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E-Commerce China Dangdang (NYSE:DANG)

Q2 2013 Earnings Call

August 15, 2013 7:30 am ET

Executives

Sophia Zhou

Yu Yu Peggy - Co-Founder, Executive Chairwoman and Executive Chairwoman of Beijing Dangdang Information Technology Co Ltd

Zou Jun - Chief Financial Officer

Analysts

Chi Tsang - HSBC, Research Division

Binnie Wong - BofA Merrill Lynch, Research Division

Andy Yeung - Oppenheimer & Co. Inc., Research Division

Philip Wan - Morgan Stanley, Research Division

Jiong Shao - Macquarie Research

Alex Yao - JP Morgan Chase & Co, Research Division

Thomas Chong - BOCI Research Limited

Tian X. Hou - T.H. Capital, LLC

Karen W. Tai - Piper Jaffray Companies, Research Division

Alicia Yap - Barclays Capital, Research Division

Long Lin - Brean Capital LLC, Research Division

Operator

Hello, ladies and gentlemen. This is Edwin, and I will be the operator for this conference call. I would like to welcome everyone to E-Commerce China Dangdang Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I must advise that this conference is being recorded today, Thursday, August 15, 2013.

And now I would like to turn the call over to Ms. Sophia Zhou of Dangdang. Please proceed.

Sophia Zhou

Thank you, and welcome to our second quarter 2013 earnings conference call. With me today are Peggy Yu Yu, Executive Chairwoman; and Mr. Jun Zuo, the CFO of the company.

Before we continue, I refer you to our Safe Harbor statement in our earnings press release which applies to this call, as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release which includes a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during the call are in renminbi.

I would now like to turn the call over to our Executive Chairwoman, Peggy Yu Yu.

Yu Yu Peggy

Thank you. Good morning, good evening, everyone. I'm pleased to report another strong quarter of strong performance. We achieved solid growth in sales, healthy margin expansion and increased our customer base, all of which contributed to our best bottom line performance since the third quarter of 2011.

Our marketplace continues to deliver outstanding performance and growth. Combined general merchandise sales from both principal and the marketplace surpassed those of books and media for the third consecutive quarter, accounting for roughly half of total sales. We are on track in transforming Dangdang from an online bookstore into an integrated online shopping mall targeting mid- to high-end customers.

Let me now discuss our business in more details. In the media segment, we maintained our dominant market share, achieving sales growth of 22% year-over-year. In our marketplace program general merchandise value, or GMV, rose 178% year-over-year. We increased the number of products available to provide our customers with growing assortment of quality brand-name products to choose from across multiple categories. Our destination categories, which include apparel, baby and maternity, home and lifestyle, also performed well. Fashion and apparel in particular were the standouts this quarter, accounting for half of marketplace GMV.

We continue to adjust products between certain self-procurement categories and the marketplace program, resulting in slower growth from self-procured general merchandise sales but with high-growth margin. The combined general merchandise sales from both the marketplace and the self-procurement business did very well, increasing at a rate of 86% year-over-year.

Let me update you on some other key operational points. In fulfillment, we enjoyed operation -- operating leverage and improved terms with service suppliers. We made additional improvements to the coordination between warehousing and delivery, reducing inventory turnover by 40 days year-over-year. We also expanded our cash-on-delivery network to include 1,600 cities and towns in China, up from 1,100 last quarter.

In keeping with our strategy to transform our company into an integrated online shopping mall, we conducted a marketing and a branding campaign targeting fashion and apparel. We employed new marketing tools, including advertisements on top-rated TV programs and other offline media with broad coverage. These efforts met with success. We saw increase in new and active customers, customer orders and revenue per order. Making a significant investment in marketing and branding while successfully improving our bottom line performance is an important achievement for us.

In technology and content, we launched the new version of our personal recommendation system on mobile Dangdang, which translated into good click-through and conversion ratio. We also beefed up technology integration with third-party logistic providers. For the first time, our customers can track estimated shipping and detailed tracking of their purchases. Customers in the past had to contact our customer service to get this information.

We have kept investing in mobile technology as we believe it will have increasing influence on our customers' online shopping behavior. Mobile traffic accounted for almost 40% of overall traffic during the quarter, up from the low-30s range in the last quarter. We believe our "customer service in your pocket" feature will increase user stickiness to our mobile platform as more and more of our loyal Dangdang customers transition their online shopping to mobile device.

In summary, in the second quarter of 2013, we made strong progress in transforming our company into an integrated online shopping mall targeting mid- to high-end customers. We expanded our marketplace to include a rich selection of quality brand-name products, particularly in our destination categories. Our improving financial results reflected the success of our cross-selling, data mining and the targeted marketing programs.

Going forward, we plan to better utilize our customer base by developing strategies to tap into their purchasing powers through cross-category sales and enhancements to the overall customer experience. We are encouraged by our financial performance thus far, and we are committed to further improvement throughout the year.

Let me now turn the call over to Zou Jun, our CFO, for the financial review.

Zou Jun

Thank you, Peggy. On this call, I would like to discuss with you the second quarter results in more details. Our total net revenues reached RMB 1.49 billion in the second quarter of 2013, a year-over-year increase of 24%. Media product revenue was RMB 945 million, which was up 22% on a year-over-year basis. General merchandise revenue was RMB 484 million, up 20% year-over-year. Other revenue, which is mainly from third-party merchants and advertising, was RMB 64 million, a year-over-year increase of 91%, demonstrating consistent outstanding growth in our marketplace, which we recognize only commission-based and net revenue.

During the quarter, we continue to strategically adjust the certain general merchandise categories between self-procurement and the marketplace. Meanwhile, GMV of the marketplace in the second quarter was RMB 788 million, up 178% year-over-year, slightly above our guidance of 175% year-over-year. On a consolidated basis, our overall general merchandise sales, combining both self-procurement and marketplace, grew 86% year-over-year as compared to 76% growth rate in the first quarter of this year and exceeded books and media product sales for the third consecutive quarter.

We grew the number of new customers by 35% year-over-year to about 2.4 million. Active customers increased by 28% year-over-year to around 7.6 million. Total orders in the second quarter were approximately 15 million, up 25% year-over-year. All 3 metrics grew faster than the previous quarter. Average contribution per customer in the second quarter was RMB 293, up from RMB 246 in the same period last year.

Gross margin was 17.1% in the second quarter, an increase of 400 bps from 13.1% in the second quarter of 2012, and maintained the level achieved in the first quarter of the year. The year-over-year increase was primarily due to the increase of other revenues, representing the sustained scaling of the marketplace, as well as improved self-procurement margin. Gross profit was RMB 256 million, a year-over-year increase of 62% and a quarter-over-quarter increase of 12%.

Fulfillment expense in the second quarter, which includes warehousing and shipping expenses, were RMB 178 million, down slightly from last year. Fulfillment expenses were only 12% of total revenues in the second quarter compared to 15% in the same period last year and 13.8% in the first quarter of the year. The year-over-year and sequential decrease were primarily due to consistent operating leverage, improved warehousing management system and lower unit shipping costs.

Now marketing expenses were RMB 77 million, representing 5.1% of total revenues compared to 3% in the second quarter of last year. The increase was primarily due to a marketing and branding campaign focused on fashion apparel products, premier television channels and other offline media and targeted marketing campaigns. We are encouraged by the fact that we are able to improve our bottom line performance while investing in marketing programs.

Now technology and content expenses were RMB 47 million, which was 3.1% of total revenues compared to 3.2% in the second quarter of last year. The decrease was primarily due to operating leverage, especially on IT headcount.

G&A expenses were RMB 35 million, which represented 2.3% of total revenues compared to 2.6% in the corresponding quarter last year. The decrease was primarily due to operating leverage and improved management efficiency.

Share-based compensation expenses, which were allocated to related expense line items, were RMB 2.6 million in the second quarter compared to RMB 2.8 million in the second quarter of last year, which was a 7% decrease.

Net loss was RMB 64 million compared with a loss of RMB 122 million and RMB 73 million in the second quarter of last year and in the first quarter of this year, respectively, primarily due to our efforts to increase gross profit and operating leverage. Net margin was negative 4.3%, narrowed from negative 10.1% in the second quarter a year ago and a negative 5.5% in the first quarter of the year, which represents improving margin for the fourth quarter in a row and the best performance since the third quarter of 2011.

Now moving to the balance sheet. As of June 30, 2013, our cash and equivalents, short-term time deposits and held-to-mature investments totaled RMB 1.29 billion as compared to RMB 1.63 billion at the end of last year. Meanwhile, short-term bank borrowings decreased from RMB 300 million as of March 31, 2013, to 0 as of June 30, 2013. Additionally, we generated almost RMB 47 million operating cash flow in the second quarter, improved from negative RMB 19 million in the same period last year.

Now turnover days for accounts receivable were 4.2 days in the second quarter compared to 5.6 days in the corresponding period last year due to improved payment terms for our advertising business. Turnover days for accounts payable were 139 days in the second quarter of this year compared to 162 days in the corresponding period last year. Turnover days for inventory in the second quarter of 2013 were 104 days as compared to 144 days in the second quarter of 2012, due to improved inventory management. Capital expenditures for the second quarter of this year were RMB 35 million, including RMB 33 million in spending on Tianjin warehouse construction.

Finally, our outlook for the third quarter of 2013 is as follows. We expect our total net revenue in the third quarter of 2013 to grow at a rate of 23% year-over-year or the equivalent of RMB 1,584,000,000. We also expect GMV from marketplace to grow at rate of 165%.

I will now open the call to questions. Operator, please go ahead. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chi Tsang from HSBC.

Chi Tsang - HSBC, Research Division

Just 2 questions. In terms of your marketing costs, your marketing costs were up fairly substantially year-over-year. I'm wondering, does this represent a new strategy to more aggressively acquire customers or was it really more tactical as it relates to targeting apparel, like you mentioned. And how do you expect that to sort of look for the next couple of quarters?

Zou Jun

This quarter we started to actually do branding -- brand advertising and targeted marketing programs for fashion apparel. We believe fashion apparel is a higher-margin business and the investment is worthwhile. And we'll continue to do, of course, branding -- brand marketing from time to time. It's quite seasonal. But one thing to note is that our new customer acquisition costs for the quarter actually decreased.

Chi Tsang - HSBC, Research Division

Great. And my second question is, I mean, can you give us an update on your e-book strategy? When I talk to investors, that usually comes up in conversation. Some investors worry that e-books ultimately cannibalize your media business. So I'm wondering if you could address that please.

Yu Yu Peggy

We increased the number of titles we carry on our e-book platform. And we also had another test launch of Dangdang readers, which we're collecting data. And the sales of e-book at this time is still very small, but we do not see the e-book hurting media business in any way. And in our experience, people tend to -- people who download the application for e-book also tend to buy books for the paper format as well. And I think that e-book in China will take a very different path as what it did in the U.S. or maybe European countries. And the starting point is very low, and we are seeing a very gradual increase. And our focus will be adding more titles we carry and encourage people to use their mobile and their pad and other applications for download for testing for experience.

Zou Jun

But still, we do see -- actually, the downloaded application of Android and iOS platforms increased a lot. And usually, the downloads, they didn't contribute a lot to our revenue, but they create a lot of opportunity for cross-selling. Many people who download e-books tend to also buy paper books and also buy other products.

Operator

Your next question comes from the line of Binnie Wong from Merrill Lynch.

Binnie Wong - BofA Merrill Lynch, Research Division

I just had a question -- a few questions on the marketplace and the fulfillment. For the marketplace, there is -- I was wondering that, can you share with us some color on the number of orders that's on the marketplace within the 15 million orders for the quarter and also on the merchant side? And I noticed that this quarter the take rate has come down from about 10% to 11% in the past quarter to about 8% this quarter. Can you share with us some -- or the major reasons for the drop in the take rate and also about how many points of that related to commissions, how much of that is related to fulfillment and how much related to advertising? And any color on the trend going forward that we should expect the take rate trending?

Zou Jun

Okay. Binnie, thanks for your question. Yes, I guess for your second question, regarding the take rate, yes, in this quarter, we did conduct some promotion, in particular on advertising, to help our merchants to actually promote the sales on our platform. So if you take a look at, actually, I guess, the breakdown, the part that grew a little bit slower is really advertising revenue coming from merchants. And so this is something quite seasonal, and it will fluctuate, of course. And now in terms of orders coming from marketplace, it's been growing very fast. We don't break down that to details. But I can tell you the orders from marketplace are getting higher and higher, and also the revenue from orders coming from marketplace are much higher than that from self-procurement business.

Binnie Wong - BofA Merrill Lynch, Research Division

Okay. And I'll just ask a second question on the fulfillment. We just hear earlier from Peggy that there is a -- making additional coordination between warehouses, so we'll find more efficient inventory turnover. So you're saying that, that has effectively reduced the inventory turnover days, you mean, in this quarter, right, particularly? I just want to hear, like, any update on that, too.

Zou Jun

Yes. We have been actually focused on inventory management, improving, actually, inventory management system, as well as labor efficiency for the last several quarters. So that's why you see that our inventory turnover days has been improving for the last several quarters continuously. And not to say a year-over-year improvement of, let's say, almost 40 days, you also see a quarter-over-quarter increase -- improvement of almost 15 days. So yes, it's going to be a continuous effort for us.

Yu Yu Peggy

And in terms of fulfillment efficiency, I would add another angle. And our technology department has been working very hard, beefing some features for logistic and fulfillment services. And so even though the labor cost in China in the last several quarters has been going up, the fact that our fulfillment cost goes down, in addition to scale -- economies of scale, faster, it also has a lot to do with technology helping procurement gaining efficiency. And this technology-empowered efficiency has helped us to offset the labor cost increase factor and actually, reduced our fulfillment cost as a percentage of revenue.

Binnie Wong - BofA Merrill Lynch, Research Division

All right. And I noticed that, like, this quarter, fulfillment costs per order is actually down from -- like, from $12.4 last quarter to about $11.9 this quarter. I was just wondering that, do you think about, like, maybe $10 to $11 per order would be kind of, like, the optimal level. And I guess, this would be, I guess, the bottom as for how much we can manage it to. Or what is the more reasonable trend? Should we see maybe, like, a $10 to $11 per order? Or do you see further improvement to lower -- even lower this fulfillment cost per order?

Zou Jun

Well, Binnie, even though we will continuously improve our management -- I mean, efficiency in warehouse, we would believe -- let's look the other way. If you look at revenue per order, this quarter, it's been growing at 22% on a year-over-year basis to almost RMB 150. And so as a percentage -- fulfillment expense as a percentage of revenue-wise will continue to improve, but yes, if you look at it that way.

Operator

Your next question comes from Andy Yeung from Oppenheimer.

Andy Yeung - Oppenheimer & Co. Inc., Research Division

My first question is actually about your order size because, obviously, it has improved or increased quite a bit over the year. What do you think are the factors that's driving that? And how sustainable that trend is going to be for the rest of the year?

Yu Yu Peggy

Let me address this question. The order size of Dangdang customers increased in the second quarter of 2013 . I think that has a lot to do with the fact that we are broadening our category offering. And a book is only maybe RMB 20 to RMB 30, and a dress can be RMB 120. So I think the fact that we're adding apparel fashion and other destination-category products contribute the most to the fact -- to the increase of our order size. And having said that, the order size of -- from customers has seasonality fluctuation, and we do bear that in mind.

Andy Yeung - Oppenheimer & Co. Inc., Research Division

Okay, got it. And then the next question is actually about your marketing. You have been able to grow your customer in prior quarters without increasing your marketing spending too much. This quarter, you actually increased it quite a bit. Just trying to understand what's the logic behind increasing marketing spending? Do you see more spending in marketing by your competitors as well?

Yu Yu Peggy

I think it has -- the marketing strategy goes hand-in-hand with our procurement or category expansion strategy. And Dangdang used to have the image of being a bookstore, and now we are broadening our offering while on our way to become an integrated shopping mall. So we have strong and new categories, such as apparel, baby and maternity. From time to time, we want to do brand-focused marketing to tell people, "Hey, we are no longer the Dangdang you used to remember 5 years ago. We are now a Dangdang with apparel store, with baby store." So I think this kind of branding event is in line with what we do with category expansion.

Operator

Your next question comes from the line of Philip Wan from Morgan Stanley.

Philip Wan - Morgan Stanley, Research Division

My first question is about your margin outlook. Gross margin has improved nicely over the past few quarters. And I understand that you don't provide margin guidance, but assuming, under the current business condition, what would be the achievable margin? And what does it take to reach that level? And then I have a follow-up.

Zou Jun

Yes. Actually, in the last quarter, we have already achieved gradual recovery on all different sectors in terms of gross margin. Our book and media gross margin has approached into very high-teens. And we also see other revenue, which is revenue coming from marketplace, has grew at 91%, which goes directly to the margin line. And so to actually improve, expand our margin is going to be a long-term goal for us, and we'll gradually achieve that.

Philip Wan - Morgan Stanley, Research Division

Okay. And then my second question is about your Tmall initiative. Could you share with us any progress about the distribution on Tmall? And then, in particular, is there any way to convert the customers who purchase through Tmall into your own customers?

Yu Yu Peggy

Yes. Dangdang opened the Dangdang store on Tmall at the end of 2012, last year. And Tmall customers and Dangdang customers are very different and the Tmall sales on -- Dangdang stores on Tmall is a very small portion of our total sales at this time. And -- but we really like what we did on Tmall because Dangdang's customers tend to be based on Tier 1, Tier 2 large cities. And we analyzed and looked at the customers we get from our Tmall store, and the Tmall customers tend to be from Tier 4, Tier 5 cities. And they are younger people, they are from smaller cities, they are the kind of customers Dangdang normally doesn't targeting or do branding or have access. So I think the Tmall business is a nice supplement of customer base to Dangdang business. And I didn't quite hear the second part of your question on this -- Zou Jun, did you get that? Yes? His words just trailed down toward the end.

Zou Jun

Philip, can you, sorry, just reiterate your second part of your second question?

Philip Wan - Morgan Stanley, Research Division

Sure. It's just related to the different customer demographic. I wonder if you are able to convert those customers who purchase through Tmall into your own customers, meaning that, next time, they will go to Dangdang directly?

Zou Jun

Yes, actually, what we can track is that the traffic coming from Tmall has a very high conversion rate, but a very -- sort of lower ticket price.

Yu Yu Peggy

Yes, the Tmall customers have -- tend to carry -- tend to contribute a smaller bucket size versus ordinary Dangdang customer.

Philip Wan - Morgan Stanley, Research Division

Okay, I see. Lastly, how do you compare the margin between Tmall customers or your direct customers?

Zou Jun

We don't break down that way. But as we mentioned, that we do see they usually have a smaller revenue per order. But still, if you just compare expenditures in terms of getting the customer, I think it's a very efficient channel.

Yu Yu Peggy

And let me add to that. When we look at the margin, we look at the margin on product line contribution, like media has certain type of margin contribution and general merchandise, or baby products have certain types of margin contribution. So as an online store, we look at margin more in terms of products and the categories rather than, like, on the customer base.

Operator

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

Jiong Shao - Macquarie Research

I have 2 as well. The first question is on the mobile. Could you talk about sort of the, it seems like a percentage of your customers are using your mobile app, the mobile as a mix for your transaction? And related to that, as you know, the Weixin 5.0 has this sort of a image search. If you take a picture of cover of the book and you can show -- you can buy the book on Dangdang. I was wondering, do you pay them anything or do they pay you anything in this arrangement? That's my first question on mobile.

Zou Jun

Jiong, thanks for the question. Well, yes, we do see actually mobile traffic continue to grow at exponential rate. In the past quarter, traffic coming to mobile almost contributed 40% of total traffic in the website. So yes, it's getting more and more significant. And orders from mobile also grew almost 3x compared to like a year ago, even though the conversion rate is still a bit lower on mobile. Now when we talk about WeChat, yes, there is no commercial relationship at this stage between us and WeChat.

Yu Yu Peggy

So no one is paying anybody, yes, okay.

Jiong Shao - Macquarie Research

Okay. But I just want to follow up on this question first. Number one, are you actually seeing an increase in your traffic through Weixin since they launched or we are just too early? Secondly, Jun, do you have a number you can share with us, the revenue? Is the mobile revenue above 10% now?

Yu Yu Peggy

It's too early to judge your Weixin or the Weibo question. I think that's in the early stage of being commercialized by themself. And what's his second question, Jun? Did you follow up? Oh, the size of mobile. We don't disclose that yet.

Jiong Shao - Macquarie Research

Okay. That's fine, okay. Then my second question is on the flash sales. I recall you launched sort of deals of the day flash sales about almost -- a bit over a quarter ago. Is there any metrics you can -- operating metrics or financial metrics you can share with us? What are some of the categories you are seeing a lot of success in the flash sales?

Yu Yu Peggy

Yes, flash sales grew nicely in the last quarter. And the flash sales is an important component of Dangdang overall apparel and fashion business. And Dangdang apparel and the fashion business addressed to the mid- to high-end customers that we accumulate over years. In addition to new items and items of the season, over a quarter -- about a quarter ago, we added the flash sales to give additional things to things kind of, like, the last quarter or a little bit slightly older inventory from merchants. And they are offered to our customers at significant discounts. And I can say that apparel and fashion is about half of our general merchandise value. And out of the apparel, flash sales is a significant contributor.

Zou Jun

Yes. And just to add to that, I just saw the pre-announcement of another flash sales company for the past quarter, and what we can see is that our fashion apparel business grew much faster than that.

Jiong Shao - Macquarie Research

Sure. Now, Peggy, you mentioned that it's a significant part of your apparel business. Should we interpret that as over 20%?

Zou Jun

Jiong, it's maybe too -- sorry.

Yu Yu Peggy

Yes. We don't really give breakdown to that extent.

Zou Jun

Jiong, maybe it's also too early to break down at this stage because we just officially launched in the middle of last quarter.

Operator

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

Alex Yao - JP Morgan Chase & Co, Research Division

I have 2 questions. Number one is can you share with us your top 3 priorities over the next 12 months? And second question is on the mobile user acquisition cost. How would you compare the mobile user acquisition cost between PC versus mobile? And what is your mobile user acquisition strategy?

Yu Yu Peggy

I think for the major initiatives for the future in Dangdang, number one, we are going to continue what we call the category expansion strategy. And we want to strengthen our destination category, apparel, fashion, baby, maternity, home and lifestyle, so that the sales contribution from general merchandise becomes larger and larger. And as you can see, the combined sales of both self-procurement and general -- and the marketplace grow at a rate of about 86% over -- year-over-year. And out of that growth, marketplace is even higher, it's 178% in the last quarter on a year-over-year rate. So we are going to follow this very good and fast-growing path to build Dangdang into an integrated shopping mall. So that's our initiative. And another major theme that we are going to continue to make investments in our technology and -- so because we see technology bring us operational efficiency and help us to better utilizing our data, to help us to cross-sell to our customers on different categories. And Dangdang accumulated millions and millions of customers. And now without adding categories to the current customer base, how do we get customers who used to buy sheets from Dangdang into buying baby products or into buying his next pair of shoes, will be something that we concentrate on. And for the mobile initiative, we see really, really strong trend in people tapping into their mobile application for all kinds of things, from reading, getting news, looking at Dangdang sales promotion activities to getting orders. And we think that the first phase will be nurture customers to use mobile Dangdang very frequently, to use "customer in your pocket" feature very frequently. And we are not spending much money on mobile acquisition yet because we think that we're in the stage of nurturing user habits, and when we see this nurture -- this using mobile application habits becoming more and more like a shopping behavior, then that will be the time we'll begin to spend more on mobile application -- on mobile acquisition of customers. Jun, do you have anything to add?

Zou Jun

Sure, just 2 points to add to what Peggy said, Alex. Acquisition costs on mobile channels are definitely much lower at this stage in the comparative -- the traditional fixed line channels. And also, Peggy, don't call me territorial, I think improving financial is definitely my priority, which is supported by Peggy.

Yu Yu Peggy

Yes, definitely, definitely. I think all efforts in that has resulted in our bottom line. And our bottom -- we narrowed a lot significantly in the second quarter this year, and we'll be doing that for several quarters. And yes, I absolutely agree with you, Jun.

Alex Yao - JP Morgan Chase & Co, Research Division

That's very, very helpful. Just one quick follow-up. Peggy, you mentioned that the priority on mobile side right now is to nurturing the user habit. But then the user behavior on mobile is different to that on the PC. What are the areas that you think you need to educate the market, educate and nurture the user behavior?

Yu Yu Peggy

Yes, the user behavior are very different. For one thing, the environment they use 2 devices are different. When people use laptop, they tend to be in the office and have a larger chunk of time. When they use mobile, they can be in the subway or in the elevator or waiting in line to get cash from ATM machine. So they -- because the environment to use mobile application is different from the environment to use a PC, that decides that the features we developed for mobile platform is different from the features that we developed for PC. And when I say that user application nurturing, I also mean that Dangdang needs to work hard on getting out more features that caters to the fact that fragmented pieces of time, 5, 10 seconds of time can be used very well by our customers. So it requires mobile traffic -- or mobile shopping behavior require companies such as Dangdang to come up with features different from the PC -- what PC deliver.

Operator

Your next question comes from the line of Thomas Chong from BOCI.

Thomas Chong - BOCI Research Limited

I have 2 questions. The first question is about the marketplace. If I look at the other revenue, it grows at 91% year-on-year. But if I look at the GMV for the third-party marketplace, it grows at 178%. I just want to get a sense about the differences in growth rate between the 2. And then I have a follow-up.

Zou Jun

Yes. It's mainly because of seasonal promotions in the second quarter. And as I mentioned when I answered Binnie's question, we actually do some promotions in the second quarter. In particular, it's represented by slower growth in advertising revenue, and we do more promotion and give, actually, a lot of, I would say, benefit to the merchants.

Yu Yu Peggy

Yes. I would like to add to that. Compared with giants like Tmall, Dangdang's marketplace starts much earlier and -- much later and with much smaller base. So for us to attract merchants to sign up on Dangdang, we need to give them some carrots to sweeten the deal, so merchants have incentive to come to Dangdang to open their store on Dangdang. So that's a pricing strategy that we do with our merchants.

Thomas Chong - BOCI Research Limited

I see. And my second question is relating to revenue breakdown in other revenues. Any color about the mix between the commissions, the advertising and the storefronts in the second quarter?

Zou Jun

Yes. In the second quarter, less than 1/3 of the other revenue comes from, actually, advertising, and the rest 2/3 mainly come from commissions and store rental.

Operator

Your next question comes from the line of Tian Hou from T.H. Capital.

Tian X. Hou - T.H. Capital, LLC

I have a question regarding the competition from -- so this year compared with last year same time. And we feel like it's kind of quieter. Last year, the price competition is pretty much everywhere, from TV, PC to -- everywhere, you could see it. But this year, it seems like even noise, we didn't hear that much. So where do you see that? Do you see that as the whole industry turning into more rational operation or some other reasons? Is this temporary? Or is this long term?

Yu Yu Peggy

I think that is a more rational environment versus what it was a year ago, maybe 18 months ago. And I think maybe one of the reasons that they -- you see a relatively quiet second quarter in the e-commerce landscape in China is a lot of e-commerce companies have burned through the equity money they raised during the have-money period in 2000 -- late 2010, 2011. So a lot of companies have burned through their equity money, and they couldn't raise new funds. And they can no longer finance the strategy of using equity money to buy market share. So I think that's a very important -- that's an important reason. But I should also say at a time -- at this time, Dangdang remains very pricing-competitive because low price is a long-term value proposition. We continue and we insist to deliver to Dangdang customers. So regardless of what other competitors do, Dangdang wants to remain to be a price-competitive company in the long term. And short term, we -- whatever our competitors do, they do theirs and we do our price -- aggressive pricing strategy because that's how -- that's one of the 3 value propositions we deliver to our customers, and we want to be very, very loyal to our principle.

Tian X. Hou - T.H. Capital, LLC

Okay, that's very helpful. A follow-up question is that you just opened the online pharmacy store called Tatisian [ph]. So in addition to your baby, mother and apparel business, is this one of the categories that you're going to expand?

Yu Yu Peggy

This -- we have new things from time to time, and some of the things we are testing is very early stage even -- infant stage for us to give you sort of additional color to it, yes. And Tian, I also want to add to what I said about our competitive pricing strategy I just talked about. I think one of the reasons that Dangdang can remain pricing aggressive is because of our operational efficiency. If you look at our logistic costs, if you look at our technology, SG&A, we're a company that is well -- very well managed. And if we do a good job in being a couple percentage lower here and there, aggregately, we can deliver that cost saving to our customers in the long run. And I think being an e-commerce company, this kind of cost-control capacity, maintaining price-competitive, at the same time, deliver good value is very important. In the second quarter, I'm particularly proud of the fact that we increased our marketing spending significantly to about -- I think Jun can correct me if I'm wrong. We spent more than 5% of our revenue on marketing, but we narrowed a lot significantly. And this is what we say about being operational efficient.

Tian X. Hou - T.H. Capital, LLC

Okay, Peggy, that's very helpful. And then the last...

[Technical Difficulty]

Operator

Your next question comes from the line of Karen Tai from Piper Jaffray.

Karen W. Tai - Piper Jaffray Companies, Research Division

This is Karen calling on behalf of Mark. I have 2 questions. One is regarding your traffic conversion rate for new customers. Can you talk about the trend in the quarter maybe month-over-month? And my second question is regarding your pricing trend. You mentioned in the quarter that the average order size was RMB 280 per order. Can you talk about your pricing strategy going forward?

Zou Jun

Thanks a lot, Karen, for your questions. Our conversion rate, we do see sequential increase, as well as year-over-year increase. On a year-over-year basis, our conversion rate improved a lot, more than 30%. And in terms of pricing, I think what we mentioned is that our revenue per order is close to RMB 150, and our single customer contribution in the quarter was RMB 293 so -- yes. And we do offer a very competitive pricing compared to other players in the market, but pricing does not always win us customers. Customers come to us because of our brand name, comes to us because of our better service quality, better delivery time and a lot of other things. So that's how we view ourselves. And we have a customer base of 7.6 million during the past quarter, and most of them are people from first 2 tier cities with better education, yes. So basically, we compete not only on pricing, yes.

Operator

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

Alicia Yap - Barclays Capital, Research Division

I have a follow-up question on the mobile front. Just wanted to get a sense that -- what is the accumulated number of downloads on your mobile apps? And when you talk about your 40% of the traffic coming from mobile, just wanted to get a sense what is the split. Is the majority come from the app or would that be some actually come from the WAP, the HTML pages?

Zou Jun

Yes. We see traffic coming from WAP, from HTML 5, coming from app. At this stage, it's probably quite similar contribution, but interestingly, orders coming from mobile app are contributing majority of the total mobile orders.

Alicia Yap - Barclays Capital, Research Division

I see. And is there any difference in terms of the average spending per order on mobile versus PC?

Zou Jun

Average spending at this stage tend to be a little bit smaller than that coming from fixed line, which, I guess, as Peggy has explained, people are mainly using their fragmented time to visit -- for mobile terminals.

Yu Yu Peggy

Yes, mobile order is smaller than PC order.

Alicia Yap - Barclays Capital, Research Division

I see. And then have you disclosed your number of downloads so far on the app?

Yu Yu Peggy

No, not at this time yet.

Alicia Yap - Barclays Capital, Research Division

I see. And then my second question, just very quickly on the flash sales. Is the flash sales volume -- or transactions is also counted on your GMV guidance?

Zou Jun

Yes, it is included.

Alicia Yap - Barclays Capital, Research Division

Okay. So that means the second quarter -- this 178% growth in the GMV is also including the beginning of the flash sales as well?

Zou Jun

Yes.

Operator

Your next question comes from the line of Ebet Zhou [ph] from Crédit Suisse.

Unknown Analyst

Just wanted to get more color on our marketplace business. Could you share with us kind of what's the current number of merchants on our marketplaces and the growth trajectory in the recent quarters? And also, how much percentage of the merchants we work with are, like, directly with brands, like the brand opened their -- one of their flagship stores on our marketplaces ? And versus how much percentage we kind of work with the distributors?

Yu Yu Peggy

We have thousands of merchants on our marketplace, and they have vendors for apparel, baby, all the categories that we mentioned. I think in terms of breakdown of brand versus stores, we have both of them. And some of the brands that have their flagship store on Dangdang, and in other cases, we have specialty store, maybe a specialty baby store that not only sells baby stroller but also sell baby shoes. So we welcome both brands and stores into our marketplace. And they have -- some of the brands have had e-commerce experience in other platforms before, and now we think that more and more brands are doing that. And in general, we think that the stores are more experienced in terms of doing orders, shipping orders and getting customers their answers. But I think that both brands and the stores will grow very nicely on Dangdang platform.

Operator

Your next question comes from the line of Long Lin from Brean Capital.

Long Lin - Brean Capital LLC, Research Division

Can you give some color on the commission trend for the marketplace business? What is the average commission rate for your major categories? Also, could you comment on the competitive dynamics in the marketplace sector right now? Any color on that will be helpful.

Yu Yu Peggy

The commission rate of our marketplace varies. For low-margin business, things like maybe mobile phone, which has as little as 0, 5% [ph] of commissions. And for some of the apparel or bag or fashion accessory things, we charge more than 10%. So I think that we go along with what the industry really charges. Because I think, in the long run, it's the industry that dictates how much they are willing to give to a certain channel. So we go along with the industry trends. At the same time, we offer our merchants attractive rates so that they sign on Dangdang platform and so they begin to sell on Dangdang. And Dangdang relative to other channel is a more cost-efficient channel for them, so that's about the commission rate. And in terms of the dynamics, let me go back to -- let me talk about the positioning. I think each store has its own positioning. Some stores cater to more mature audience and some stores cater to maybe teenagers. As a store, Dangdang caters to medium- to high-end customers with higher-than-average education level and larger wallet size and they tend to live in top 20 cities. So going along with this Dangdang positioning, we decide what categories and inside what categories, what kind of merchants and products we bring along to them. So it's not really the competition decides what company to bring what category. It's more of a customer accumulation, our customer base, our customer targeting decides what we do in terms of the assortment we put in different categories and what we do with destination category, what we do with convenience category and what we do with other type of category.

Long Lin - Brean Capital LLC, Research Division

Okay, that's very helpful. Just a follow-up on the commission trend. Can you provide some insights on the industry -- you were talking about the industry average. Do you have any insights on the industry average for the commission in the marketplace? Like the ones...

Yu Yu Peggy

As I said, the different types of category has different -- for instance, in department store, the markup for clothes is very high. And so we take a significant discount from what department store charges to merchants. We also look at what other companies, online companies, are charging merchants. Then, we look at it, we take a reasonable pricing. That's how we do it. To also get back to your question about -- to get back on my comments on the positioning. I also want to say, because of customer targeting, we are very, very selective as to what kind of stores or brands we invite to Dangdang to ensure that our mid to -- medium- to high-end customers are satisfied. We are very selective. And there are certain brands and stores that want to open on Dangdang, we don't accept them because we want to make sure that the service quality, the packaging and everything are in line with Dangdang's self-procurement or what Dangdang customers historically get. Because I think the advantage of a company like Dangdang getting to marketplace is to use the high service standards that our customers are used to have to stretch that into the marketplace program.

Long Lin - Brean Capital LLC, Research Division

Okay, that's very helpful. So what percentage of your merchants use your fulfillment services?

Zou Jun

At this stage, around 40% -- 50% of our merchants use our COD service, which means cash on delivery. And we are starting to roll off fulfillment by Dangdang service, which means you help them to manage their warehousing. We can ship a pack. But this is at a very early stage. It could be a future growth area, but at this stage, it's still very insignificant.

Operator

And next question comes from the line of Maria Xin [ph] from China Renaissance.

Unknown Analyst

I have 2 questions. Firstly, how about the management's expectations of the book market growth in China for the next couple of years? It's a question on how about the growth potential for this category for Dangdang and competition landscape for books recently. This is my first question. And I have one question -- follow-up.

Yu Yu Peggy

The media and/or book market itself in China continues to grow, but at a low rate. And I'm very happy that Dangdang maintained its dominant market share position with the media segment. And with different players getting in and out of book segment, Dangdang's holding a large percentage of all books sold in China remain very, very strong. And our quarterly growth rate in the second quarter of this year was 22%. Given the fact that Dangdang is the largest store of books in China and the book itself is not a hyper-growth segment, we think that this growth rate is very good, and we look forward to deliver strong performance in our book segment going forward.

Zou Jun

And also, Maria, just one thing to add is that during the last quarter, we do see that while we maintained a healthy growth in books and media sector, some of the competitors' growth rate had dropped quite significantly compared to their previous performance.

Unknown Analyst

Okay. And second, how about the new customer acquisition cost trend in the second half of this year? And how about Dangdang's marketing strategy in the second half? And so given the customer acquisition cost of about RMB 30 per customer in this quarter, which is a little bit higher than last quarter, so how about the trend in the second half?

Zou Jun

Yes. As I mentioned previously, the customer acquisition cost in books and media sector actually declined in the second quarter. So we continue to see our scale will help us in book and media. Now we actually gradually do have increasing sales from general merchandise, in particular books -- sorry, general...

Yu Yu Peggy

Apparel.

Zou Jun

Apparel and fashion. Now we think it's a worthwhile to invest marketing dollars in the higher-margin business. But still it's going to be seasonal, so we don't see sort of like set pattern for our spending at this stage yet.

Yu Yu Peggy

Yes, because in the second quarter, if you look at Dangdang's marketing spending, we spent, like, very large sum of money in branding and the TV advertising. And this is branding and marketing effort to promote Dangdang general merchandise and the Dangdang apparel and fashion business. And in Dangdang's calculation of customer acquisition cost, we put total marketing spending and divide by the number of customers. And because of this very high seasonal spending in marketing, we see this increase of customer acquisition cost for RMB 30.

Operator

Now ladies and gentlemen, we have come to the end of the Q&A session. And I would now like to hand the conference back to Mr. Jun Zuo for his closing remarks.

Zou Jun

Ladies and gentlemen, thank you for joining us here tonight. And that concludes the E-commerce China Dangdang Second Quarter 2013 Earnings Call. I wish you have a good evening or good morning. Thank you very much.

Operator

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

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