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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day everyone and welcome to Vipshop Holdings Limited’s Fourth Quarter and Full Year 2018 Earnings Conference Call.
At this point, I would like to turn the call to Ms. Jessie Fan, Vipshop’s Head of Investor Relations. Please proceed.
Thank you, operator. Hello everyone and thank you for joining Vipshop’s fourth quarter and full year 2018 earnings conference call. Before we begin, I will read the Safe Harbor Statement. During this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations, assumptions, estimates and projections about Vipshop Holdings Limited and its industry. All statements other than statements of historical fact we may make during this call are forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as anticipate, believe, continue, estimate, expect, intend, is/are likely to, may, plan, should, will, aim, potential, or other similar expressions. These forward-looking statements speak only as of the date hereof and are subject to change at any time, and we have no obligation to update these forward-looking statements.
Joining us on today’s call are Eric Shen, our Co-Founder, Chairman, and CEO; and Donghao Yang, our CFO.
At this time, I would like to turn the call over to Mr. Eric Shen.
Good morning and good evening, everyone. Welcome and thank you for joining our fourth quarter and full year 2018 earnings conference call. We delivered solid operational results in the fourth quarter of 2018, with total active customers growing by 13% year-over-year. Our collaboration with Tencent and JD continued to bring us high quality new customers.
In the fourth quarter, new customers from WeChat and JD accounted for 23% of our total new customers. Our existing customers are also becoming more loyal to our platform. As of the end of 2018, around 3.2 million customers joined our Super VIP Paid Membership, which is a 38% increase quarter-over-quarter. The initial renewal rate for customers who joined the program before 2018 was over 70%. We are glad that our customers recognize the value of this membership.
All these successes are the result of our focus on merchandising and the shift back to deep discounted products.
In the fourth quarter, we also delivered good results during the two promotional events. The number of active customers who purchased during the year’s Singles’ Day increased by 23% year-over-year. In addition, our suppliers are now even more willing to partner with us as a result of the change to focus on discounted retailing. More than 5,500 brands joined the December 8th Anniversary Sale, representing a 14% year-over-year increase.
Looking ahead, we will continue to focus on discounted retailing and execute on our merchandising strategy, which have already shown some positive results in the fourth quarter. We are committed to getting the best products that’s meeting to our customers’ needs. By becoming the dominant player in the apparel discounted retail segment, we aim to further drive our profitability and deliver robust shareholder return in the long run.
At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss our strategies in more detail and go over our operational and financial results.
Thanks Eric and hello everyone. In the fourth quarter of 2018, we saw a healthy sequential recovery of our net margins, which is a reversal from the previous trend of declining year-over-year net income profile. Additionally, we generated robust free cash flow of RMB6 billion during the quarter, as compared with RMB2.1 billion in the prior year period.
The positive changes in gross margin and net margin trends resulted from our focus on highly profitable apparel category. During the fourth quarter of 2018, we began to shift some low margin categories from our first-party business into the marketplace platform, which reduced their drag on our profitability.
Further, GMV contribution from the apparel category, which has a relatively high return rate but is more profitable as compared to other categories, increased from the prior year period. As a result, we delivered improved profitability while still achieving a solid 15% year-over-year growth in GMV.
We began to disclose GMV as an additional operational metric this quarter primarily due to a few considerations.
First of all, as compared to total net revenue, we believe GMV serves as a better metric for industry comparison. Furthermore, GMV provides an additional perspective to understanding the scale of our business in light of the recent development in our revenue mix.
We record product revenue for our first-party business and other revenue for our marketplace business. As we currently expect contribution from other revenue to increase, we believe the additional disclosure of GMV could help investors understand the scale of our business in a more consistent fashion.
In the fourth quarter of 2018, while our total net revenue grew by 8% year-over-year, our GMV grew by 15% year-over-year. This recent development in revenue mix will have a rather significant impact on our reported total net revenue in the coming quarters, making it less meaningful to compare future total net revenue numbers with historical figures. Therefore, we encourage investors to use GMV as an additional metric to measure the scale of our business, and also focus on our profitability trends going forward.
Please note that we continue to be committed to doing business on the first-party model for our core categories, which is a key competitive advantage for Vipshop.
Moving on to logistics. We continued to build out our warehousing capability, adding around 86,000 square meters of warehouses in the fourth quarter. As of December 31, 2018, we have approximately 3 million square meters of total warehousing space, of which around 1.9 million square meters is owned by the company.
Turning to our Internet finance business. Approximately 6.4 million active customers used our consumer financing service during the quarter, which accounted for around 24% of GMV. As of December 31, 2018, the total balance of credit outstanding to customers was approximately RMB5.7 billion, and the total balance of credit outstanding to suppliers was approximately RMB1.3 billion.
We remain focused on stabilizing our margins through implementing strict cost control as well as improving our category mix. Our core competency lies in our ability to procure desirable products at low costs. By continuing to execute on our merchandising strategy, we will enhance our profitability and drive improved shareholder return over time.
Now moving on to our quarterly financial highlights. Before I get started, I would like to clarify that all the financial numbers presented today are in renminbi amounts and all the percentage changes refer to year-over-year changes unless otherwise noted.
Total net revenue for the fourth quarter of 2018 increased by 8.1% to 26.1 billion from 24.1 billion in the prior year period, primarily driven by the growth in the number of total active customers.
Gross profit for the fourth quarter of 2018 increased by 2.8% to 5.4 billion from 5.2 billion in the prior year period. Gross margin was 20.6% as compared with 21.7% in the prior year period.
Fulfillment expenses for the fourth quarter of 2018 were 2.1 billion, as compared with 2.1 billion in the prior year period. As a percentage of total net revenue, fulfillment expenses decreased to 8% from 8.9% in the prior year period.
Marketing expenses for the fourth quarter of 2018 were 1.1 billion, as compared with 1 billion in the prior year period. As a percentage of total net revenue, marketing expenses were 4.3% as compared with 4.2% in the prior year period.
Technology and content expenses for the fourth quarter of 2018 were 533 million, as compared with 486 million in the prior year period. As a percentage of total net revenue, technology and content expenses remained stable at 2% year-over-year.
General and administrative expenses for the fourth quarter of 2018 were 821 million, as compared with 780 million in the prior year period. As a percentage of total net revenue, general and administrative expenses decreased to 3.1% from 3.2% in the prior year period.
Our income from operations for the fourth quarter of 2018 increased by 13.5% to 1 billion from 884 million in the prior year period. Operating margin increased to 3.8% from 3.7% in the prior year period.
Non-GAAP income from operations, which excludes share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, was 1.1 billion as compared with 1.1 billion in the prior year period. Non-GAAP operating income margin was 4.3% as compared with 4.6% in the prior year period.
Our net income attributable to Vipshop’s shareholders for the fourth quarter of 2018 increased by 2.3% to 689 million from 673 million in the prior year period. Net margin attributable to Vipshop’s shareholders was 2.6%, as compared with 2.8% in the prior year period.
Net income attributable to Vipshop’s shareholders per diluted ADS was 1 RMB, as compared with 1.07 RMB in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders, which excludes share-based compensation expenses; impairment loss in investments; amortization of intangible assets resulting from business acquisitions and equity method investments; tax effect of amortization of intangible assets resulting from business acquisitions; loss or gain on disposal, revaluation and value changes of investments; and share of result in investment of limited partnership that is accounted for as an equity method investee, increased by 2.9% to 914 million from 888 million in the prior year period.
Non-GAAP net margin attributable to Vipshop’s shareholders was 3.5%, as compared with 3.7% in the prior year period. Non-GAAP net income attributable to Vipshop’s shareholders per diluted ADS was RMB1.33 as compared with RMB1.41 in the prior year period.
As of December 31, 2018, our company had cash and cash equivalents and restricted cash of 10 billion and short-term investments of 2.3 billion. For the fourth quarter of 2018, net cash from operating activities was 5.9 billion.
Looking at our business outlook for the first quarter of 2019, we expect our total net revenue to be between RMB19.9 billion and RMB20.9 billion, representing a year-over-year growth rate of approximately 0% to 5%. These forecasts reflect our current and preliminary view on the market and operational conditions, which is subject to change.
With that, I would now like to open the call to Q&A.
Thank you. [Operator instructions]. Your first question comes from the line of Alicia Yap of Citigroup. Please ask your question.
Hello. Hi. Can you hear me, okay? Yes, so good evening, Eric, Donghao, Jessie. Thanks for taking my question. I have a question. I think Donghao how you mentioned that GMV is now probably better metrics indications to look at the business. So just wonder any color that you could share with us, like how fast we should expect the GMV to grow in 2019? Given you ended 2018 with a very strong GMV growth of 21%, how should we reconcile your 1Q net revenue guidance to how fast we could expect for 1Q GMV? And then any color on the full year GMV, would be helpful? Thank you.
I’ll take that question. Okay, Alicia, thank you very much for your question. Well, again, we do not provide guidance for the full year GMV. But if you look at our earnings release, we actually disclosed our GMV year-over-year growth for Q4 2018 as well as net revenue growth for the same period. The GMV growth for Q4 2018 was 15% compared to roughly 8% of net revenue growth for the same period. So there is obviously a gap between the growth rates of these two metrics, which can serve as a very good indication on the gap between these two numbers going forward.
So back to your question about the GMV growth of Q1, what we can tell you now is the GMV growth for Q1 2019 will for sure be higher than the net revenue guidance that we've provided here.
Thank you. Our next question is from the line of Wendy Huang of Macquarie. Please go ahead.
Thank you, management. So your revenue guidance is suggesting a deceleration. I just wonder if you can actually quantify the impact from the different sectors such as macro impact on the lower consumption demand, the competition from other emerging players, especially those in the lower tier cities as well as the change of the business challenges? Thank you.
So Wendy we are not seeing a lot of negative impact macro wise on the e-commerce industry, particularly given that our ticket size is not too high, in the few RMB100 range. And we are not seeing further intensified competition in the lower tier cities given that we're actually seeing the strongest growth in the lower tier cities and we're quite strong in tier 2 and tier 3 cities, so not as much in the tier 5 and tier 6 cities. So even though we are seeing our revenue deceleration accelerating, but that's mostly due to the revenue recognition from shifting some of our products from 1P to the 3P platform. So in terms of GMV, we're still quite pleased with the growth rate, particularly given the improvement in profitability.
Thank you. [Operator Instructions]. Next question comes from the line of Alex Yao of JPMorgan. Please go ahead.
Thank you management for taking my question. I have a question regarding the user growth trends. We understand that in second quarter and third quarter the user growth acceleration was primarily driven by Tencent traffic. But another quarter of further acceleration is a quite achievement in our view because you guys have been strategically deemphasizing some of the standardized product categories. Can you elaborate what are driving the user growth in this quarter? How sustainable it is? Are there any new traffic cooperation -- ways of the traffic cooperation you will do with Tencent, JD et cetera. How should we think about the user growth outlook for 2019? Thank you.
So Alex our collaboration with Tencent and JD has been almost a year and both platforms are very helpful in terms of bringing new customers to our platform. So going forward, we will continue to collaborate with Tencent and JD and acquire new customers through these partners channel.
In 4Q in addition to the partnership with Tencent and JD, we also adjusted our product offering, so we offered bigger discounts, we selected better products. In other words, we were more selective in terms of the kind of merchandising we’ve put on the platform. And the good news is customers are very receptive to this change. Therefore, we achieved high new customer growth and the ticket size is -- the first ticket that they purchased is now a lot more towards the apparel category rather than the cosmetic category, like it used to be. And we also noticed a very solid retention trend. So all of these prove that our merchandising strategy is in the right direction and in particular we launched this platform called [Fung Chung] and [Kwai Chung] on our platform which are more flat sales with deep discounts in [Kwai Chung] in single product and [Fung Chung] is by events. So both are delivering very solid results and going forward we will continue to work on deepening the kind of merchandising capability and the kind of discounts we offer to our customers.
Thank you. Our next question is from the line of Joyce Ju of Merrill Lynch. Please go ahead.
Thanks management for taking my question. I would like to get more colors on our marketplace initiatives. Could you please elaborate a bit more in terms of our strategy to grow our marketplace? How should we kind of forecast the breadth of the marketplace? Do we have any new category or like brands we would like to add and how should we understand the future take rate trend as well as the gross profit trend? Thank you very much.
So Joyce in terms of the marketplace in 4Q as I mentioned earlier, we had some changes, shifting of certain standardized products, especially the ones with low gross margin and high fulfillment costs from our principal models to the third-party platform. So this one improved our margin and also continued to enrich our category mix. The take rate for our marketplace is around 10% to 12% blended. And looking towards 2019, we will continue to work with our partners to grow our marketplace steadily and continuing to enrich the kind of offering we have across the platform including the marketplace.
Thank you. Our next question comes from the line of Hans Chung of KeyBanc Capital Market. Please go ahead.
Good evening, management. Thank you for taking my question. So can you elaborate more the detailed wallet dynamics in the category change? I mean when did we start this initiative, I mean in the fourth quarter like what category have we shift to the marketplace model specifically and what category have we exit? And then -- and assuming with this type of activity continue into Q1, so should we expect the gap between the revenue and GMV growth become larger in the fourth quarter than -- in first quarter than fourth quarter?
So, Hans we actually started in September, the impact was much bigger in 4Q, but we started to -- the low ticket size items including products in the category of cosmetics and home goods and food et cetera from the principal model into the marketplace platform. In the fourth quarter GMV contribution from the marketplace platform is 6% and we do believe that in Q1 and Q2 that contribution may continue to increase.
And well let me take the other question from Hans. So you’re asking about, if the gap between GMV and our revenue in Q1 2019 will be wider than that in Q4 2018? Well that, we can’t be very sure about because there are a number of things that could have impact on the difference between those two numbers, the example is seasonality. Q4 was the high -- was the peak season for apparel, Q1 maybe a little bit different and also in Q1 we have our traditional Chinese film festival. So those things may have an impact on the difference between GMV growth and net revenue growth in Q1. But one thing that we are quite sure about is the GMV growth is definitely going to be higher than net revenue growth in Q1.
[Operator instructions]. Our next question comes from the line of Jin Yoon of Newstreet Research. Please go ahead.
Thanks for taking my question. I think Jessie you mentioned that GMV -- did I hear you correctly first of all, that GMV 1P, 3P split is about 6%, 3P right now. Is that correct? And then my follow-up to that is, when you switch over from 1P to 3P mix, are you -- can we eventually envision your business being more of a FBA (Fulfillment by Amazon) model where you’re actually doing the logistics and distribution for your 3P partners and your merchants. So hence we’re going to be able to see that take rates actually scale. Is that how we should be thinking about foreseeable future? Thanks.
To answer your first question Jim, yes, you're right. The GMV contribution from marketplace is around 6%, and the remaining is from our direct model.
Jin, most of our marketplace customers actually use the major warehousing and delivery services in China, and not our own, including in [indiscernible] and so on. So the majority is actually in that kind of model rather than the Amazon kind of model.
Some customers use our delivery but not necessarily our warehouse definitely.
Thank you. Our next question comes from the line of Jerry Liu of UBS. Please go ahead.
Hi, thank you. Yes, I want to ask about the margin profile in 2019 and maybe beyond. If we shift a bit more to the 3P model, could we see gross margin improvement? And if we look at fulfillment, like fulfillment expenses were also lower in the last few quarters, but especially in the fourth quarter. So if 3P uses other peoples' fulfillment, do we also see a bit of a change in our OpEx ratio, especially fulfillment ratio? And again, what is the impact on margin in that case? Thank you.
Okay, well, thank you for the question. Let me take your question. Well for gross margin if you compare our gross margin for the last few quarters and you can easily see a recovery in our gross margins for the last few quarters. That’s definitely having to do with our category shift in our mix, as well as the marketplace contribution to our business is increasing. And you asked the questions related to the fulfillment cost reduction. Well, we are just starting to experiment with outsourcing some of our last mile delivery operations to third-party service providers. And it's going to take a while and it's going to be depending on a number of things. One, our customer experience; two the collaboration with third-party service providers. And so it's going to take a while, and which we are not so sure about how long.
So over the long-term, the move to outsource some of the fulfillment services to outside -- to third-party providers, will definitely help us reduce the costs. But it's just hard at this moment to quantify the impact on our financials, on our net margin, operating margins for this year, 2019.
Thank you. Our next question is from Monica Chen of Credit Suisse. Please go head.
Hi, management. Thank you for taking my question. I have a question about our ARPU. We noticed the ARPU trends in this quarter is getting a bit weaker than before. So we want to understand a little bit more of what's the reason behind? Especially, we see a larger decline in the order size, in this quarter, and how to think about the ARPU trend for 2019? Thank you.
So Monica, to answer your question, yes, our ticket size is down by quite a bit 4Q year-over-year, but it's due to a few reasons. The first reason is, due to shifting some of the products from the first party business to the third party business. Order shifts from our third party buyers is up around 15 million orders year-over-year. So that's quite a significant impact terms of average ticket size.
And the second one is in the fourth quarter, during our two major promotional events, Singles Day and Anniversary Sale, we offered prepay, and the prepay amount increased also in terms of the number of orders by a few million. So in the prepay orders, they are also effective ticket size, given that customers don't always come to us using -- given the value that they are getting from the prepayment.
And the third major factor is, the new policy that we wrote out which is called (inaudible) in Chinese, it essentially mean you no longer have to bundle multiple items in order to get a certain discount. In other words, customers can enjoy the deepest offer by Vipshop by buying only one product that they would like to purchase. So in terms of ticket size, that will have some impact, but the shopping experience has improved significantly.
And the fourth and the rather minor point is our Super VIP, because they enjoy free shipping and free returns, their ticket size tends to be lower than the rest of the customers. Given that our ARPU decreased by 5% year-over-year, we don't think it's too much of drastic change, especially given the robust customer growth. And we're actually quite pleased that we're seeing order frequency improve significantly to actually drive the GMV growth. That means, our customers are more sticky to our platform, they're visiting more frequently, and going into 2019, we are actually OK to see these kind of trends going forward as we -- what we want to do is serve our customers and also improve the number of new customers coming into our platform, as well as their shopping experience and shopping frequency over time.
Thank you. Our next question is from the line of Jamie Shen of Bank of China International. Please go ahead.
Hi management, I have a follow-up question on the removal of low margin categories from the first party to the third party platform. I was just wondering if we exclude of the sales of -- these low margin category sales from previous year's number, what would be the revenue growth with fourth quarter on an apple-to-apple basis, and also what would be the revenue guidance for the first quarter of 2019? Thank you.
Well, I think -- I better take that question. I understand where you're coming from, and your question, but we haven't actually done that calculation, but if you need that information, maybe we can talk offline.
Thank you. Next question is from the line of Nicky Ge of China Renaissance. Please ask your question.
Hi, Shen, Donghao, Jessie, thank you for taking my questions. I have a question about the impact from our business focus shift from 1P to 3P, to our last mile business in June and our warehouse business. Actually, we have seen that this quarter, we expanded our warehouse in past week. Just want to know what's the impact on those lines of the business here? Thank you.
So Nicky, our shifting from 1P to 3P is not a big impact on Tianjin's business, which Tianjin is our own logistics unit. So given that our warehouses are quite massive, we are utilizing most of it ourselves, but we also plan to continue to lease out the spare capacity to other third-party. So we do not think this will have a major impact on the business on the the warehousing side.
We got a question from John Choi of Daiwa. Please go ahead.
Thank you for taking my question, I have a question on your gross margins, given that we are changing, we are focusing more on the -- back on the apparel, how should we be thinking on the take rate on this part? Should we be expecting a gradual uptake or do you think it's mainly going to be driven by more 3P, you're kind of offloading the profitability on the 3P business, onto a -- more to the 3P category. And just as a quick follow-up on the new user growth, you mentioned that 23% is from Tencent and JD this quarter, but it has been almost a year. Can you kind of give us kind of the user habit that has changed over the past, I would say, one year that has happened with this collaboration. Thank you.
So John, as for your first question regarding gross margins, we do believe that in the future gross margin expansion is going to come from higher contribution from the apparel category, including better terms with our suppliers as well as doing more and doing better in our core apparel category. It's not going to come from continuing to move what we do well, which we consider core into the marketplace. So in terms of the marketplace, we will only be using that to enrich the category offering, and the more standardized categories. And we're quite confident that we have a dominant position in the apparel discounted retail segments, and we can continue to hone our skill-sets, as well as improve our merchandising capability.
As far as the WeChat side collaboration goes, we continue to experiment with both Tencent and JD in terms of how we can collaborate better. Our new customers on the wallets has improved by quite a bit, as well as conversion rates in the WeChat Mini Program. So we do believe there is a lot more to do with two partners, but we're still in the effort of continuing to experiment with them.
Thank you. Our last question is from the line of Hans Chung of KeyBanc Capital Market. Please go ahead.
Yes, thank you for taking my question again. So things like the inventory level in apparel industry getting elevated, given a weak consumer demand environment. So, I would thing the this should be naturally a positive for the company, given the company is doing off-season product sales. So, can management team share with us, so far, how do we see the trend -- how do we benefit from the trend and then any evidence to support that? For example, like you probably have more interesting for -- to bring customer or you have a new -- more new brands, doing the off-season sales. And finally, so how has been the apparel performance so far, like what's the GMV growth versus the overall GMV growth?
So Hans, we did notice that brand actually always had the need to clear inventory and lately, more brands have had more need and they come to us because we are the biggest channel. So we'll continue to work with our partners to help them clear inventory, whether that's in season or out of season, as long as they can offer a good price. In terms of apparel contribution from 4Q 2017 to 4Q 2018, we saw a 7% to 8% increase, so that's quite positive, given our refocus back into the apparel category.
Thank you. We're taking our last question from Wendy Huang of Macquarie. Please go ahead.
Thanks for taking my follow up questions. Can you give us some update on the in-season versus off season GMV breakdown? And also I think previously, you had some metrics such as sell-through rate is 50% and the return rate is 20%. So is there any changes with these two metrics? Thank you.
So Wendy, regarding your three questions, the first one is, we used to say -- have approximately 35% in new in-season apparel, and around 65% in off-season apparel, and now given that we're focused on deeper discount products and inventory clearance, our new inventory apparel is under 30%. And we will continue to focus on deep discounted product.
The second point regarding sell-through rate, that metric is no longer relevant, given that we used to disclose that metric in the logistics model first-in, first-out. And now we have connected our inventories, with our suppliers. So we no longer need to ship everything to our warehouse ahead of time. Therefore, given the JIT model, sell through rate in no longer something we track.
And the third point of return rates, in the fourth quarter, we disclosed that apparel contribution is up 7% to 8%. Given that, the return rate naturally will be slightly higher than before, it's up around 2% year-over-year.
Thank you. As there are no more questions, I'd now like to hand the conference back to our presenters. Please continue.
Thank you for taking the time to join us and we look forward to speaking with you next quarter. Thank you.
Thank you, ladies and gentlemen. That does conclude the conference for today. Thank you for participating. You may now all disconnect.