Ladies and gentlemen, thank you for standing by, and welcome to the Vipshop Third Quarter 2013 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, 12th of November 2013. I would now like to hand the conference over to your first speaker today, Ms. Millicent Tu, Vipshop Director of Investor Relations. Please proceed, ma'am.

Thanks, operator. Hi, everyone, and thank you for joining Vipshop's Third Quarter 2013 Earnings Conference Call. Before we begin, I'll 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, projections about Vipshop Holdings Limited and its industry. All statements, other than statements of historical fact, that 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 Mr. Eric Shen, Chairman, the company's CEO and Co-Founder; and Donghao Yang, the company's Chief Financial Officer. At this point, I would like to turn over the call to Mr. Eric Shen.

Hello, everyone. Welcome to our third quarter 2013 earnings conference call. We are proud to report another good quarter of strong revenue growth and margin expansion. Total active customers increased by 132% year-over-year to 4 million, and total orders increased by 116% year-over-year to 11.7 million. This drove a 146% year-over-year increase in our total sales to $384 million. Moreover, despite the third quarter traditionally being a slow season, we were still able to continue to expand our gross margin and increase our overall profitability. At the same time, we continue to make improvements in scale, warehousing capacity, merchandising and mobile capability, further enhancing the foundation of our discount retail platform. Looking ahead, we will continue to strengthen our market leadership and expertise in online discount retail and to capture the robust growth of online retail sector in China. We are very confident in our ability to leverage our assets to increase future opportunities and are committed to ensuring Vipshop is a long-standing leader in China's discount retail market. At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss some new growth initiatives, as well as this quarter's financial achievements.

Thanks, Eric, and hello, everyone. We are extremely pleased about our solid financial and operational results. As Eric discussed, although the third quarter is a seasonally low season, we were still able to expand our gross margin to 24.2%, thanks to the pronounced scale effects in our growing business. Moreover, since we achieved positive non-GAAP net income 1 year ago, we have continued to successfully increase our profitability, achieving 3.9% non-GAAP net margin this quarter. We believe these results are a testament to the strength of our reputation as a channel for brand partners to monetize overstocked products and for customers to purchase discounted quality products, as well as our improving ability to control costs and achieve greater operational efficiency. Moving on, I would like to update you with our progress in some key growth areas, initiatives. I'd like to start by highlighting some of the progress we have had on the mobile front, a key initiative we have been building out for the past few quarters. Our mobile sales as a percentage of total revenues increased to 15% in the third quarter, up from 12% last quarter. As discussed in last quarter's earnings, strong growth on this platform is due to 2 key underlying factors: first, the nature of the flash sale model is well suited for mobile shoppers, making quick on-the-go decisions; and second, our improved aesthetic interface provides users with an easy-to-use and reliable way of quickly purchasing products. Such improvements have further helped increase overall customer interaction and stickiness on our platform. We will continue to invest in building out and refining this platform and place a greater focus on improving the integration of our partners' e-payment solutions in order to increase orders and mitigate payment risks. In addition, in order to keep up with our…

[Operator Instructions] Your first question comes from the line of Alan Hellawell of Deutsche Bank.

Two questions. First of all is you have, generally, got about a 25% gross margin target over the next year or 2. And so that -- it already could be [ph] -- you're going to get really close to that. Should we, at this point in time, be considering a higher gross margin for the business? And if you can add a little color on that. Secondly, I'd love to get some more input as to how we might think of modeling the marketplace business as a third-party business in terms of scale and in terms of impact on margin? Those would be my 2 questions.

Okay. Well, thank you very much, Alan, for the questions. Well, your first question was related to gross margin. You are right, we've told our investors that a long-term sustainable gross margin level is going to be around 25%, and we were at 24.2% in Q3 this year. We're not far away from our long-term sustainable goals. That being said, we believe that there's still room for us to improve on gross margins, but the room is going to be limited because the current level of 24.2% is already a pretty high gross margin level. And I believe that in the long run, we're going to focus both on top line growth and gross margin improvements, meaning we will not only focus on gross margin improvements and gaining more market share, and growing our top line [indiscernible] will be our other focus. To your second question, marketplace, we are not disclosing our gross merchandise value in Q3, and we're not giving any guidance in the coming quarters. The reason for that is because our direct shipping business, meaning our vendors are shipping directly the products to our end customer, that business is still very small, and compared to our overall business, that scale is still absolutely immaterial. And also, that direct-to-consumer business was only started back in April this year. It's still a very new initiative. So in the future, once it gets to a material level, we will start to give more guidance on that business. But overall, the reason why we do this direct-to-home business is because we wanted to do become, of all of our non-core product categories, which are [indiscernible] products [indiscernible] home goods, that are very costly and difficult to move around. And [indiscernible] those products are -- they're a key to business in that it can improve efficiency, it can expand our product offering and lower our costs.

Our next question comes from the line of Alex Yao of JP Morgan.

This is Bingbing Hoy [ph] calling on behalf of Alex. I actually have 3 questions. My first question is on your marketplace business model. I know you don't want to share any revenue guidance on the business model. But how many partners, third-party partners, do you have on the marketplace platform so far? Can management answer this?

Sure. So Bingbing [ph], we'll take your first question. I will just translate that to Eric. [Chinese]

[Chinese]

So Bingbing [ph], since we launched the third-party platform model in April this year, so at the moment, that number is standing at around 200 [ph] .

Okay, got it. My second question is on the revenue side. We saw strong growth in the third quarter and you mentioned in your opening remarks that it's primarily driven by new traffic growth. I'm just wondering whether it is also some factor from the -- like increase of order size? And how much of the management plan [ph] are your user acquisition strategy in the fourth quarter and the next year? And what are your projections on user traffic growth in 2014? And what is your projection of the channel's acquisition cost per user basis?

Let me take your second question. Well, you're right. In Q3, our top line growth was mainly driven by the increase in number of active customers and number of orders, as well as increase on average order size. In Q3, our average order size was close to $33, a much significant increase compared to a year ago. Your second -- your first question, we're going to continue to do what we have been doing successfully to acquire new active customers, meaning by working hard in the channels [ph]. We're offering good shopping services to our customers and believe they will keep coming back and share their experiences with their friends. So that is basically our kind of strategy. And new active -- acquisition cost trend, well, our cost for acquiring new customers have been trending down, specifically in the past several years. And we believe that trend is going to continue as we keep managing investments, keep focusing our resources and energy on improving our operation, operational capability and designing for the better of [indiscernible].

Okay, got it. My last question is actually a housekeeping question. Can management share the vertical categories breakdown in your revenue, like what is your top revenue-contributing categories? I mean, what percent of the revenue is from hats or bags, something like that?

Our biggest product category is apparel, which is about 60%, 6-0 percent, of our total revenue. And then we have home goods, about 11%, 12% of the total and cosmetics at 10% and other smaller categories based on the season [ph], about 5%.

[Operator Instructions] Your next question comes from the line of Gene Munster of Piper Jaffray.

A couple of questions. One is just in terms of traffic trends in the first half of December quarter. Any sort of -- I know you gave guidance, but just general thoughts on that. And second, can you just talk a little bit about how we should think about your warehouse capacity and how much capacity you have to support what growth rate? So do you feel that the current capacity that you have will support a 30% growing business, 60% or 20%? Any sort of context around warehouse capacity relative to growth rate would be helpful.

Okay. There were problems on the call through your questions [ph]. Well, let me take your first question. Traffic in the first half of fourth quarter, well, we are not disclosing that number, but Q4 is generally our strongest season in the year. So as you can imagine, traffic should be going up compared to the first 3 quarters because it's seasonally the strongest season. To your second question, we are trying to build or expand our warehouse capacity ahead of time because time we know it takes time for us to build [indiscernible] those warehouse facilities, starting from negotiating with the government, acquiring the land and building the structure and putting in place the infrastructure [ph] . So it usually takes about 12 to 18 months to complete a large facility of about 100,000 square meters. So according to our current CapEx plan, we're going to build additional 300,000 [ph] square meters of warehouses in the next 3 years. So we are very confident that with that kind of addition in our warehouse space would be a pretty good addition to support our growth through the next few years.

Your next question comes from the line of Eric Wen of China Renaissance Securities.

I have 2 questions. First question is, if Yang Dong can share with us the latest data on the repeat customer rate? And I just have a follow-up question. The second question is I noticed that our cash flow was very strong this quarter, and it's virtually through liabilities. There seems to be some very strong cash inflow in third quarter. Can the management outline for us what's going on with this line of balance sheet item? And what is the cash flow outlook going forward in the next few quarters?

Well, I'm sorry, Eric, I didn't get your first question. Could you please repeat?

[Chinese] repeat customer rate [Chinese] Operating cash flow at this time is strong. [Chinese] liability -- you've got balance sheet and liability items [Chinese] operating cash flow [Chinese]

Okay. Your first question, I think we need to go back and check all the numbers and get back to you.

[Chinese]

So Eric, to answer your question on the repeat purchase rate, if we look at it on 2 angles. If you look at the repeat purchase rate from the customer point of view, it was 74% in Q3 this year. If you would look at the orders placed by repeat customers, that number was around 91% for Q3 this year.

[Chinese] What is the trend compared to the Q2 and Q1? Has this continued to rise or this actually flattened out or coming down?

[Chinese]

So Eric, to answer your question, that repeat purchase rate was actually quite typical over the past few quarters. If you look at Q2, for example, it was 75% versus 74% -- sorry, 75% for Q2 and 74% for Q3 this year.

[Chinese]

And 75% again for Q1 2013.

To answer your question, regarding cash flow, well, our business model has always had a very stable cash flow because the vast majority of the products we inflow we don't need to purchased upfront. So we believe our strong cash flow situation is going to continue going forward as our top line continues to grow fast.

Your next question comes from the line of Jiong Shao of Macquarie.

I have a couple as well. The first question is going back to the platform business, I noticed that you have $2.5 million revenue in the other income category in Q3. I was wondering if that is the commission revenue from your platform business. If it is, it looks like it's mostly profits. It should have a nice impact on your margins. And if that's the case, how do you think about your previous margin guidance because now that you have a new platform business, which is a much higher-margin business? Just any sort of directional thoughts would be helpful. That's my first question.

Okay. Well, thanks, Jiong, for carrying in your questions. Well, yes, in our financial segment there's a line item in other [ph] revenue. That is actually the revenue from the direct shipping business. And as I explained earlier, it's still variable and it's still in it's very early stage. And we don't know whether or not it's going to have a very significant impact on our future margin profile. So as of today, we still believe that our long-term gross margins to a stable level is going to be around 25%. It's helpful, you're right, but we still don't know yet whether or not it's going to be very significant in the long term.

Just a quick follow-up on this, do you have any kind of target on your mind or your plan in a couple of years how big a contribution this type of business is going to be in terms of the revenue contribution?

Not really because it's only a complementary business to our main business. As we discussed earlier, we've just only moved our non-core product categories and the bulky stuff, which is difficult to move [ph] or costly to ship through our direct shipping business. It's still small and it's not part of our core business. And it's still very new. So it's very hard for us to make any meaningful forecast.

Okay. And second question I have is on the fulfillment cost. It's nice to see you made some progress in this quarter, in particular. I think your fulfillment cost as a percentage of revenue dropped nicely quarter-over-quarter to 11.4%. You've had a couple of reasons for that decrease for that leverage. And moving forward, should we continue to see the improvement in the fulfillment cost line? Any metrics you can share in terms of the per order or per shipment fulfillment cost, that would be helpful as well.

Okay. Well, as I said, earlier, we have done a lot of things to try to reduce the fulfillment expenses for [indiscernible]. And also the [indiscernible] increase in average order sizing you see helped with that improvement in terms of expenses as a percent of revenue. Going forward, it's really hard to forecast. Again, here, in China, the labor cost, the transportation costs, especially, gasoline costs are all going up. And we believe that there is still room for us to improve on our fulfillment expenses, but it's going to be pretty limited because there are negative factors that would impact on that cost.

The next question comes from the line of Weibo Hu of Goldman Sachs.

Weibo Hu from Goldman Sachs. And just 2 questions. And the first one is that Jiong Shao just mentioned, the longer term, the sustainable gross margin, maybe the 25%, and I want to ask on the longer-term targets or the strategy maybe to gain more and more market share. So I just want to know, can you explain more about this strategy? Do we attribute the strategy by the category expansion or it would be other -- with the other items, yes? And also can you share more insight on the fierce competition landscape in the e-commerce market? Yes, that's the first question.

Okay, Weibo, I think Eric can take these questions. But let me first just translate that. [Chinese] Now we believe that these challenges [Chinese]

[Chinese]

So we're going to answer your question, how to grow the market share, how to grow the pie. So as you know, we currently have a very tiny market share of the overall B2C market here in China. And Vipshop has demonstrated our capability and success to become the specialized discount retailer here in China, primarily focusing on fashionable goods. So one thing we want to make absolutely sure is that we'll continue to do our core products, especially apparel, cosmetic, handbags and shoes through the principal B2C business model. We really want to focus on customer satisfaction. And secondly, to grow the pie, obviously, we will need to attract more new active customers, which leads to stronger and higher growth in our top line.

Understand. And the second question is regarding the company's mobile Internet strategy. As the mobile Internet marketing and shopping has become increasingly important to the retailers, so do we have any plans in this area and how much resources do we plan to invest? Also including the CapEx in this area?

I think maybe Eric can take the first half of the question on the mobile situation and then our current behavior, and then Donghao can talk about the CapEx in the second part. [Chinese]

[Chinese]

So actually mobile is very well suited to the flash sale business model because it enables customers to shop anytime, anywhere. It's very convenient. And it has become the trend. As for the recent quarter, sales from mobile has increased to about 15%, up from 12%, in the second quarter this year, and 8% in the first quarter this year. And we do have a lot of hopes that by the end of this year, and even going forward, that percentage will go even higher.

Weibo, you asked what our CapEx was in mobile, right?

Yes, or the total IT system or the IT infrastructure?

Okay. Well, IT, the CapEx, compared to what I'll spend in a normal [ph] Year, is not that significant. So the big-wigs -- anybody that we have in our IT department is actually handcuffed. We're trying to hire the top talents from across the country and maybe as well as overseas. So that's the business spending in terms of IT investment.

Okay. So if we go back on the mobile strategy, so do we have any plan to invest in this -- how to say -- in this area in terms of the investment, yes?

I'm sorry, can you repeat your question?

Yes. [Chinese]

Very well. [Chinese]

So in terms of the CapEx and also the investment components for the mobile strategy, mainly 2 components. First is to continue to hire for talent who are specialized in this area and who has track record and are highly experienced to be able to contribute to our current infrastructure upgrades and continue to create more products and to be more user-friendly. And secondly is how to commercialize the mobile to make sure that our products and the mobile strategy are actually compatible to make more popular among our customers. So mainly it's for areas of people and then infrastructure, including servers and so on and so forth.

Your next question comes from the line of Hye Won Cho of Credit Suisse.

My question is mainly about our long revenue growth outlook and particularly in 2014. Can you guys share with us kind of the top 3 priorities that you think you guys will be focusing on in 2014 and the major areas of opportunities or major areas of the resources that we might want to focus on for, just for our long term goals going forward?

Okay, Hye Won, I think we can take at least the first question. [Chinese]

[Chinese] Okay, so to summarize, perhaps 2 areas that we would like to focus in that share, first of all, is to continue to increase our client visibility among our consumers here in China, continue to attract more new, active customers. And secondly, continue to invest in our warehousing infrastructure, including IT systems, to ensure our warehouse equipment and infrastructure is upgraded and continues to provide a better customer shopping experience.

Great. That's very helpful. And just another quick follow-up on the user acquisition side. So I think maybe and [indiscernible] maybe share with us some of your, like, specifics of how do you guys plan to do that specifically? I think, Vipshop, in general, has already been growing very well in terms of popularity and definitely much more well-known compared to the previous several years. So I think -- I'd like to know if that perhaps there are any specific areas of user acquisition? Or do we have any specific plans to target a specific section of users that we think we are kind of [indiscernible]?

Okay. [Chinese]

[Chinese]

So a few areas to highlight here. First of all, in terms of our customers, we actually are serving entire nations, whether it's first tier [ph], second tier [ph], third tier [ph] and fourth tier [ph] cities. They're all important to us. And we actually continue to go after further penetration around all tier cities here in China. And secondly, we'll continue to use the watermark approach [ph] strategy. And this has always proved very effective and very efficient and has been able to contribute to lowering our marketing spending dollar. And thirdly, of course, we will continue to do a bit more branding because branding is very crucial to our long-term development. But one thing that we want to make sure is that when we apply or when we allocate budget for marketing, we're going to be very self-disciplined. In other words, as a percentage to top line, marketing spending for next year will be lower compared to that of this year. So yes, Hye Won, that's the best to summarize what Eric just mentioned.

Our next question comes from the line of Ming Zhao of 86Research.

So my question is about yesterday, November 11, and I assume that you put out your guidance after you know the [indiscernible], which is $35 billion in the GNP [ph]. So my question to you is do you have any comments on that figure? And also, how do you think about this kind of consumer behavior in buying a lot of stuff in one day? Would there be any impact to your business in the fourth quarter and then beyond [indiscernible]? I just want to hear your thoughts about this.

Okay, thank you, Ming. [Chinese]

[Chinese]

First of all, the Singles Day, as you know, is China's biggest online shopping day. And it has, indeed, much endured a shopping frenzy, attracting more and more consumers to engage e-commerce. It's actually putting a lot of the off-line retailers through a lot of difficulties, but it's actually growing the pie of the online shopping. So from this regard, we have the shop benefits from the Singles Day. And for yesterday's sale, we actually recorded record-high in terms of sales and traffic. So a lot of people are concerned whether once the consumption has been relieved, whether the ongoing shopping spree will be negatively impacted but the answer is no. Because judging from our experience, when we look at today's sales versus the same day last month, we actually recorded 20% of growth income on top line. So we still hope very positively and feeling very strong for our achievable [ph] sales.

The next question comes from the line of Andy Yeung of Oppenheimer.

I have actually a couple of questions around mobile operation. Now that it accounts for 15% of your traffic, can you share with us the position [indiscernible] on the operation such as your mobile sales or repeat customers or order size for mobile? And also you said basically between your customer acquisition strategy and customer [indiscernible] than in mobile?

Okay, so thank you, Andy. [Chinese]

[Chinese]

So, Andy, in terms of the traffic from mobile is actually higher than 15%. We noticed that the conversion rates on mobile is actually quite lower, although we have been making improvements. But it's still slightly lower behind compared to that from PC. In terms of the repeat purchase rate and average order times, it's very much similar to that from the PC end. Another behavior that we noticed that it's better from Monday to Friday. A lot of customers are actually shopping from the office. And over the weekend, thousands [ph] shopping from the mall actually have had a significant spike.

Good. That's helpful. Just a quick follow-up on that. On your customer acquisitions, do you do anything differently on the mobile side versus your PC side? Do you use different channels similarly [ph] when you are referring customers?

[Chinese]

[Chinese]

So we would actually use a different media or channels for trying to get after [indiscernible] customers from PC end and mobile. In terms of the acquisition cost, it's actually lower for the mobile end versus -- as compared to that of the PC end because we would have a significant amount of organic traffic to our mobile channel.

The next question comes from the line of Alicia Yap of Barclays.

My question is regarding your future product mix in terms of the category. Could you look out like, let's say, a few quarters? Would there be any meaningful change of the category contribution percentage? And will we consider kind of a move our sorting value chain to a higher-end product or some branded product, even higher-branded product? Any plans for us to work even closer to some overseas suppliers?

[Chinese]

[Chinese]

So, Alicia, in terms of the product mix or the category areas that I'm saying that there will be a significant change, although we continue to add more categories based on the customers' needs and based on the development stage. But I think, what he's saying is for apparel, it will continue to grow [ph] , will continue to contribute roughly 26% [ph] of our top line. So you wouldn't be seeing overnight a significant change in the product mix. And secondly, we have been doing a lot of initiatives to improve our average [ph] designs. We have been pondering with higher-end or premium kinds of products that actually offer a higher average ticket size and actually prove to be very popular among our customers. So it's in our interest and also in the customers' interest to work with the better, more popular and more desirable products with better SKUs. So this has always been our goal to continue to optimize our brand and portfolio, whether it's domestic good product or whether it's international, overseas SKUs.

Ladies and gentlemen, due to time limitations, we have to close the call. At this moment, I will turn the call back to Mr. Donghao Yang, CFO of Vipshop, for closing remarks.

Well, thank you, all, for taking the time to join us. And we look forward to speaking with you next quarter. Thank you.

Thank you.

Bye-bye.

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