the prior year period. Net income per diluted ADS increased to $0.05 from $0.02 in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders, which excludes share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, increased by 206.8% to $46.3 million. Non-GAAP net income margin increased to 5.2% from 3.9% in the prior year period. Non-GAAP net income per diluted ADS increased to $0.08 in the third quarter of 2014 from the $0.03 in the prior year period. As of September 30, 2014, our Company had cash, cash equivalents and restricted cash of $668.2 million and held-to-maturity securities of $491.1 million. For the third quarter of 2014, net cash from operating activities was $80.8 million. Looking at our business outlook for the fourth quarter of 2014, we expect our total net revenues to be between $1.20 billion and $1.22 billion, representing a year-over-year growth rate of approximately 84% to 87%. These forecasts reflect our current and preliminary view on the market and operational conditions which are subject to change. With that, let us open to our Q&A.

Operator

[Operator Instructions] Your first question comes from the line of with Alan Hellawell with Deutsche Bank.

Alan Hellawell

…in other words what might the trends the - if we did not have that. Secondly, can you just give us an update on what marketplace commission revenue is and what the take rate is? Then finally, with the heavy investment in logistics technology and marketing, can you give us a preliminary view on 2015 margins? Thank you very much.

Donghao Yang

Well, Alan, thank you for the question, but we didn't hear your first question very well. Can you please repeat?

Alan Hellawell

Yes. Basically, just trying to find out what the impact, if we strip out the reduction in group buying activities, what would the quarterly trend in order numbers and active customer numbers be if we take out group buying?

Millicent Tu

Alan, to recap what Eric said now, the marketing spend amount grew by channel which actually led to substantial decrease in new active customers from our group buy. That number had been reduced by more than half. This is because we strategically made some optimization in our operations. As Eric mentioned, our customers on the group buy channel tend to have lower average ticket size and lower repeat purchase rates, therefore by making the strategic optimization in our operations, it will enable us to focus more on high quality, high value customers.

Donghao Yang

Okay. Let me take your second question about our market place. In Q3, our marketplace business grew substantially compared to Q2. In Q3 a GMV from our marketplace business accounted for about 12% of our total GMV whereas in Q2 it was about 7% to 8% and commission level on our marketplace remains stable at about 10% to 11%. Your third question was about our margin outlook for the next year. We do not provide guidance for next year's margin outlook, but we are pretty confident that this business is a very profitable business and we will be able to maintain or improve, continue to improve our margin going forward.

Operator

Part of the leaders' request, we would like to ask all participants to limit their questions to one. At this time, your next question comes from the line of Binnie Wong with Bank of America Merrill Lynch.

Binnie Wong

Hello. Thanks for taking my question. My question is on the geographical coverage. I just wanted to hear from management about the percentage of sales from [indiscernible] and just want to get a sense of how our market positioning is progressing. Just, I guess, a question following up on Alan's question earlier, so we should expect in fourth quarter to normalize, so the group buy activity should not be an impact to us again. Then the sequential growth in the active customers and total order would be basically based on our core platform, core platform [ph] and not from - I mean, that will be phased out to group buy. Is that right?

Millicent Tu

Binnie, can take your first question average sales geographic.

Eric Shen

[Foreign Language]

Millicent Tu

Binnie, continued trend which you saw in the second quarter, the combination also from Tier-1 and Tier-2 city is really to 52%, whereas Tier-3 and Tier-4 have contributed more than 45% of our total net revenues.

Donghao Yang

Binnie, thanks for your question. Let me take your second question. We have just provided revenue guidance for Q4, which is going to be roughly 40% Q-over-Q growth and 84% to 87% year-over-year growth. I think, you know, the increase in our number of active customers is going pretty much in line with the growth rate of our revenue.

Operator

Your next question comes from the line of Eric Wen with China Renaissance.

Eric Wen

Hi. Thank you very much for taking my questions. My first question is, Donghao you mentioned that the company intends to build up its last-mile delivery infrastructure. Does that change? What kind of CapEx guidance that you would give to us for this initiative? Second, can you elaborate on your investment in technology and G&A expense, which seems to be higher than normal trend this quarter? Where does this technology goes to?

Donghao Yang

Okay. Thanks Eric. Well, actually to expand our last-mile delivery capabilities does not require too much of CapEx, because we don't need to buy a lot of fixed for last-mile delivery teams. Mostly it is operating assets and headcount, which is going to be covered by our revenue. Your second question, our IT expense increase in Q3 was largely due to our increase in headcount. We are trying to build out our IT capabilities over time, so in Q3 we hired few hundred of new IT people, which drove up the technology expenses, but that that kind of investment we feel is very necessary to drive the company's long-term growth.

Operator

Your next question comes from the line of Cynthia Meng from Jefferies.

Cynthia Meng

Thank you, management. I have two questions. First of all, can management share any single-day promotion metrics that you have so far? Then secondly, what is the average revenue per order mobile compared to that on the PC orders. Thank you very much.

Millicent Tu

[Foreign Language]

Eric Shen

[Foreign Language]

Millicent Tu

Lefeng's [ph] GMV is really our expectation recording more than three times the last year's net sales. [ph] on my nationwide shopping festival promoting the awareness and consumption of e-commerce, which Vipshop benefits. [Foreign Language]

Eric Shen

[Foreign Language]

Millicent Tu

Average order size on mobile is estimated at 2,000 PC, while shopping frequency and conversion rates are higher compared to PC.

Operator

At this time, we would like to ask that all participants please only ask one question. The next question comes from the line of Jiong Shao with Macquarie.

Jiong Shao

Thank you for taking my one question. Maybe I would just follow-up on the earlier question on group buy to put the question to rest. Will you be able to share with us the revenue contribution and order contribution from group buy in Q3 and in Q2?

Donghao Yang

Thanks, Jiong for your question. Well, GMV, Q3 grew by channel was substantially smaller than Q2. In Q2, it was 5% of our total GMV. In Q3, it was only 3%, so it came down quite substantially.

Operator

Your next question comes from the line of Gene Munster with Piper Jaffray.

Gene Munster

Thanks for taking my question. You mentioned escalating demand as being the reason for accelerating fulfillment investment. Can you guys elaborate a little bit on what you are seeing in terms of escalating demand and how should we be thinking about 2015 GMV and sales growth. Thanks.

Donghao Yang

Sorry. Could you please repeat your question? I couldn't hear it.

Operator

One moment please. Mr. Munster, if you would [Operator Instructions] Go ahead with your question?

Gene Munster

Thanks. You guys talked about escalating demand as being the reason for fulfillments investments expansion. Can you guys talk a little bit about what you are seeing in terms of escalating demands and how should we be thinking about 2015 GMV and sales growth?

Donghao Yang

What demand? I am, sorry? Did you hear that?

Gene Munster

In your prepared remarks, you guys talked about escalating being the reason for accelerating the warehouse investment. Can you talk about the escalating demand that you are seeing?

Donghao Yang

[Foreign Language]

Millicent Tu

[Foreign Language]

Eric Shen

[Foreign Language]

Millicent Tu

The company has made substantial investments in expanding the warehouses and of course building our last-mile capabilities. We are actually very confident about the outlook in 2015 and beyond. Although we don't give specific guidance for the full year, we do see the need to reinvest for future growth. Just for your information, we now have altogether 700,000 square meters of warehouse already and Eric also mentioned that there is another 600,000 square meters, which is under construction. All-in-all, the demand for orders and the demand for discount in branded goods, the outlook is pretty promising.

Operator

Your next question comes from the line of Chi Tsang with HSBC.

Chi Tsang

Hi. Great. Thank you very much. I wanted to ask you about how your cosmetics business is building. If you can give us an update on that, maybe the GMV contribution this quarter, thank you so much.

Millicent Tu

[Foreign Language]

Eric Shen

[Foreign Language]

Millicent Tu

Okay. Lefeng is now an integrated part of Vipshop, so the combined cosmetics GMV as well as Vipshop in the third quarter this year was U.S.$191 million and we still aim to be the biggest in this vertical in the near future.

Operator

Your next question comes from the line of Alicia Yap with Barclays?

Alicia Yap

Hi. Good evening. Thanks for taking my question. My question is related to your last-mile delivery investment. When do you actually expect to achieve the 70% to 80% of the order that cover by your own logistic. Currently, if you can share with us the percentage of orders that is being delivered by the carriers that you have invested, also percentage of your own last-mile people. Thank you.

Millicent Tu

[Foreign Language]

Eric Shen

[Foreign Language]

Millicent Tu

Alicia, by the end of this year, I think we would have approximately 50% of the orders to be delivered by the companies we acquired together with our start recruiting people and hopefully in the year or two we will have 75% to 80% of orders to be covered by our 8,000 last-mile. As of now, we have altogether 9,000 last-mile delivered people, whether that is through the companies that we invested or our full-time employee.

Operator

Your next question comes from the line of Bo Pang with Oppenheimer.

Bo Pang

Thank you for taking my question, management. I am actually asking question on behalf of Ella Ji, so my question is just a follow-up on the group buy business. We want to know about the margin profile of the group buy business. Is that last end of fast sale [ph]? How will the downsize of the group buy business affect the overall margin going forward? Thank you?

Donghao Yang

Well, thanks for the questions. Well, as we have explained earlier, our group buy business tends to have low average ticket size and a lower margin profile. For example, typically average ticket size for our group buy orders is like one-half, 50% of our main site. If you think about the fulfillment cost that we have to incur to deliver the products that order to the customers, you know, you would understand why the margin for our group buy orders is much lower than our main business. Going forward, if we continue the current strategy and deemphasize the group buy business, you are going to see probably two things. One is, increase in our average ticket size. Secondly, the improvement - although, pretty small, so there is going to be some improvement on our overall margin profile.

Operator

Your next question comes from the line of [indiscernible] CIPC-China International.

Unidentified Analyst

Hi. Thank you for taking my questions. My question is regarding your 2015 margin outlook. We see the fulfillment cost as a cost as a percentage of revenue consistently decline this year, so could you please give us more detailed explanation and the future trend about this and what is other operating expenses items going forward? Thanks.

Donghao Yang

Thanks for the question. Well, you are right. In Q3, our fulfillment expenses as a percent of revenue came down pretty substantially compared to Q2. If you consider it is only quarter-over-quarter, there are few things behind that reduction. One is, of course, you know we are trying to expand our warehouses. By having larger warehouses, we can achieve greater economies of scale or operating efficiencies, which will help drive down the costs. Secondly, we have talked about our strategy to kind of deemphasize our group buy business. If you compare our average ticket size in Q3 with Q2, you would see a roughly 9% increase in average ticket size and that has helped also drive down fulfillment expenses as a percent of revenue. Going forward, again, we don't provide any guidance for next year's profit margin, but I believe we are so very confident there is still room for us to improve on our margins.

Operator

Your next question comes from the line of Sean Zhang with 86Research.

Sean Zhang

Hi. Good evening, management. Thank you for taking my question. Seems like cutting down some low ticket size, low margin business such as group buy and you are focusing more on your core flash sale business, can you share with us more color on your new initiative in terms of your biggest category apparel or other category your direct flash sale business. Thank you.

Millicent Tu

[Foreign Language]

Eric Shen

[Foreign Language]

Millicent Tu

Just recall, our existing core categories include apparel, shoes, handbags, cosmetics, baby, home goods already, which we have already established ourselves with being in mid-market. In the near future, we don't plan to immediately add any new categories rather than focus on the current ones, because the existing categories that we are in, already has substantial opportunities in the future.

Operator

Your next question comes from the line of Thomas Chong with Citigroup.

Thomas Chong

Hi. Good evening. Thanks for taking my question. My question is about the competitive landscape for the online discount retail sector. Did management see any change in the competitive landscape last year compared to this year and how should we think about the outlook in terms of the competitive landscape. My second question is about the CapEx guidance, because of expansion warehousing capacities. Any color about the CapEx for this year and next year would be helpful. Thanks.

Millicent Tu

[Foreign Language]

Eric Shen

[Foreign Language]

Millicent Tu

We don't see any significant changes in the competitive landscape. We continue to stay focused and gain market share in the discount retail market. We don't see any direct competitors, because we are focused on flash sales [ph] business model, while most of the other general e-commerce players primarily selling apparel and other fashion group through the marketplace model.

Donghao Yang

Okay. Let me take your second question about CapEx. We are expecting to spend roughly $150 million to $200 million in the next couple of years, each year. Most of the CapEx will be spent on, of course, warehouse expansion project.

Operator

Your next question comes from the line of [indiscernible] Research.

Unidentified Analyst

Hi. Thanks for taking my questions. I would like to ask about current warehouse utilization and whether you the utilization going from third quarter to fourth quarter. Also, if you the management can give some update about the current merchandise sell-through, that would be very helpful. Thank you.

Millicent Tu

[Foreign Language]

Eric Shen

[Foreign Language]

Millicent Tu

Okay, because we have continuously adding and building more warehouse capacities, so the current utilization rate is low. [Foreign Language]

Eric Shen

[Foreign Language]

Millicent Tu

Although we don't disclose specific ratio for the sell-through rate, but the trend has been pretty stable and healthy.

Operator

Your next question comes from the line of Robert Lin with Morgan Stanley.

Robert Lin

[Foreign Language] I will English to ask the question. I know, our anniversary sales are in December beginning period and it is probably factored into our revenue guidance already. Can we provide some color in terms of GP margin? Would that be fairly stable year-on-year or will it be better. I guess, in addition to that would be in terms of marketing spend, would that be fairly controlled similar to last year's percent of the revenue, if you can provide some color. The second is initiative [ph] about data leverage. We talked about in the last quarter. We were wondering if you can provide more color when [ph] will be started in VIP next year, the timing, I guess.

Donghao Yang

Hi. Robert. Thanks for the question. Let me take your first one. Well, again, we don't provide guidance for margin or any specific expense item for the next quarter of next year. What I can tell you is, this Management's strategic focus right now is on top-line growth. Basically, we are going to reinvest some of our profit to drive top-line growth at least for the near future to gain more market share, so that is about your margin question and expense questions. Millicent, would you translate the next one?

Millicent Tu

[Foreign Language]

Eric Shen

[Foreign Language]

Millicent Tu

Okay. With the personalization asset, we already started to make some primary intent on our mobile platform. We are still in the period of cumulating and trying the personalization assts on the mobile channel and we found that the initial feedback has been that with that initiative, our average ticket size and the conversion rate would be positively impacted. If all goes well, we expect that the complete personalization launch will be carried out by the end of this year.

Operator

Your next question comes from the line of Evan Zhou with Credit Suisse.

Evan Zhou

Hi. Good evening. Shen, [ph] Donghao, Millicent. Thanks for taking my question. My question is on customer acquisition cost. Can you maybe give us some color, how do you see that trend going forward? What kind of our sales and marketing acquisitions [ph] strategy in the coming years? What are the main channels that can be considered? Thank you.

Millicent Tu

[Foreign Language]

Eric Shen

[Foreign Language]

Millicent Tu

You saw that the new active customer acquisition cost for Q4 sequentially went up, whereas the margin expanding as a percentage to top-line trend up sequentially. This, again, goes back to our efforts to strategically - our operational optimization and substantially reducing the marketing spending now improve by channel. We expect the normalization to take place in Q4. Going forward, marketing spending as a percentage will come down. mobile continue to have a bigger portion of our top-line. We said the overall new active customers cost will come down in the longer run.

Operator

Your next question comes from the line of Weibo Hu with Goldman Sachs.

Weibo Hu

Good evening, Management. Thank you for taking my question. My question is on gross margin. For the third quarter, our analysis shows that our self operation business, the gross margin declined about 0.8 percentage points quarter-on-quarter, so what is the reason behind that? Would you mind helping us to refresh the third quarter gross margin on the different categories such as apparel gross margin, cosmetics gross margin and the other categories gross margin? Thank you.

Donghao Yang

Thanks, Weibo, for your question. Well, again, the biggest reason for the kind of decline in the gross margin of our direct business is largely due to our reinvestment of the profit back into the business to drive top-line growth. In August, we had our first generation, you know, [ph]. It is a very big promotional event. where we offered discounts to our customers to drive more top-line growth. Again, the strategy is very clear, top-line growth is our top priority and you know we are going to reinvest our process including gross profit is always the spending more operating expenses to drive top-line growth in the long run. Your second question is about the gross margin for our main product categories, right? Our cosmetics good gross margin is close to 20% and our apparel gross margin is that is about 25% to 27%, so those are actually the two largest categories that we have.

Operator

Your next question comes from the line of John Choi with Daiwa Capital Markets.

Unidentified Analyst

Hi. Thank you for taking my question. This is Alex on behalf of John. My question is on mobile side, so could you talk a bit about the sort of mobile contributions on your promotion [ph] event to the overall GMV. Also, about a source of traffics on the mobile, could you talk a little bit about how much traffic is coming from the your own apps and how much is from the retail platform? Thank you.

Millicent Tu

[Foreign Language]

Eric Shen

[Foreign Language]

Millicent Tu

Okay. Our mobile business is growing very fast. In the third quarter of 2014, mobile capital 57% to GMV, compared to 15% in the same period last year. In the October 2014, mobile GMV contribution reached 65%. In terms of the traffic radar, the majority of the traffic is coming from our own app. In terms of the traffic from retail and other social networking platform, it is very small.

Operator

At this time, I would like to turn the call over to management for closing remarks.

A

Thanks, everyone, for attending our call. I am looking forward to seeing you guys and talk to you guys again next quarter.

Donghao Yang

Thank you.

Eric Shen

Thank you.

Operator

This concludes today's conference call. You may now disconnect.