VIPS 唯品会

Operator

Ladies and gentlemen, thank you for standing by. And good day, everyone, and welcome to Vipshop Holdings Limited's Third Quarter 2015 Earnings Conference Call. At this point, I would like to turn the call to Ms. Millicent Tu. Please go ahead.

Millicent Tu

Thank you, operator. Hello, everyone, and thank you for joining Vipshop's third quarter 2015 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 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 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, plan, should, will, aim, potential, or other similar expressions. These forward-looking statements speak only as the date hereof and are subject to change at any time, and we have no obligation to update these forward-looking statements. Joining us on today's call are Mr. Eric Shen, our Chairman, Chief Executive Officer and Co-Founder; and Donghao Yang, our Chief Financial Officer. At this point, I would like to turn it over – turn the call over to Mr. Eric Shen. Shen-san?

Eric Shen

Good morning and good evening, everyone. Welcome to our third quarter 2015 earnings conference call. We are disappointed that we didn't meet our top-line guidance due to unexpected seasonal patterns over optimistic forecast and conservative marketing investments. Donghao will discuss this in more detail shortly. After the close of the quarter, we strengthened our efforts to spur user growth and buying activity. On the famous Singles' Day, November 11, we achieved a GMV three times that over last year's Single Day. New active customer for this event also tripled year-over-year. This gave us strong boost to our platform and helped us improve the new customer growth momentum. With the success of our Singles' Day sale event and the new marketing act in the fourth quarter so far, we believe we are back on the right track, to drive further customer – help to drive future customer and revenue growth. A good aspect of our company is that our flash sales model is very suitable for mobile devices. In the third quarter, the GMV from mobile rose to 79%, up from 57% one year ago. And the total active customers on mobile in our core flash sale business increased by 137% year-over-year. We are also excited about our new cross-border offering which allows foreign brands to test into the Chinese market and bring our customers a wider range of international products, strategically it provides us with good cross-selling opportunities. During the third quarter revenues from the cross-border business grew by over 164% quarter-over-quarter. And we expect to start seeing fast growth in the coming quarters. With our continued growth, we remain confident in the strong fundamentals and the market opportunities for our company. At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss our operations and the financial results.

Donghao Yang

Thanks, Eric, and hello, everyone. As Eric mentioned, unfortunately we missed our top-line guidance for the first time in the 12 quarters since we became a publically listed company. In hindsight our third quarter guidance was overoptimistic to begin with and additionally we didn't invest enough in marketing. The in-traffic acquisition cost increasing at a rate faster than we anticipated, we were a bit slow to adjust to this new market condition. Our total marketing expense for the third quarter was less than that for the second quarter. Lastly, we saw different seasonal patterns this year, especially late into the quarter impacting customers' purchasing behavior, which further hindered our top-line growth. With high [indiscernible], we continued to have slowest revenue growth of 63% year-over-year and made strong operational progress during the third quarter. In the last quarter, we added more than 5 million new active customers to our platform, brining our total active customers to nearly 15 million. These customers placed nearly $45 million orders in the third quarter, up from $28 million one year ago, excluding the impact of the group-buy business and Lefeng, the number of total active customers and total orders for Vipshop's core flash sales business increased by 71% and 75% year-over-year respectively. Our customers remain sticky and loyal to our platform. The number of repeat customers grew to over 11 million in the last quarter and these repeat customers contributed 92.5% of our total orders. In the third quarter, our average active customer made 3.1 purchases and spend RMB 595 on a platform, up from 2.9 purchases and RMB 541 in the prior year period. Furthermore, our operating margins further expanded to 5% from 2.4% in the prior year period, driven by a decline in our operating expenses as a percentage of total revenue. The growing size of our platform, stronger customer royalty, increased buying activity and strengthening operating leverage brings us many opportunities to offer more product, provide better service and reduce costs. On the logistics side, we have continued to build out a strong infrastructure of warehouses and network of invested delivery companies to support and enhance our order fulfillment capabilities. By the close of the third quarter, our warehouse capacity reached 1.6 million square meters, and we also started automation projects in some of our warehouses. On the last-mile side through our network of in-house and invested couriers, we're now delivering 80% of our total orders across almost all provinces in Mainland China. Our logistical enhancement enabled us to reduce delivery time, provide more coordinated and friendly delivery service, reduce costs and ultimately provide a more consistent and pleasant customer experience. For example, elaborating our last-mile capabilities, we are now able to return orders more profitably and cost effectively utilizing our own logistics infrastructure. Overall it is our unique and prudent offering as all that's exemplary beginning to end customer experience we provide which sets us apart in the market. We are confident that are continuing to leverage our proven model, improve our operations and deliver the best experience possible to our loyal customers. We are very well positioned to further expand our platform and fill our brand globally. Now moving onto our quarterly financial highlights. Before I get started, I would like to clarify that all the financial numbers presented today are in RMB amounts, and all the percentage changes refer to year-over-year changes unless otherwise noted. Total net revenue for the third quarter of 2015 increased by 63% to RMB 8.67 billion, primarily driven by continued robust growth in a number of total active customers and total orders as well as the increasing revenue contribution from our mobile platform. On the mobile platform, the number of total active customers and total orders for Vipshop's core flash sales business increased by 137% and 141% year-over-year, respectively. Gross profit for the third quarter of 2015 increased by 63% to RMB 2.16 billion, primarily driven by the expanding scale of the business. Gross margin for this quarter remained stable at 24.9% as compared with the prior year period. Fulfillment expenses for the third quarter of 2015 were RMB 778 million as compared with RMB 509 million in the prior year period, primarily reflecting the increase in sales volume, and number of orders fulfilled. As a percentage of total net revenue, fulfillment expenses decreased to 9.0% from 9.6% in the prior year period, primarily reflecting the scale effect associated with our growth in total net revenue and the increase in average ticket size. Marketing expenses for the third quarter of 2015 were RMB 470 million as compared with RMB 284 million in the prior year period, reflecting our strategy to drive long-term growth through increasing investment in strengthening our brand awareness, particularly for our mobile application, attracting new users, and expanding our market share. As a percentage of total net revenue, marketing expenses were 5.4% as compared to 5.3% in the prior year period. Technology and content expenses for the third quarter of 2015 were RMB 253 million as compared with RMB 190 million in the prior year period, reflecting our continued effort to invest in human capital and advanced technologies such as data analytics, which can help improve the ability to predict consumer behavior and further enhance user experience. As a percentage of total net revenue, technology and content expenses decreased to 2.9% from 3.6% in the prior year period, primarily reflecting the scale effect associated with the growth in total net revenue. General and administrative expenses for the third quarter of 2015 were RMB 297 million, as compared with RMB 259 million in the prior year period. As a percentage of total net revenue, general and administrative expenses decreased to 3.4% from 4.9% in the prior year period, primarily reflecting the scale effect associated with our growth in total net revenue. Driven by the growing scale of our company's operations and decrease in fulfillment, technology and content and general and administrative expenses, as a percentage of total net revenue, our income from operations increased by 241% to RMB 436 million for the third quarter of 2015. Operating income margin increased to 5% from 2.4% in the prior year period. Non-GAAP income from operations, which excludes share-based compensation expenses and amortization of intangible assets resulting from a business acquisition increased by 131% to RMB 587 million from RMB 254 million in the prior year period. Non-GAAP operating income margin increased to 6.8% from 4.8% in the prior year period. Exchange loss was RMB 57 million as compared to an exchange gain of RMB 21 million in the prior year period. Primarily driven by the weakening value of the RMB relative to the U.S. dollar. Our net income attributable to Vipshop's shareholders for the third quarter of 2015 increased by 90% to RMB 317 million from RMB 167 million in the prior year period. Net income margin attributable to Vipshop's shareholders increased to 3.7% from 2.1% in the prior year period. Net income per diluted ADS increased to RMB 0.53 from RMB 0.28 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 a business acquisition and equity method investments, increased by 62% to RMB 453 million from RMB 279 million in the prior year period. Non-GAAP net income margin remains stable at 5.2% as compared to the prior year period. The sudden growth in non-GAAP net income margin was primarily attributable to the relatively large exchange loss in the period. Non-GAAP net income per diluted ADS increased to RMB 0.76 from RMB 0.47 in the prior year period. As of September 30, 2015, our company had cash, cash equivalents, and restricted cash of RMB 3.54 billion and held-to-maturity securities of RMB 2.58 billion. For the third quarter of 2015, net cash from operating activities was RMB 285 million. As we discussed last quarter, this was primarily due to Vipshop's substantially speeding up our payments to suppliers, in order to support their growth and create an ecosystem that will strengthen our competitive advantages. We also continued to significantly increase our supplier financing and this was one of the large cash outflow items in the quarter. Looking at our business outlook for the fourth quarter of 2015, we expect our total net revenue to be between RMB 12 billion and RMB 12.5 billion, representing an year-over-year growth rate of approximately 43% to 49%. In order to secure the necessary land for the future office space in the Pazhou Internet Innovation zone we at least have incurred a capital expenditure of RMB 837 million in the third quarter of 2015. Lastly, the Board of Directors has approved a share repurchase program whereby we made purchase up to $300 million of our ADS over the next 24 month period. We expect to fund the repurchase from our existing cash balance including cash generated from operations. With that, I would now like to open the call to Q&A.

Operator

Thank you sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of George Meng from Goldman Sachs. Please ask your question.

George Meng

Hi, good evening, everyone. Thank you very much for taking my question. I have two questions. The first one just relate to your other revenue. I see that didn't grow that much in the third quarter sequentially. Can you help us understand that, is that the net GMV from marketplace as a percentage of total net GMV decreasing? Or is that the commission rate actually decrease? And also what's your view for the longer run for your marketplace business? And then the second one is, you've mentioned the cross-border is growing really fast. Can you disclose by how big is it as a percentage of your 1P revenue and then how big do you think it will become in the longer run? And also if you can disclose some of the operating margins, for example the size of your bonded warehouse now, and then do you have any expansion plan and any related CapEx, any color will be very helpful? Thanks.

Eric Shen

Well, thanks for your question, all right. In the other revenue line, you're right. Q3 is smaller than Q2, mostly because of a smaller commission revenue from our third-party marketplace business. We have – total investments that we're going to be very careful about how aggressive we want to grow our marketplace business, because there has been – there have been some issues with other marketplace platforms, where people have complaints about quality of products and et cetera. So that's why, we have been pretty careful about how aggressive we want to do that. So your question about the cross-border business, now it's – the cross-border business is about – it's about 5% of our total GMV, and our goal is to grow the business a bit more faster going forward as long as the regulatory environment or the – to be more specific the import duty policy remain stable.

Donghao Yang

[Foreign Language] Okay. So, George, at the moment, we have purchased 50,000 square meters of bonded warehouses in China, and we are – we're intending to expand that capacity in the future.

Millicent Tu

[Foreign Language]

Operator

Okay. The next question comes from the line of Alan Hellawell from Deutsche Bank. Please ask your question.

Alan Hellawell

Great. Thank you. First question, just I was noticing that DSOs have risen somewhat, payables have come up a tiny bit, but the overall cash conversion cycle has risen somewhat. Can you give us a sense – I know you mentioned a couple of initiatives, but what might be driving that, and what we should anticipate going to the end of the year and into next year? And then my other question is, obviously we heard about weather impacting growth for the third quarter. I was just wondering where do you could address the competition, particularly in light of recent competitor comments on its own robust growth in flash sales for the points that they read through it a bit that it might be even 15% of our GMV level, any comments will be helpful? Thank you.

Eric Shen

Alan, thank you for your questions. Let me take your first question. So – well, it has always been the – this management's goal to help our suppliers to grow their business, and then as a result of that, we can – I think can have more products to sell, inventory to sell through us which will benefit our business eventually. So, we have been leveraging our large cash balance at Vipshops to first shorten the payment terms for our suppliers, and second to offer supplier financing to our suppliers. So, this is critical for a established retailer to build in healthy and fast growing ecosystem. And this quarter, our operating cash flow situation is much better than the previous quarter, and as I explained earlier to our investors that this -- we've changed our payment policy earlier this year, and the impact on our operating cash flow will be only temporary. Going forward in Q4, our operating cash flow even better going forward, the cash conversion cycle will return to its normal level.

Alan Hellawell

[Foreign Language]

Millicent Tu

[Foreign Language]

Donghao Yang

So, Alan, we are very specialized in this strong retailing. In our specialty, we do not see any threats in our business. We are always staying focused, able to grow very fast. And as you can see, the majority of our business is still on the direct third-party business model, which is a very different – substantially different compared to other flash model largely on marketplace. In our business, we have substantial entry barrier and we have always have competitors along the way in many forms and we always able to strengthen and defend our competitive advantage, mainly in merchandising very specialized warehousing, et cetera.

Operator

Thank you. [Operator Instructions] The next question comes from the line of Dick Wei from Credit Suisse. Please ask your question.

Dick Wei

Great. Thank you for taking my questions. I have one question. I guess the company have seen top-line deceleration over the past couple of quarters. I think, at this point, how management thinks about kind of the growth strategy going forward? Are we focusing more on the – try to increase the GMV growth related to the partnership, marketing et cetera, or should we focus more on slower growth rate, but more profit EBITDA, the higher profitability?

Millicent Tu

[Foreign Language]

Eric Shen

Okay. Just for the benefit of others, I'll quickly summarize what Eric just said. If we look at excluding the group-buy impact, if we look at the past three quarters, orders has been – it's growing at 107%, 86%, and this quarter 75% respectively year-over-year. So judging from this growth rate, it's still very healthy and it's still very fast. Of course, the company is not very sizable. So the size, the basics there is to kick-in, it's going to be a fact that you'll consider. In terms of strategy, the company will try [indiscernible] to deepen our penetration, and of course grow our market share. We're doing pretty well in our existing categories, of course we'll need to include in which into other category. New customer acquisitions, new customer growth is still one of the top priority. The company learning from the Q3 experience, we try to be a bit more aggressive in terms of getting more new users. Having said that, the company is trying to balance in terms of top line growth and overall profitability.

Millicent Tu

[Foreign Language]

Operator

Thank you. The next question comes from the line of Cynthia Meng from Jefferies. Please ask your question.

Cynthia Meng

Thank you, management. I have two questions. First of all, as management mentioned that you are looking to increase spending on the marketing side to increase new customers and expand into more categories. Can management give some more colors on how you look at marketing expense to sales ratio? Is it – is this some kind of metric that you will look at to monitor how much spending you will put in next year, in order to grow customer base? And then with respect to the product category expansion, we appreciate some more color on what type of categories and also what geographic market that you are going to expand to? The second question is with respect to the competitive environment. Management just mentioned that you will continue to focus on online direct sales versus a platform type of approach for the flash sale. Can you give us some more color on, why using this is much more effective compared to the platform approach? Thank you.

Eric Shen

Let me take your first question. Well, when we say, we're going to be a bit more aggressive in our marketing strategy to acquire new customers, it doesn't mean that we will significantly increase our marketing, total marketing spend as percent of revenue. And we believe that even going forward, our total marketing dollars as percent of revenue will remain relatively stable, and more importantly, we will try to optimize our – our channel mix or method for marketing strategy. For example, currently, we spend quite a significant amount of marketing dollars on – on branding our TV commercials. So, yes, the customer acquisition costs go up really, really fast, we can definitely be a bit more flexible, allocating more of our branding, our TV commercial campaign dollars to – to online customer acquisition channels, for example, right. So, that's your question. We believe that the total marketing spend as a percent of revenue won't go up significantly.

Cynthia Meng

[Foreign Language]

Millicent Tu

[Foreign Language]

Donghao Yang

I think the answer for the – your question on the category expansion, just to highlight a few. Last year, we did a tremendous job in improving or increasing our market share in the beauty and cosmetics category. And this year, we are putting more emphasis and more effort in baby and mother, and this year is another highlight that we feel very proud and have done a very good job in achieving further growth. Next year, probably, home good is another area where we can focus, because this category still has a lot of room to grow in the future. 3C or electronics has not been our core categories in the past and we believe that even in this category, there should be some room to improve to diversify our product offerings.

Millicent Tu

[Foreign Language]

Donghao Yang

[Foreign Language]

Eric Shen

Okay. We believe that direct sales and principal business model is much more advanced and sophisticated compared to that of our marketplace, and we will continue to be focused in this area. We believe by offering under direct sales business model, we are able to do much better merchandising and product offering. For example, for a customer, if the order multiple orders on the marketplace, they will be expecting to receive multiple orders individually and return individually. However, by offering under direct sales business models we're controlling the entire process whereby we can consolidate multiple items into one order, it can save cost for the brands and consumers and offer integrate a consistent user experience.

Operator

Ladies and gentlemen, just to remind you, the management would be taking one question per person at a time. [Operator Instructions] The next question comes from the line of Wendy Huang. Please ask a question.

Wendy Huang

[Foreign Language] My question is, the share price tanked 40% in the past one week. I think this might to be partially due to the disappointing growth and revenue in the quarter. But as you mentioned that the revenue actually after all is still healthy and also the growth is actually above the industry average. So I think it is probably more due to the confidence crisis that company is facing that was caused by the dramatic rating and then late Q3 warning. So I want to – what does the management learn from the recent experience? What will you do to actually improve the invest communication to prevent this from happening again? And related to this, you mentioned that Singles' Day growth is actually quite strong and the company already actually went back to the growth track. So if this is the case, why hasn't the management actually provided more robust Q4 guidance to recover the recently lost investor confidence? Thank you.

Eric Shen

Well, thank you, Wendy, for your question. Your first question about our preannouncement, I believe. Well, as a publically traded company, we at Vipshop is required legally to disclose any material information to the public as soon – immediately. So, the reason it took so long for us to make this preannouncement was because of the few things. One, it took some time for the auditor to complete their review process before we make this announcement. And secondly, we missed our guidance, you said by 6%, its midpoint, it's actual to midpoint of our guidance but it's less than 5%, if you compare our actual number against the low end of our guidance, so – which usually viewed as not material. So it took for management sometime to consider whether or not we should do it. We finally decided to make the preannouncement, because this was the first time ever we missed our guidance during the past tough quarters and it might have a pretty significant impact on the margin. So, going forward, Vipshop will continue to be fully compliant with all legal and regulatory requirements and follow the highest standard of information disclosure. And guidance, we don't believe that guidance should serve the purpose of boosting the covenants of the market. Our guidance is not intended to have any immediate or a short-term impact on our stock price. So you mentioned that our strong [indiscernible] Single's Day sales, which is correct. But again, it was only just one day and we have over 90 days for Q4. So when we give guidance, there are few things that we need to consider. One is, usually we give guidance about one half of that quarter has already passed, so we're going to give our guidance based on what actually happened. And also we need to consider the historical pattern when we give guidance. So if you look at all the seven years since Vipshop's day one, all Q3s were higher than Q2s, except for this year. So when we gave guidance for Q3 this year, we looked at the historical pattern of the previous six years. And we have very good reason to believe that this year covenants would follow the historical pattern, but it turned out that this time the seasonal – seasonality pattern is different. So that's why we said we gave an overly optimistic guidance for Q3.

Millicent Tu

[Foreign Language]

Donghao Yang

[Foreign Language] Okay. So just to add a few things from Eric. So of course since the IPO, 12 quarters, we have done a very good job and this is with the first time the management was happy to deal with meeting our internal guidance. So, we have to say that in – the hopes are certain, but maybe show some sort of inexperience and we are learning from that hard lesson and being aggressive is not the management style as we are not looking for the short-term return. We are working with the long-term shareholders and hopefully to create long-term value for them. And we missed the quarter. It doesn't mean that we will keep making the same mistakes again and again. So the quarter – let's forget about Q3, let's look forward and as we're still very optimistic and -- about our future outlook.

Operator

Thank you. The next question comes from the line of Natalie Wu from CICC. Please ask your question.

Natalie Wu

Hi. Good evening, management. Thanks for taking my question. I have two quick questions if I may. The first one is can you share with us all the top five cities or the shifts ranked by sales? And the second one is that I have noticed that your fulfillment expense decelerated – declined sequentially. I can understand the shipping related portion, but why is the non-shipping handling portion also down by 20% sequentially. Can the management give us some color on that? And what will be the trend going forward? Thank you.

Eric Shen

So, sorry Natalie, so your first question, are you asking about the sales competition by different tier city?

Natalie Wu

Yes.

Donghao Yang

Okay. Eric, answer that question.

Eric Shen

[Foreign Language]

Donghao Yang

[Foreign Language]

Eric Shen

Okay. So, the geographic operate down by different tier cities is largely very stable. Tier 1, Tier 2 combined 52% of our business, and then Tier 3 and Tier 4 about 48%. So, there's no significant difference compared to that in the second quarter, and then in the first quarter.

Millicent Tu

[Foreign Language]

Operator

Thank you. Your next question comes from the line of Jin Yoon. Please ask your question.

JinYoon

Hey. Good evening, guys. Revenues per customer growth seems to have decelerated sequentially both when looking at active customers and core customers, and why that is? And do we know why total customer growth accelerated from 2Q to 3Q while customer or core customer growth decelerated? Thanks guys.

Eric Shen

[Foreign Language] I'm sorry, we are kind of confused about your question, can you please ask it again?

Jin Yoon

Yeah, the first question was – sorry about that. Revenues per customer growth seems to have decelerated sequentially when both looking at active customers and core customers, can you give us a little color why that is? And why total customer growth accelerated sequentially while core customer growth decelerated?

Eric Shen

Well, let me take your first question. Basically, I think you – your question is about our average ticket basket size, right? Revenue per customer.

Jin Yoon

Right.

Eric Shen

Okay. So that's why we've had Q3 – the seasonality of this year – the seasonality pattern is different from all of the previous years. And we mentioned weather as a reason for – one of the reasons for why we missed the guidance. And actually in September exactly, in the second half of the month, the northern part of the country, I mean northeast, northwest, those parts of the country were warmer than expected. So our more pricey autumn and winter clothes sales were slower than expected, and that's -- that was -- I think the main reason why the average basket size in Q3 was smaller than Q2, and usually, historically, our Q3, the average basket size should be higher than Q2.

Jin Yoon

And the total customer growth accelerated from Q2 to Q3 while core customer growth decelerated?

Eric Shen

Well, Jin, we have to go back and look at the numbers that you mentioned and get back to you with the – when we find out, figure out why.

Operator

Thank you. Ladies and gentlemen, we have no further questions at this time. I would like to turn the call back to the management. Please go ahead.

Eric Shen

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