LightInTheBox Holding Co., Ltd. (LITB) Q2 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the LightInTheBox Holding's Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference call is being recorded today, September 16, 2015. And now it is a pleasure to hand over the conference to your host for today, Mr. Christian Arnell. Please go ahead.

Thank you. Hello, everyone and welcome to LightInTheBox's second quarter 2015 earnings conference call. The company's results were released earlier today and are available on the company's IR website, as well as through PRNewswire. Today you will hear from LightInTheBox's Chairman and CEO, Mr. Alan Guo, who will give an overview of the company's strategies and recent developments, followed by Mr. Robin Lu, the company's Chief Financial Officer, who will address financial results in more detail. Before we proceed, I would like to remind you of our Safe Harbor statement. Please note that the discussion today may contain certain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. To understand the factors that could cause results to materially differ from these in the forward-looking statements, please refer to our Form 20-F filed with the Securities and Exchange Commission on April 17, 2015. We do not assume any obligation to update any forward-looking statements, except as required under applicable law. At this point, I would like to turn the call over to LightInTheBox's Chairman and CEO, Mr. Alan. Guo. Alan, please go ahead.

Thanks Chris, and thank you everyone for joining us today. I am pleased to report that we delivered a strong performance despite continued economic uncertainty in several major markets and unfavorable currency fluctuations, especially the Europe. We've made significant progress in our efforts to reduce costs and improve operational efficiency, which is reflected by our improved gross margin and the bottom line on a sequential basis. Our GAAP gross margin reached 37.5% from 34% last quarter, which represented 3.5 percentage of gross margin expansion sequentially. Total operating expenses were reduced by 30.9%, which translates into cost saving of U.S. $15.8 million and includes reductions in marketing fulfillment and G&A. Excluding unfavorable impact of year-over-year changes in foreign exchange rates, we achieved a non-GAAP net income of $7.1 million, a significant increase from our non-GAAP net loss of $6.9 million in the same quarter of 2014. Our GAAP net loss was $5.6 million, an improvement of $16 million sequentially. Revenue from repeat customers increased to 46.1% of total net revenue from 40.4% a year ago. Revenues from mobile users increased significantly to 32.9% of our total net revenues from 28.2% a year ago. Macro-wise [ph], while we don’t predict currency trends, we do welcome the recent slight depreciation of the R&D, which modestly helped our cost structure. These achievements were direct result of executing our strategy of improving cost structure and operational efficiency, which we explained during our last earning call. We realigned our product and the geographic focus towards markets with greater profit potential. We enlisted more upstream suppliers to cut out more middle men in the supply chain. We scaled up our procurement bidding program to keep our sourcing prices competitive. We enhanced our executive oversight program with our key suppliers to better align strategy and interest across the supply chain. We developed a more sophisticated pricing model to expand the gross profit margin. We further improved our marketing efficiency by implementing a more advanced traffic acquisition program and a better CRM system. We upgraded our website and mobile technology platform in a number of major ways, including better search functionality, more advanced ranking and recommendation algorithms, as well as improved the user interfaces which led to higher conversion rate and marketing efficiencies. We optimized our global logistic planning system, renegotiated with a number of major shipping companies, enlisted a number of new shipping partners with better services and cost structure in many key geographic markets. We also significantly improved our packaging program to reduce shipping weights. We also upgraded our warehouse management system to improve warehouse efficiency. We worked very hard to reduce G&A [ph] costs. We reorganized and streamlined our corporate structure to improve the efficiency, optimize operations, and reduce costs. We reorganized our corporate structure into business units from a functional standpoint in order to shorten the command line, foster faster decision making, and achieve better efficiency and accountability. As a result, we successfully reduced a significant portion of our labor cost, yet were able to maintain operational effectiveness and customer satisfaction. During the last quarter, we were also very excited to welcome Aokang as a strategic investor and partner. Together, we have taken our first step in driving industry revolution by combining mobile internet technologies and Big Data analytics with first class manufacturing capability and a powerful supplier network. We believe this partnership will act as a role model for China's Internet Plus strategy and create tremendous opportunity for us. While it is still very early in the collaboration between LightInTheBox and Aokang, we have identified that mobilizing the best Chinese manufacturers and brands to increase the cross-border ecommerce which was invented by LightInTheBox is the most important objective here. Aokang not only is the number one brand in Men’s shoes category in China, but it also has great connections and significant interest in the whole fashion retail and the manufacturing industry in China, which would help us to enlist other powerful players to join our cross-border retail platform with favorable terms, we believe. We are also working together to identify other important areas where Aokang can leverage LightInTheBox internet and Big Data technology as well as our software systems and platforms to empower their businesses and potentially incubate new business initiatives. I would also like to mention that LanTingZhiTong, our open cross-border logistics platform is growing very fast in both customer base and total number of packages shipped with extremely small cost bases. Moving to the second half of the year, we are focusing on the following four objectives; number one, continue to improve our operational efficiency, number two continue to improve and upgrade our supply chain in part by leveraging our relationship with Aokang in order to achieve better customer loyalty. Number three, continue to migrate and improve our user experiences into mobile internet; and number four, introduce new monetization and revenue streams without additional investments such as advertising fees and annual platform services fees from suppliers and platform sellers and shipping insurance and extending warranties from purchasing customers. Geographically, we will be focusing on developed countries where we are traditionally strong and are less affected by economic problems including North America, Northern and Western Europe, the United Kingdom, and so on. In summary, we made significant progress during the quarter, which I believe has positioned us strongly for future growth. All in all, we are working to rebuild LightInTheBox into a leaner, stronger, and more efficient company without sacrificing our core values. I will now turn the call over to Robin, who will take you through our financial results.

Thank you, Alan. As Alan mentioned, we continue to face significant currency headwinds which are having an adverse effect on our business. We expect our performance to continue to improve in the coming quarters as a result of initiatives we implemented to reduce costs, improved supply chain and operating efficiency to offset pressure we are facing from depression [ph] currencies. With all these measures we have somewhat countered the effect of depression [ph] currencies. They will also improve our performance and the competitiveness over the long-term. Some of the progress has already been seen in our second quarter P&L which went to our non-GAAP net profits of $7.1 million from our non-GAAP net loss of $6.9 million in the same quarter last year. Well to be modest the recent depreciation of the RMB will increase the positive impact of our cost cutting giving us increased confidence in our future. As I review our net results let me remind you about a few things. All numbers quoted are in U.S. dollars. All percentage changes we report through year-over-year, unless otherwise noted. Net revenues increased to 12.6% to $78.4 backing out the $12.4 million unfavorable currency impact net revenues actually increased to $90.8 million. Repeat customers purchase accounted for 46.1% of total net revenues up from 40.4% a year ago, while mobile revenues as a percentage of total net revenues increased to 32.9% from 28.2% year-over-year. Total orders fell 7.2% year-over-year to $2.0 million and the total number of customers who made a purchase in the quarter decreased by 6% to $1.6 million. Revenues in the apparel category were down 1.3% year-over-year to $34.9 million despite a strong performance in the ready-to-wear apparel business. As a percentage of total net revenues apparel revenues were 44.6%, compared with 39.5% a year ago. Revenues generated from other general merchandise were down to $43.5 million also reflecting the impact of depression currencies [indiscernible] the euro. Looking at our business geographically, revenues from North America were up by 18.2% to $23.6 million and accounted for 30.1% of total net revenues up from 22.3% a year ago. Revenues from Europe decreased to $44.6 million representing 56.8% of total revenues. Revenues from other countries decreased to $10.2 million representing 13.1% of total net revenues. Gross profit was $29.5 million and the gross margin was 37.5% down from last year's gross margin of 39.5% but up sequentially from 34% demonstrating our success in re-expanding margins. Excluding the $12.4 million unfavorable impact our year-over-year change in foreign exchange rates non-GAAP gross margins would have been 46.1%. Fulfillment expenses decreased to $5.4 million from $5.5 million during the same period last year. Fulfillment expenses per order were $2.68 up from $2.51 from last year. As a reminder, fulfillment expenses also include payment processing fees. Selling and marketing expenses were $20.1 million much lower than $24.8 million last year. As a percentage of total net revenues, selling and marketing expenses accounted for 25.7% a decrease from 27.7% last year and 36% last quarter. Selling and marketing expenses per order improved to $9.97 from $11.4 a year ago. G&A expenses were $9.8 million or 12.5% of total net revenues compared with $11.5 million or 12.9% of total net revenues last year. G&A expenses include $3.9 million in technology investments compared with $3.7 million during the same period last year. The consistent investment in technology reflects our confidence in the future of our business and the need to continue to build up our core competencies. Non-GAAP net income was $7.1 million, a substantial turnaround from our non-GAAP net loss of $6.9 million [indiscernible] in the second quarter of 2014. Non-GAAP net income per ADS was $0.15 compared with non-GAAP net loss per ADS of $0.14 in the same quarter of last year. As of June 30, 2015, we had cash, term deposits and restricted cash of $56.8 million. As of June 30, 2015 we have repurchased a total of $17.7 million of our ADS as part of our share repurchase program which was extended for additional 12 months period through December 15, 2015. For the third quarter of 2015, based on our estimates of foreign exchange depreciation against the U.S. dollar, we expect our net revenues to be between $67 million to $70 million. This forecast reflects the company’s current and the preliminary views on the market and operational conditions all which are subject to change. This concludes our prepared remarks. At this point, we are ready to take some questions.

Hi operator, we are ready to begin Q&A.

Sure. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Rick Shea from Vardon Capital. Please go ahead.

Good evening. I just wanted to know, when you thought customers would see the product offering from Aokang available?

Hi, Rick this is Alan. We actually just started off some small trial programs with Aokang. There is a very small number of product offerings as a trial that it’s already online that people can buy from, but we think in general we are still in our final planning phase with Aokang with bigger scope of collaboration, but the initial trial has already started.

Okay. And what percent of their full branded offering would you expect would make it into the relationship with the LightInTheBox?

I think, from our -- based upon our relationship, they certainly have a very open mind that basically Aokang, the whole selection of their product available for us to choose from and also would like to provide us with very good prices and terms. We are still doing research to look into the product that matches our customer bases, but we feel very positive about the match because Aokang not only is the number one men’s shoes manufacturer and brand in China, they also have a long history of doing OEM manufacturing for many major U.S. and foreign brands, so they are quite familiar with the western customers with their manufacturing and the design capabilities.

Right. Thank you and good job in a tough environment.

Thank you.

Thank you. Your next question comes from the line of Xiaonan Bian from CITIC Securities. Please go ahead.

Hi, Alan and Robin, this is Xiaonan from CITIC Securities. I have two questions, the first is that I know that it is for the first time there is a decline in both the number of customers and the number of orders. Could you please explain the reason why these two metrics declined for the second quarter? And secondly, the second question is that, could you please share some light on why there is a big improvement on the non-GAAP gross margin for the second quarter over the second quarter last year? Thank you.

So I will take the first one and I think Robin will actually explain the second one in detail. I think we actually talked about our strategy last quarter. I mean just fast backwards, during last Q4, it was a huge very sudden climate change in the currency market, particularly in Europe, which caused us shifting our strategy from acceleration of growth which happened in the second half of last year to a more conservative strategy in terms of improving operational efficiency which were running in full speed in executing Q2 which related to a couple of the initiatives, A is to reduce the marketing spending. As you can see from our financials, we actually significantly reduced the markets spending which certainly slowed down our new customer acquisition across the board. And secondly, we were also more focused on the markets or sectors where we have a higher profit gross profit margin structure and also have bigger profit potential. We certainly cut down our investment in some of the developing countries where they get hugely hit by the currency problems such as Russia, such as Brazil, et cetera. We also focus more on the categories with bigger margin and we certainly reduced our investment into the categories where the margins are thinner which also as a result slowed down our new customer acquisition. I think both the strategy, the general strategy shift and also our alignment of investment input [ph] and geographic and category focus really kind of caused the reduction of the new customer numbers. And also, I want to remind you on top of that because of the currency fluctuations, so the total number of revenue on top of that was also reduced due to our currency fluctuation as well. So I think those three things combined together, which caused you to see a GAAP reduction of revenue and order numbers, but we feel strongly that even though we have slightly smaller number of averages in new customers, we actually have better quality customers, the customers who will generate more life time value and also more profit will add over time. We think it’s very strategically selectively picking of customers and the categories we chose, which is perfect in line with our cost cutting and efficiency improvement strategy and programs. And then I will let Robin to answer the gross margin question.

Hi Xiaonan, it's Robin. Actually, just I had one point, we have a better average with other sites in Q2 which really prove we are in the better customer base than before. Regarding gross margin when you look at our non-GAAP basis, we are at 46.1% and even for the GAAP basis, we improved about 3.5% sequentially versus Q1. I think you know that’s really positive traction we can see when we do the supply chain realignment and we put a lot of hard work to improve our supplier quality and also to try to reach the direct manufacturers, we see the positive results for that. And also as you know our cost of product also includes shipping costs based on our experience and our networks in the overseas logistics really allow our shipping networks and better rate of the suppliers also contribute some of the cost reduction in the shipping cost. So based on these two reasons, we have better gross margin than before.

Okay, thank you, Alan and Robin. Just a follow up question, what do you expect these three metrics, the number of orders, the number of customers and the gross margins for the third quarter this year, could you please give some guidance on these three metrics? Thank you.

Hi it’s Robin. Actually we generally don’t provide the guidance for that. But what I can say with the realignment in the supply chain and our cost reduction we’re focused in primary market, I think we’re in the right direction to get better future.

Okay. Thank you.

Thank you. Your next question comes from the line of [indiscernible] Associates. Please go ahead.

Yes, good evening and congratulations on finally turning a profit on the non-GAAP line. Listen, with Q3 forecasted revenues of $67 million to $70 million, do you guys foresee the company once again turning a profit on a non-GAAP basis just like you did in Q2?

Actually we, as I said before we don’t provide guidance for the bottom line. What I can say here is we’re in the right direction to implement our strategy.

Go ahead.

I guess there is some latency on the phone, just to add on Robin’s point, I think our operational focus is certainly continuing to improve our operational efficiency as our number one focus while we are doing other initiatives as I laid out. We are, but we are, I also want to remind that we are doing so without sacrificing our long-term business perspective, also without sacrificing our customer satisfaction. And also it’s very important to remind that in our business we have natural seasonality of Christmas Holiday season which will happen right after Q3. So a lot of effort of the second half now the company is really focused on building the right momentum and the right foundation for the Q4 which will be the big quarter from a seasonality perspective in our business which will come in the next months.

Okay. Thanks, I’ve got one follow up question, back in 2013 the company instituted, enacted the 20 million share buyback or $20 million buyback of which you’re now at close to having that matched out. Is the company confident enough in its cash position and its cash flow and its future business to enact yet another share buyback or is this going to be it?

So, actually we are very confident in the future of our business with implementation of our right strategies and we have the – I think we have the cash position to support us to fulfill our goals. I think that depends on the Board decision.

Very good, well, thank you.

Thank you.

Thank you. [Operator Instructions] As there are no further questions, I would now like to hand the conference over to Mr. Christian Arnell. Please go ahead.

Thank you. This concludes our second quarter 2015 earnings conference call. Thank you for your participation and ongoing support of LightInTheBox. We look forward to providing you with updates of our business in the coming weeks and months ahead. If you have any questions don’t hesitate to reach of us. Thank you very much.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may disconnect your lines now. Good day.