LightInTheBox Holding Co., Ltd. (LITB) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the LightInTheBox 2016 Third Quarter Earnings Conference Call. [Operator Instructions] I must advise that this conference is being recorded today, December 12, 2016. I would like now to hand the conference over to your host today, Mr. Christian Arnell. Thank you. Please go ahead, sir.

Thank you, Joe. Hello, everyone and welcome to LightInTheBox’s third quarter 2016 earnings conference call. The company’s results were released earlier today and are available on the IR website as well as through PR Newswire. Today, you will hear from LightInTheBox’s Chairman and CEO, Mr. Alan Guo, who will give you 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 today’s discussion 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 those in the forward-looking statements, please refer to our Form 20-F filed with the U.S. Securities and Exchange Commission on April 29, 2016. We do not assume any obligation to update any forward-looking statements, except as required under applicable laws. At this point, I would like to turn the call over to Alan. Alan, please go ahead.

Thanks, Christian and thank you everyone for joining us today. We are pleased with our performance during the third quarter. Revenue came in at $64.4 million, exceeding our guidance of $61 million to $63 million. We also delivered a much improved net income, with GAAP net loss shrinking to $2.3 million, a 73.8% improvement over $8.6 million during the same quarter last year. As a testament of our improving efficiency, fulfillment expenses, selling and marketing expenses as well as G&A expenses all decreased year-over-year and sequentially as a percentage of total net revenues. Total operating expenses during the quarter were $25.0 million, a 28.1% improvement over $34.7 million during the same quarter of last year. During the second half of the third quarter while many currencies, including the euro continued to fluctuate, we saw the RMB further depreciate against the U.S. dollar. We think this will create an improved macroeconomic environment for our business, which focuses on exporting goods from China abroad and could present us with new opportunities for growth as the pricing of our products could become more competitive. As a result, we fine-tuned our strategy in the fourth quarter to regain revenue growth momentum, which has been trending upwards as shown by the 10% increase in our Black Friday sales and our fourth quarter guidance. The midpoint of our fourth quarter guidance represents approximately 5% year-over-year growth and a 43% sequential growth, which would be our highest sequential growth rate in the last – in the past 5 years. After a number of quarters where we continued to realign our supply chain, we think we have built a stronger foundation to support our strategy of capturing new opportunities and sales expansion. With fewer but stronger suppliers, we have a more manageable and more engaged supply chain with higher quality products. We also continued to increase direct sourcing from factories and in factory direct wholesale marketplaces rather than through trading agents. As a result, we saw significant sequential increase in the number of new product listings and the products sourced directly turning into a new important revenue driver for the fourth quarter. Our improved supply chain management is helping us maintain healthy margin, while allowing us to become more competitive on price. It’s also enabling our category expansion into sports and hobbies, among others, an integral part of our growth strategy. Operational efficiency, optimization in logistics and warehousing also further improved. Fulfillment costs as a percentage of revenue dropped to 6.0% compared to 7.0% in the same quarter last year. The percentage of orders shipped with trackable or expanded shipping carriers reached an all-time high and our post-return refund dropped to a low for the last 2 years demonstrating the effectiveness of our initiatives. Thanks to our big data analytics capabilities. We were able to more accurately determine which products were stored and in which warehouse, keeping our overall inventory level low and at the same time, improving order fulfillment rates and shortened delivery time to the customers. As a result, customer satisfaction with order fulfillment continued to improve. We also continued to gain traction and made progress with LanTingZhiTong, our global cross-border logistic platform, with number of order shipments increased. LightInTheBox has always been a technology enabled online retail company with strong capability to develop proprietary productivity enhancement software. We believe that many other company could leverage our software to achieve higher efficiency in their operations, which present us with a new business opportunity. Therefore, in early November, we launched a cloud-based enterprise resource planning Software-As-A-Service solution for online and offline distribution companies. It was developed on top of our self-developed and proprietary ERP system, which has been beta tested and improved over the past 8 years. We believe it is a great solution for small and emerging companies that never use the ERP system as well as large distribution companies that handle millions of orders per order – per year and many thousands of suppliers like us. Designed for both online and offline distribution companies, retail and wholesale, particularly offline business trying to expand online, the newly launched system comes with a full spectrum of management solutions to facilitate order management, procurement management, product category management, supplier management and inventory management. The ERP solution is web-based, easily configured and requires no installation and comes with fully self-serving registration. It’s built to use open-sourced software and database stacks and can easily be deployed on several major cloud platforms such as Amazon AWS. We will offer it for free for small and medium enterprises, first in China and later globally to demonstrate how innovative and disruptive our ERP solution is to the distribution industry. We are currently in trial runs with a number of our partners in the Zall offline wholesale ecosystem and expect that an increasing adoption will contribute to further growth in our business in the future. Now, I will turn to Robin who will walk you through our Q3 financials.

Thank you, Alan. As I review our financial results, let me remind you about few things. All numbers quoted are in U.S. dollars. All the percentage changes refer to year-over-year unless otherwise noted. Net revenues were $64.4 million, total orders were $1.4 million, and the total number of customers who made the purchase in the quarter, were $1.1 million. Revenues in the apparel category were $23.6 million. As a percentage of total net revenues, apparel revenues were 36.7% compared with 41.6% a year ago. Revenues generated from other general merchandise were $40.8 million. Looking at our business geographically, revenues from North America were $20.4 million and accounted for 31.7% of total net revenues. Revenues from Europe were $35.6 million, representing 55.3% of total revenues while revenues from other countries were $8.4 million, representing 13% of total net revenues. Gross profit was $22.5 million and the gross margin was 35% compared with 37.5% in the same quarter of 2015. Fulfillment expenses, which include payment processing fees, decreased to $3.9 million from $4.9 million. Selling and marketing expenses were $13.3 million lower than $19.5 million in the same quarter of last year. G&A expenses were $7.8 million or 12.2% of total net revenues, down from $10.3 million or 14.7% of total net revenues. G&A expenses include $3.1 million in technology investments compared with $3.6 million during the same period last year. GAAP net loss was $2.3 million compared with GAAP net loss of $8.6 million a year ago. Non-GAAP net loss was $1.1 million compared with non-GAAP net income of $3.3 million in the same quarter of 2015. GAAP net loss per ADS was $0.03 compared with GAAP net loss per ADS of $0.18 in the same quarter of last year. As of September 30, 2016, we had cash and cash equivalents and restricted cash of $89.1 million. As of September 30, 2016, the company has repurchased a total of $0.4 million of ADS as part of 10 million share repurchase program announced on June 8, 2016. For the fourth quarter of 2016, based on our current estimates and the business seasonality, we expect net revenues to be in the range of $91 million to $93 million. This forecast reflects the company’s current and the preliminary reviews on the market and operational conditions, all of which are subject to change. This concludes our prepared remarks. At this point, we are ready to take some questions. Operator?

[Operator Instructions] Our first question comes from the line of [indiscernible] Capital. Please go ahead.

Hello. May I ask you two questions? The first question is that can you give us more color about your cloud ERP and the relationship with your core business? The second one is that with your announcement of 10% growth of your Black Friday sales as well as higher than last year revenue guidance, what are the main sectors to drive the growth? That’s all.

Yes, thank you. So the – as we mentioned before, the ERP system was part of our own operation developed software we have been using for a long period of time. And over the years, we discovered actually many other distribution companies in the wholesale business or in the e-commerce business also needs this type of software and a lot of the solutions on The Street actually cannot meet their requirements and our product actually is well battle tested. So we folk the software and make it a cloud-based solution for the SMEs. We also work very closely with our strategic partner, Zall, which has a relationship with large number of wholesalers in China. We think with their help we will be able to get a lot of adoptions in the market. We feel it’s a very important strategy for us in the future. We are very – for your second question, we are very pleased that our revenue in the fourth quarter start to – gaining growth momentum. Our Black Friday sales increased 10% year-over-year and we provided guidance today with year-over-year growth compared with last year and also very significant sequential growth compared with last quarter. We think it’s – there are a couple of reasons for that. The first reason is after a rather lumpier time of streamlining, optimizing our supply chain, we gained a better supplier base, our products with better quality and also the price of our product, it’s more competitive, which drive up the conversion rate from our customers. And secondly, we also felt the general macroeconomic environment, especially the depreciation of Chinese yen against the U.S. dollar would be a help, a force for us to gaining market share and we also made a number of improvements in other areas of our operations, including marketing, including customer service, etcetera and all these things contribute to the regaining growth of our sales in Q4. Thank you.

Okay, thank you.

Our next question comes from the line of Rick Shea of Vardon Capital. Please go ahead.

Good evening. Nice work on the expense and service improvements. So based on the new expense structure, what total annual sales number do you think the company needs to produce positive earnings per share? And what is – what initiatives for 2017 will drive the top line to that number?

Hey, Rick, this is Alan. We certainly have internal models what kind of fixed cost in the company. The ballpark of the fixed costs actually the personnel related and a big part of it is actually our software R&D. So we have about a quarter of our personnel cost is about R&D, and three quarter of them spread between marketing, supply chain, customer service and order fulfillment. So the customer service and order fulfillment, it’s pretty much variable cost, while the revenue goes – a bit goes up. So, it’s – while we are improving over time, but it’s more or less percentage-based costs and the rest of that is actually fixed cost. I think during the past six quarters, we have been well managed our fixed cost. We feel that we have reached a point where we can start to regain revenue, which will give us further leverage of our fixed cost. And the higher – certainly the higher the revenue goes it will give us a better cash flow and better profitability, but that’s kind of the way I look at it. But beyond the Q4, we are certainly not giving guidance as one-time for the 2017, but we feel with the macro environment, with our internal cost management initiatives, with our stronger price competitiveness and supply chain, we feel the company is certainly in much a stronger shape than a couple of quarters ago.

And just maybe as one follow-up, you have mentioned this, the continued progress on direct sourcing of products as opposed to working through agents. Any quantification of that in terms of what percentage of total inventory or merchandise sales is now sourced directly without a third-party?

We actually track two things internally. A) We track the number of product listings, especially the number of new product listings come from direct. The second is obviously the procurement dollar percentage. We don’t feel that is metrics we want to disclose externally, but we feel very good about our access direct, especially after we have strong partner in supply chain angle in the wholesale – factory direct wholesale marketplace, which our partner, Zall, has been running a very big part there together with us. So, I guess, qualitatively, we certainly see the percentage going up.

Okay, thank you.

Thank you, Rick.

[Operator Instructions] There is no further question at this time. I would like to hand the conference back to Mr. Arnell. Please continue.

Thank you. This concludes our third quarter 2016 earnings conference call. Thank you all for your participation and ongoing support of LightInTheBox. If you have any other questions or would like to visit the company in China, please don’t hesitate to reach out to us. Thank you very much. Have a good day.

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