LightInTheBox Holding Co., Ltd. (LITB) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to LightInTheBox Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Friday 29th of March, 2019. I would like to hand the conference over to your first speaker today, Mr. Christian Arnell. Thank you. Please go ahead.

Hello, everyone and welcome to LightInTheBox’s fourth quarter 2018 earnings conference call. Today, you will hear from LightInTheBox’s CEO, Mr. Jian He, who will give you an overview of the Company’s strategy and recent developments, followed by Ms. Wenyu Liu, the Company’s acting Chief Financial Officer, who will address financial results in more detail. Before we begin, I would like to remind you of our Safe Harbor statement. Please note that the discussion today may contain 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 these factors and how they 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 on March 28, 2018. We do not assume any obligation to update any forward-looking statements, as required under applicable law. At this point, I’d now like to pass the call over to Mr. He. Mr. He, please go ahead.

Yes. Thanks, Christian. Thank you everyone for joining us today. A lot has changed at the LightInTheBox over the past quarter, and I’m thrilled to have the opportunity to work with all the talented employees here who remain deeply committed to its long-term success. We truly believe in LightInTheBox’s long-term potential and the enormous growth opportunities the cross-border e-commerce presents. After carefully reviewing the business since coming on board, we immediately began implementing key initiatives which positively impact our financials for the quarter and which I believe indicates the direction we are headed in. While net revenue decreased 37% year-over-year during the quarter, we improved our gross margin improved to 34.6% from 29.7% during the same period last year and generated positive cash flow, which resulted in cash and cash equivalents increasing slightly to $38.8 million, from $37.5 million as of September 30, 2018. Our loss from operations also narrowed to $1.7 million from $2.6 million in the same quarter of 2017. These initial results are encouraging, and I'm confident that those initiatives will help build a solid base through which we can turn this business around and regain growth momentum. First, we shifted our focus from geographic markets towards generating sales in categories that have higher gross margin such as our Home & Garden, Sports & Outdoors categories. We also began integrating high-quality suppliers from ezbuy scenario, improved supply chain management and reduced procurement costs. At the same time, we optimized our product recommendation algorithms to recommend more cost efficient products to our uses, which altogether have significantly improved gross margin. Secondly, we launched a more targeted and effective marketing campaign for a number of key categories, during the Black Friday and Christmas sales period. This marketing campaign leverages ezbuy’s localized marketing experience across a number of key markets in Southeast and Northeast Asia, which positively impacts both our top and bottom-line. Lastly, we significantly improved inventory turnover efficiency and increased sales within categories that offer us stronger and more flexible payment terms with the suppliers. To improve inventory turnover efficiency, we began shifting away from categories with low inventory turnover such as electronics, which needed to be stopped well in advance and generated lower gross margins, and began focusing more on higher margin categories such as Weddings & Events, fast fashion, and the Home & Garden categories. These categories also have more favorable payment terms for us with suppliers. The integration of ezbuy and LightInTheBox is processing well. We are seeing lots of opportunities to grow create greater synergies between both businesses, particularly in digital marketing, shipping and order fulfillment, which are expected to significantly improve repeat purchase and drive down cost over time. We’re now working to consolidate LightInTheBox’s two warehouses in China with ezbuy’s two warehouses, which will result into higher efficiency warehouses for the business. I’m very pleased with the progress we have made so far and look forward to further improving this business with so much potential. Going forward, we are going to implement these initiatives and a number of other that we are currently working on which will further improve efficiency and fully leverage the synergies that are being created by businesses, LightInTheBox and ezbuy. Our business is typically impacted by seasonality and the Chinese New Year holiday during the first quarter. This, combined with the ongoing integration of both companies is expected temporarily negatively impact cash flow and on the bottom line in the first quarter of 2019. As our newly implemented initiatives take further hold, we expect that our business to continue improving, starting during the second quarter. I will now turn the call over to Wenyu to go through the financials for the quarter.

Okay. Thank you, Mr. He. 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. So, to start, net revenues decreased 37.2% to $50.5 million (sic) [$57.5 million] for the fourth quarter of 2018. Ezbuy contributed 20 days of revenue during the quarter. Net revenues from product sales were $55.4 million compared with $83.1 million in the fourth quarter of -- in same quarter of 2017. Net revenues from service and others were $2.1 million, compared with $8.5 million in the same quarter of 2017. As a percentage of net revenues, service and others accounted for 3.6% in the quarter. Total orders of product sales were 1.3 million compared with 1.7 million in the same quarter of 2017. Total number of product sales customers in the quarter was 1 million, compared with 1.4 million in the same quarter of 2017. Product sales in apparel category were $20.3 million, compared with $25.3 million in the same quarter of 2017. As a percentage of product sales, apparel revenue accounted for 36.6%, compared with 30.4% in the same quarter of 2017. Product sales from other general merchandise were $35.1 million for the fourth quarter of 2018. Looking at our business geographically. Product sales from Europe were $29.7 million for the fourth quarter of 2018, compared with $44.5 million in the same quarter of 2017, representing 53.6% of total product sales for the fourth quarter of 2018. Product sales from North America were $16 million, compared with $19 million in the same quarter of 2017, representing 28.8% of total product sales for the fourth quarter of 2018. Product sales in the Gulf Cooperation Council, GCC countries were $0.9 million for the fourth quarter of 2018, compared with $1.1 million in the same quarter of 2017, representing 1.5% of total product sales for the fourth quarter of 2018, while product sales from other countries were $8.8 million, representing 16.1% of total product sales for the same quarter. With our focus now shifting away from geographic markets and towards generating sales in categories with higher quality products and gross margins, starting the first quarter of 2019, we will no longer be providing a geographic breakdown of product sales. Total cost of revenue was $37.6 million, compared with $64.4 million in the same period of 2017. Cost for product sales was $36 million, compared with $56.7 million in the same period of 2017. Cost for service and others was $1.6 million, compared with $7.7 million in the same period of 2017. Gross profit was $19.9 million, compared with $27.2 million in the same period of 2017. Gross margin improved to 34.6%, compared with 29.7% in the same quarter of 2017. Fulfillment expenses which include payment processing fee, were $3.5 million, compared with $5 million in the same quarter of 2017. Selling and marketing expenses were $11.9 million, compared with $17.8 million in the same quarter of 2017. G&A expenses were $6.2 million, compared with $8 million in the same quarter of 2017. G&A expenses included $2.2 million in technology investments, compared with $2.7 million during the same quarter of 2017. Loss from operations was $1.7 million, compared with a loss from operations of $3.6 million in the same period of 2017. Net loss was $24.4 million, compared with a net loss of $3.5 million a year ago. The increase in net loss was mainly due to a loss -- in change in fair value of convertible promissory note of $22.8 million which was issued to acquire ezbuy. Net loss per ADS was $0.37, compared with net loss per ADS of $0.05 in the same quarter of 2017. We generated positive cash flow during the quarter which stabilized our cash position. As of December 31, 2018 we had cash and cash equivalents of $38.8 million, a slight increase from -- as of September 30, 2018. For the first quarter of 2019, based on current information available to the Company and business seasonality, we expect net revenues to be between $48 million and $51 million. This forecast reflects our current and preliminary view on the market and operational conditions, which are subject to change. As Mr. He already mentioned, the first quarter is seasonally slower base in terms of Chinese New Year and the shutdown of factories across China. This, combined with our ongoing integration of ezbuy and LightInTheBox is expected to negatively impact our cash flow and bottom-line in the first quarter of 2019. But, this will be temporary as our initiatives take further hold and begin to bear more fruits. We expect our business to continue improving again during second quarter of 2018. This concludes our prepared remarks. At this point, we are ready to take some questions. Hi, operator.

Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Billy Chen. [Ph] Please ask your question.

Hi. Can you please give me -- give us some more color on your cash flow in Q4? And what do you expect to see for 2019, please?

Hi. This is Wenyu Liu here. I'm going to translate the question to Mr. He.

[Foreign Language]

Okay. I'm going to translate. So, our cash flow became positive in fourth quarter of 2018 and it has been remained stable as compared to the third quarter of 2018. But, due to the impact of seasonality from Chinese New Year, we expect cash flow in the first quarter of 2019 to dip a bit but we expect to have positive cash flow again in second quarter of 2019 and for the rest of the year.

[Operator instructions] There are no further questions at this time. I would like to hand the conference back to today’s presenters. Please continue.

That concludes today’s call. Thank you everyone for joining. If you have any questions or comments, please don’t hesitate to reach out to the LightInTheBox IR team. Thank you and good night.

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