LightInTheBox Holding Co., Ltd. (LITB) Q1 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you all for standing by and welcome to the First Quarter 2016 LightInTheBox Holdings Company Limited Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] Now I would now like to hand the conference over to Mr. Christian Arnell. Please go ahead, sir.

Thank you. Hello, everyone and welcome to LightInTheBox’s first quarter 2016 earnings conference call. The company's results were released earlier today and are available on the company's IR website as well, as through PR newswire. 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. Today's discussion may contain forward-looking statements made under the Safe Harbor provisions of the US 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 those in the forward-looking statements, please refer to our Form 20-F filed with the Securities and Exchange Commission April 29, 2016. We do not assume any obligation to update any forward-looking statements except as required under applicable law. At this point, I'd like to turn the call over to LightInTheBox's Chairman and CEO, Mr. Alan. Alan, please go ahead.

Thanks, Christian and thank you, everyone, for joining us today. I'm pleased to report that Q1 revenue came in at US$67.3 million, which exceeded our guidance of $65 million to $67 million. We also made substantial improvement in our bottom line with our GAAP net loss improving to US$2.1 million compared to a loss of US$3.5 million last quarter, and US$21.6 million during the same quarter last year. We also recorded our fourth consecutive quarter of non-GAAP profitability. I believe this result comes from the effective and consistent execution of our strategy over the past few quarters to improve our customer satisfaction, improve operating efficiency, and foster greater innovation. We made major progress in our marketing efficiency during the quarter. Marketing as a percentage of revenue dropped to a historical low of 21.1% compared with 23.4% last quarter and 36.0% during the same period last year. This was done by optimizing the use of our various acquisition channels including social media marketing. We reworked our mathematical model for our integrated marketing deployment strategy, which led to higher marketing ROI. We streamlined our customer acquisition channel optimization practice, which helped us identify a number of high impact improvements on our website platform and mobile apps. We enhanced our social marketing practice to engage bloggers and other online opinion leaders to increase our brand and product exposure. We continued to make substantial progress in increasing customer satisfaction, which I'm pleased to see take hold on our platform and make us a more attractive choice for our consumers. With a stronger supply chain, we had a lower order cancel rate, faster order fulfillment time, lower post-sales return and refunds, which all helped increase customer satisfaction and financial performance. We continued to consolidate and optimize our supply chain during the quarter. We adopted an improved supply-chain valuation system, which helped us rapidly identify the nurturing new high-quality suppliers. We continued to focus on developing supply-chain networks in geographically strategic cities with concentration of high quality manufacturers and suppliers. Our partnership with Zall Development and Aokang have provided us with unique access and insights into these supplier networks across a number of key categories. All the initiatives also increased our gross margin to 36.8% from 34% during the same quarter – during same period last year. We continued to improve our operational efficiency in both our back office and fulfillment centers with enhanced in-house developed IT systems. We also realigned our business units to make them more financially accountable and effective in their individual execution. We continued to make progress with LanTingZhiTong, our global cross-border logistic platform, with numbers of business customers and order shipments both increasing. In a recent development, the Board authorized a share repurchase program last Thursday of up to US$10 million worth of our outstanding ADS. The implementation of our share repurchase program reflects our confidence in our strategy, operating fundamentals, and the business prospects, as well as our commitment to enhance value for our shareholders. To conclude, with the improved operational efficiency, our new major long-term shareholder and strategic partner, Zall Development, on board, our strengthened balance sheet with a substantially increased cash position, we believe the company is well-positioned to capture opportunities in the large global cross-border eCommerce market. Now, I will turn to Robin, who will take you through our Q1 financials.

Thank you, Alan. We are very pleased to report the continued improvement of our bottom line, which we expect to continue in the second quarter of 2016. We ended the first quarter with a much stronger balance sheet thanks to a substantial increase in our cash position, which provided us with ample financial resources to continue to fund improvements in operational efficiency, technology, and customer certification. Currency volatility and [indiscernible] of the euro in particular has stabilized when compared to the same period last year. The depreciation of RMB has also benefited us from a cost perspective. As I review our financial results, I need to remind you about a few things. Our numbers quoted are in US dollars. Our percentages change refer to year-over-year unless otherwise noted. Net revenues were $67.3 million. Taking out the $2.5 million unfavorable foreign exchange impact, net revenues actually were $69.8 million. Total orders were 1.7 million and the total number of customers who made a purchase in the quarter were 1.4 million. Revenues in apparel category were $23.8 million. As a percentage of total net revenues, apparel revenues were 35.4% compared with 36.2% a year ago. Revenues generated from other general merchandise were $43.5 million. Looking at our business geographically, revenues from North America were $21.3 million and accounted for 31.6% of total net revenues. Revenues from Europe were $39.7 million, representing 59% of the total net revenues; while revenues from other countries were $6.3 million, representing 9.4% of total net revenues. Gross profit was $24.8 million and the gross margin was 36.8% compared with 34% in the same quarter of 2015. Excluding the unfavorable changes in foreign exchange rates, non-GAAP gross margin would have been 39.1%. Fulfillment expenses, which include payment processing fees, decreased to $4.5 million from $6.9 million. Selling and marketing expenses were $14.2 million or 21.1% of total revenue, substantially lower than $31.5 million or 36% of total net revenue last year, stating a historical low as a percentage of total revenue. G&A expenses were $8.3 million of 12.3% of total net revenues, down from $12.8 million or 14.6% of total net revenues. G&A expenses include $3.5 million in technology investments compared with $5.1 million during the same period last year. Our bottom line continued to improve. GAAP net loss was $2.1 million compared with GAAP net loss of $21.6 million a year ago and we expect this will continue during the second quarter of 2016. Non-GAAP net income was $0.9 million compared with non-GAAP net loss of $8.7 million in the same quarter of 2015. With this, we have delivered four consecutive quarters of non-GAAP profit benefit. GAAP net loss per ADS was $0.04 compared with GAAP net loss per ADS of $0.45 in the same quarter of last year. Our balance sheet and cash position improved substantially during the quarter, with new strategic investor coming on board or the strategic partner. As of March 31, 2016, we had cash and cash equivalents and restricted cash of $104.3 million. For the second quarter of 2016, based on our current estimates, we expect net revenue to be in the range of $62 million to $65 million. This forecast reflects the company's current and 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.

Sure, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of George Askew from Stifel. Please ask your question.

Hello, excuse me. Thank you very much. I have three questions. First question is regarding share count, can you just tell us what's the share count today, and what do you think it will be, if you can project at the end of June, reflecting the investment - the new equity investment?

Hi, George, it's Robin. So your question is what’s the share count about -- I mean, the share numbers at the end of June. Is that correct?

Yes, I mean, is it as simple as taking end of March and adding 21, 125 or are there other nuances that would affect the share count for the quarter in lieu of the current share count as well?

Yes, for the common shares at the end of June, our count is about 133 million shares. These are ordinary shares. So if you calculate the ADS, just divide it by two.

Right. Okay, good. You've obviously cut expenses dramatically and more aggressively than I expected really. Your operating expenses from my review look like they are the lowest since 2012. How high would revenue climb on a quarterly basis before you need to materially or meaningfully increase operating expenses? I mean, are you at a level of efficiency where you can support $80 million of revenue on the current expense rate?

George, this is Alan. So the way we look at it is, we have of variable costs and fixed costs in our operating expenses. The big items are variable cost –the fulfillment centers and customer services. Those will certainly go up when the order number revenue goes up. And the fixed costs will be the marketing personnel, the supply chain personnel, and R&D. Those will stay fixed while the revenue goes up. So we do think we will - when the revenue regains growth, we will actually gain more leverage on our fixed costs - fixed part of the operational cost. We don't give a very precise breakdown, but in a sense that we think - because we disclose how much we're spending in R&D each quarter, so those are the - certainly are the fixed costs. So we do think if we regain growth in the revenue in the future, we will actually see better leverage in the fixed costs in operational expenses.

Okay, good. And then, Alan, what are the - the world's changed during the last year or two, what are the three financial metrics that you guys are watching most closely from here going forward at the company…

Right. So I think at the different stages of the progress of the company, we certainly have slightly a shift in our focus. For the past couple of quarters, the major focus of the company was to reduce the loss and go back to a path of profitability. So we were extremely focused on gross margin. We were very focused on marketing as a percentage of revenue. We are also very focused on marketing dollar per order, which is the marketing dollar divided by the number of orders. We are also very much focused on our net operational margin as well, so those are the metrics we have been very focused on. But I think when we're getting more and more close to profitability, we will certainly be gradually shifting our focus in revenue, regaining revenue growth as well, but we think at this moment in time, we are certainly focused on both the cost side of the equation and also start to focus on the revenue side of the equation.

Okay, great. Thank you very much.

Thank you, George.

Thank you. Your next question comes from the line of Ethan Sun [ph] from Guangfa Securities. Please ask your question.

Hello, Robin, Alan.

Hi.

Can you hear me?

Yes.

Can you give us more color about the impact of RMB depreciation on your business?

Yes, as you know, we have already depreciation in the whole Q1. From a cost perspective, we have a big part of our cost paid by RMB. With the depreciation of RMB, we get a benefit. Of course, we don't expect further depreciation or appreciation of RMB. You may see some forecasts in some third party institutions, and definitely we will benefit from further depreciation of RMB if it will be, if.

Okay. Thank you.

Thank you. Your next question comes from the line of Yan Jin Chan from Godi [ph] Please ask your question..

Hello, Robby and Alan. [Foreign Language]

Hello?

Okay. I have two questions for you. Firstly, congratulations on your great improvement in the bottom line number. What do you think are the major contributions to this leap?

This is Alan. So when I look at Q1, I think, first of all, it's a continued execution of our strategy to improve our operational efficiency. That was the main driver behind the numbers. And secondly, I think that a couple of key metrics improvements really contribute to the bottom line. The first one is the gross margin expansion. The margin expanded from 34% to 36.8%. Secondly, was also a major breakthrough in the marketing percentage drop, the marketing spending dropped to 21%, which was a historic low. That certainly helped significantly on the costs side. There was also improvements of supply chain and customer satisfaction, which led to a higher conversion rate, lower return refunds. All these combined was a major contributor to our bottom line improvements in the first quarter.

Okay. Thank you. And we also noticed that the growth of the channel export was decreasing for the recent years. What do you think is the trend for the global online retail industry for the next two years?

We think that, the way we look at is we think there are a couple of things are very important. The first one is the users continue to migrate from PC to mobile. So that's why we have been focusing on our mobile platform environment, both on the website and also on the mobile app. We have built a mobile R&D center in Chengdu, which is more cost effective, with high quality software developers. And secondly, is we did notice that the consumers more and more focus on product quality. So that's why we invested significantly on building our supply chain. That's why we brought in two major partnerships from Zall and Aokang, which helped us in supply network development. We think in the longer term the competition among eCommerce players really focus on the supply chain side of the equation. And thirdly, we also think the capability of logistics and fulfillment are going to be a differentiator. So that's why we have been focused on building our own fulfillment facilities in China, in Europe, in US and also adapted the LanTingZhiTong as our cross-border logistic platform.

Okay. Thank you, Alan.

Thank you. The next question comes from the line of Rick Shea from Vardon Capital. Please ask your question.

Good evening. Congratulations on your progress.

Thank you, Rick.

Alan, on the past two operating profits, do you think the bigger contribution is more likely to be from a larger customer base or from a larger product offering? And maybe you could give a little color if it's some combination of both of those, in terms of where those customers come from, how they become aware and what types of products you might be offering? Thank you.

Yes. We do think on our past profitability, we need to have a balanced focus of - deeply calculate a number of - small number of selected categories which will provide us long-term defensible supply chain advantages, like we traditional focus on wedding. We recently also developed a number of new categories such as home decor. But we also think horizontally expanding in category is also a very natural way of gaining repeat customer purchase from the same customer group who purchased from us in the past. I think we - in the early days, we certainly suffered from the category such as wedding increasing at a lower repeat rate. That's why we added ready-to-wear fashion category. We added home decor category, et cetera. We think there is still huge room for us to grow in that regard. We recently had some successes in hobbies and toys. We had a number of success in sports. We had a number of early attractions in the wig and hair, a number of those things. But again, I think our continuous progress in the category expansion is still underway. So I don't want to provide - I don't want to be very focused on how much is going to come from the category expansion versus how much gross in the future going to come in the category, vertical integration. That would be the way I look at it.

Okay. So just from a customer base standpoint, is it deeper penetration in existing markets? Do you think there are markets that you haven't tapped particularly well or where should we see the expansion of the customer base coming from?

I think in the past two years the major geographic customer penetration change was primarily driven by the ForEx exchange rate fluctuation. That's why we see more percentage of revenue coming from North America, particularly US, and fewer new customers come from the emerging countries like Brazil or Russia where their currency undergo a major revaluation. I think that was kind of the big backdrop in the past 18 months. Certainly, Europe was also suffering partially, particularly the euro zone was more suffered from the ForEx, while in comparison, UK, because they were not euro zone, so they were performing better than the euro zone of Europe. We think this big backdrop will probably continue in the next couple of quarters. But very - so we will continue to focus on the markets where the currency are strong, such as the US dollar markets, such as the UK market, et cetera.

Thank you.

Thank you, Rick.

Thank you. [Operator Instructions] There are no further questions at this time. I would like to hand the conference back to Mr. Christian. Please go ahead, sir.

Thank you. This concludes the 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. Have a good day and a good night. Thank you.

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