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E-Commerce China Dangdang (NYSE:DANG)

Q3 2013 Earnings Call

November 14, 2013 7:00 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

Li Guoqing - Co-Founder, Chief Executive Officer, Director and Chief Executive Officer of Beijing Dangdang Information Technology Co Ltd

Analysts

Dick Wei - Crédit Suisse AG, Research Division

Binnie Wong - BofA Merrill Lynch, Research Division

Jiong Shao - Macquarie Research

Thomas Chong - BOCI Research Limited

Chi Tsang - HSBC, Research Division

Philip Wan - Morgan Stanley, Research Division

Andrew Marok - Cowen and Company, LLC, Research Division

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

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

Alex Yao - JP Morgan Chase & Co, Research Division

Alicia Yap - Barclays Capital, Research Division

Operator

Hello, ladies and gentlemen. This is Shu Wei [ph]. I will be your operator for this conference call. I would like to welcome everyone to the E-Commerce China Dangdang Third Quarter 2013 Earnings Conference Call. [Operator Instructions] I must advise that this conference is being recorded today, Thursday, the 14th of November, 2013.

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 third quarter 2013 earnings call. With me today are Peggy Yu Yu, Executive Chairwoman; and Jun Zou, 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 and good evening, everyone. During the third quarter of 2013, we made a meaningful improvement to our bottom line by moving certain low margin general merchandise from self-procurement to the marketplace and achieving better operating efficiency. While this impacts our topline growth, the end result was the increase in gross margin and the best bottom line performance since the second quarter of 2011. Dangdang's net loss margin for the third quarter narrowed to 1.8% from 7.8% a year ago. We continue to enjoy our leadership position in the online growth for media market, achieving sales growth of 23% year-over-year. Our marketplace delivered another quarter of strong performance and growth.

Marketplace general merchandise value rose 184% year-over-year, faster than our expectations. Combined general merchandise sales from both principal and marketplace surpassed those of books for media for the fourth consecutive quarter, an increase of 88% year-over-year. Fashion and apparel performed very well, accounting for nearly half of the marketplace GMV, and growing at a faster rate than the overall marketplace.

We increased the number of products available to provide our customers with a growing assortment of quality brand-name goods across multiple categories. We are closer to achieving our goal of transforming Dangdang from an online bookstore into integrated online shopping mall, targeting mid- to high-end customers.

Let me update you on some other key operational achievements. In fulfillment, we enjoyed operating leverage and benefited from more efficient operations. We enhanced our warehouse operations and upgraded our warehouse management on the quality control systems. As added convenience for our customers, we have given them the option of shortening delivery time by shipping packages separately or waiting for their entire order to be consolidated and is shipped from one central location. The end result of this upgrade was a reduction in fulfillment cost per order to about RMB 11, which we believe is one of the lowest in the industry. We also saw quarter-over-quarter and year-over-year improvement in inventory turnover.

We continue to invest in marketing activities to build awareness of the Dangdang brand and to support our transformation from a online bookstore into integrated shopping mall for mid- to high-end customers. We conducted online advertising as well as off-line campaigns. We recently hosted a fashion show designed to promote Dangdang's apparel and to showcase our platform as an online fashion shopping mall. Dangdang acquired close to 2.9 million new customers in the third quarter, and this is a record number for us.

With strong increases in both order size and contribution per customer, Dangdang is strengthening our capacity to acquire customers at a low cost, retain them with our broader product selection and grow our business in a very healthy manner.

We made a number of enhancements in technology this quarter. We refined our personalized recommendation system and have streamlined our customer review function. We also augmented the platform with features that make it easier for merchants to achieve -- to service their customers on a real-time basis, such as instant messaging.

In summary, in the third quarter of 2013, we are closer to our goal of transforming our company into an integrated online shopping mall. We generated another quarter of solid revenue growth, enhanced gross margins and operational improvements, that yield our best financial performance since the second quarter of 2011.

Going forward, we plan to better utilize our customer base by developing strategies to tap into their purchasing power through cross-category sales and enhancements to the overall customer experience. In the near term, we will seek to balance revenue growth and bottom line performance.

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

Zou Jun

Thank you, Peggy. Ladies and gentlemen, I would like to discuss with you the third quarter results in more details. Our total net revenues reached RMB 1.53 billion in the third quarter of 2013, a year-over-year increase of 19%. Okay, and media product revenue was RMB 1.05 billion, which was up 23% on a year-over-year basis. General merchandise revenue was RMB 422 million, up 6% year-over-year. Other revenue, which is commission-based net revenue mainly from marketplace, was RMB 58 million, a year-over-year increase of 44%.

At the end of the third quarter, we continue to strategically adjust the certain general merchandise categories between self-procurement and the marketplace. This quarter, we focus on transitioning lower margin product to the marketplace, which as Peggy noted, resulting in lower self-procurement sales growth, but contributed favorably to our gross margin. We'll continue to adjust our general merchandise categories going forward, as we believe there is still more room for margin improvement.

Meanwhile, GMV of the marketplace in third quarter was RMB 970 million, up 184% year-over-year, above our guidance of 165% gross. On a consolidated basis, our overall general merchandise sales, combining both self-procurement and the marketplace, grew at 88% year-over-year, compared to 86% growth in the second quarter of this year, and exceeded books and media product sales for the fourth consecutive quarter, demonstrating our continued success for execution in transforming our company from an online bookstore into an integrated online shopping mall.

Now we grew the number of new customers by 19% year-over-year to approximately 2.9 million. Active customers increased 21% year-over-year to around 8.4 million. The average contribution per customer grew 24 -- 27% to RMB 289, up from RMB 227 in the same period last year. Total orders in the third quarter were approximately 15.7 million, up 13% year-over-year.

Now gross margin was 17.6% in the third quarter, an increase from 15.2% in the third quarter of last year, and an increase of 50 basis points from the second quarter of this year. The year-over-year increase resulted from the strong gross margin contributions from books and media and the growth in other revenues, representing the sustained scaling of our marketplace business.

Now gross profit was RMB 268.4 million, a year-over-year increase of 36.8% and a quarter-over-quarter increase of 5%. Fulfillment expense in the third quarter, which includes warehouse and the shipping expenses were RMB 179 million, down significantly from last year.

Fulfillment expense were 11.7% of total net revenue in the third quarter, compared to 14.4% in the same period last year and 12% a quarter before. The year-over-year and quarter-over-quarter decrease in fulfillment expenses as a percentage of revenue was primarily due to economy of scale, more efficient warehousing management and the lower shipping costs.

Marketing expenses were RMB 58 million, representing 3.8% of total net revenues, compared to 3.6% in the third quarter of 2012, and 5.1% in the second quarter of 2013. The year-over-year increase in the marketing expenses as a percentage of revenue was primarily due to increased investments in online marketing programs, to build awareness of our fashion apparel business. The quarter-over-quarter decrease in marketing expense as a percent of revenue was due to reduction of off-line advertising, including television advertising. But in the meantime, our data mining and target marketing programs generated strong growth in new customers at a much lower acquisition cost.

Technology and content expenses were RMB 44.6 million, which was 2.9% of our total net revenue, compared to 3.2% in the third quarter of last year, and 3.1% in the second quarter of this year. The decrease in technology and content expenses as a percentage of revenue was primarily due to our operating leverage.

Now G&A expenses were RMB 36 million, which represent a 2.4% of our revenue, compared to 2.6% in corresponding quarter last year. The decrease in G&A expenses as a percentage of revenue was primarily due to larger scale and improved management efficiency.

Share-based compensation, which were allocated to related expense lines, were RMB 2.7 million in the third quarter, compared to RMB 2.8 million in the third quarter of last year.

Net loss was RMB 27.9 million, compared to a loss of RMB 100 million and RMB 64 million in the third quarter of last year and the second quarter of this year, respectively, primarily due to a strong execution on margin expansion on operating efficiency.

Net margin was a negative 1.8%, narrowed from a negative 7.8% in the third quarter a year ago, and a negative 4.3% in the second quarter of this year, which represents the improving margin for the fifth quarter in a row and the best since the second quarter of 2011, demonstrating management's determination and commitment to improve our financials.

Now moving to the balance sheet. As of September 30, 2013, our cash and equivalents, short-term time deposits and held-to-maturity investments totaled to RMB 1.43 billion, as compared to RMB 1.63 billion, including RMB 709 million of restricted cash at the end of last year. Meanwhile, short-term bank loans decreased from RMB 6 million as end of last year and RMB 200 million as -- in the third quarter of last year to 0 at the end of this quarter.

Additionally, we generated RMB 158 million operating cash flow in the third quarter, improved from a negative RMB 106 million in the same period last year, reflecting narrow net loss and a better working capital management.

Turnover days for accounts receivable were 4.3 days in the third quarter of this year, compared to 4.9 days in the corresponding period last year, due to improved payment terms for our advertising business. Turnover days for inventory in the third quarter of 2013 were 101 days, a reduction of 33 days as compared to 134 days in the third quarter of last year, due to improved inventory management, better product selection and a clear result of aging general merchandise inventory.

Now turnover days for accounts payable were 145 days in the third quarter of this year, 12 days shorter than the corresponding period in 2012. Capital expenditure for the third quarter of this year were RMB 16.9 million, including RMB 9.0 million in spending on Tianjin warehouse construction.

Finally, our outlook for the fourth quarter of 2013 is as follows. We expect total net revenue in the fourth quarter of 2013 to be around RMB 1,938,000,000, representing a year-over-year growth of around 20%. We also expect the GMV from our marketplace to grow at a rate of around 150%.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question from the line comes from Dick Wei from Crédit Suisse.

Dick Wei - Crédit Suisse AG, Research Division

I have 2 questions. First question is for the fourth quarter guidance, if you can give us some -- directionally, which of the subsegment is going to grow faster? So we get a sense of how each segment is going to trend next quarter. And secondly, as far as the marketing expense growth, I think that will, probably in this quarter, we probably had more of a normalized range around RMB 20 per new customer. I wonder what is the plan going forward as far as rating the number of new customer growth down the road as we are seeing better monetization on both the marketplace as well as the media side?

Zou Jun

Hey, Dick, thanks for your question. Well, according to your first question, I think in this fourth quarter of this year, we will see a strong growth in the books and media sector to continue and also in our marketplace business, we will continue to grow at a very strong pace. Now you understand that our general merchandise self-procurement business is still undergoing some necessary adjustment, so we will see probably some smooth, let's say, growth in this sector. But overall, I think we'll still maintain a reasonable and decent growth rate, maintain our leadership in our destination categories such as fashion, apparel and the books and media, while we continue to improve our financial.

Yu Yu Peggy

Yes. And let me address the marketing expense question, the second one. We spent about 3.8% of our sales in marketing and the -- our customer acquisition cost was about RMB 20 per customer. And going forward, we are going to continue to grow new customers, but both monetization of our existing customer base, particularly those from media segment to other categories is very important for us. We're seeing that we want Dangdang to grow in a very healthy manner, meaning that we'll have a lot of cross-category sales and we'll groom customers from one category to another. Since our number of active customers is very high, I think it's over 8 million, close to 9 million this quarter, and this is very good for a company like Dangdang. We should utilize that strength. So probably between driving growth from existing customers takes higher priority and the marketing expense will adjust accordingly.

Dick Wei - Crédit Suisse AG, Research Division

Peggy, I wonder is there any plans maybe to -- maybe further accelerate the growth as far as the new customer, as far as page view is concerned to our site? I mean, the site -- the visit to our site is one of the priority?

Yu Yu Peggy

In our growth strategy, one thing we want to do is we want make sure that we grow traffic slower than revenue. And because, that way, it means we're having better quality products. So customer acquisition pace and the traffic growth and everything will look at how much revenue we are growing and at what kind of expense ratio. So we would like to derive more sales dollar per click, per customer or per order. And that's the direction we head.

Operator

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

Binnie Wong - BofA Merrill Lynch, Research Division

On the marketplace performance, we noticed that the percentage of take rate, the other revenue as a percentage of the GMV on the marketplace is actually trending down again this quarter to 6%. So just wondering what are the reasons for the decline? And can we get a breakdown also -- what sort of the take rate include the commission and how much is it related to the fulfillment and advertising? And how should we see the trend going forward? And the second question is on the user traffic, how is it trending this quarter?

Zou Jun

Binnie, thank you for the questions. Yes, we actually, in this quarter, again recruited some new merchants to our platform and we offered promotionally, advertising rate. And this is the first reason why you see a decline in sort of like take rate. And number 2, we also started to adopt a progressive rebate, a progressive commission for top sellers on our platform. So this is the second reason. But overall, I think, still we see more than 50% of total, actually, other revenue coming from, let's say, the commission and the store rental. And the rest are coming from advertising and COD services for our merchants.

Binnie Wong - BofA Merrill Lynch, Research Division

And my second question is on the user traffic, how is it trending this quarter?

Zou Jun

User traffic, well, actually, I think in the third quarter, our average daily UV was 3.5 million per day and that's a 20% plus growth compared to -- actually 30% plus growth compared to same period last year I think. And roughly, I guess, again close to 40% of the traffic are from mobile.

Operator

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

Jiong Shao - Macquarie Research

Firstly, I just want to follow-up on the previous question on the take rate and your other revenue growth sort of you come [ph] to 91% Q2, 44% in Q3. You talked about there are similar reasons for the lower take rate in Q3. Could you talk about -- is the bottom? Can you expect a sort of snap back top? And the reason you had to offer promotions, et cetera, was that due to a competition or intense decline? Any additional color will be helpful.

Yu Yu Peggy

No. Not really. Some of the merchants are very new and some of them are transformed from off-line merchants, off-line retail stores to online. And we want to give those merchants adequate cycle time to begin to perform. And since our other revenue growth line, I think it's very healthy, so I think low rates during certain period of time or promotion activities are very good incentives for merchant customers to grow their business on Dangdang.

Jiong Shao - Macquarie Research

So, Peggy, do you think this rate of take rate is going to be here for a while or do you think actually it may go down further from here?

Yu Yu Peggy

It's very difficult actually to judge because it's a mix of sales, because the take rates from different types of merchants vary so drastically. 0 -- 5% for some consumer electronics and more than 10% for some apparel or maybe 12% for some shoe merchants. And given the availability of their products and how well they're using Dangdang traffic, their fluctuation and their performance are just quite new on Dangdang. So overall, I think with the monthly fluctuation of product mix performed by those merchants as a group, so I think we're going to see some fluctuations, but there is no, what you would term as a concern, as far as I look at it.

Jiong Shao - Macquarie Research

Okay. And the second question is more of the media. I think you talked about the fashion and apparel is about 50% of the marketplace GMV. Could you talk about the other major verticals and what are their rough mix for those verticals?

Yu Yu Peggy

Maternity and infants, another very major category for us. Dangdang traditionally had a very strong young mother following from the pregnancy or early childhood development media segment, and we probably have more than 1/3 of that segment in media. So from those customers, they brought with us very strong buying for maternity and the infants and the young baby borrowing from marketplace. And after that, we also see scattering around general merchandise, like bedding and home and lifestyle items and the consumer electronics.

Jiong Shao - Macquarie Research

Okay. And my last question is that, anything you can share with us on what you saw on November 11 and what kind of promotions you get, how that -- sort of what are you seeing post that event in terms of the sales of your products?

Yu Yu Peggy

You are talking about November 11? For a Single's Day event, we think it's very good for us. And our sales doubled and, more importantly, a very big difference from what we did last year was our customer experience was very good. Most of our parcels were shipped very quickly. And we took a count last night and we see that more than 50% of Dangdang customers got their parcels by last night, which is a whole lot better than some other e-commerce companies. So with this kind of, as I say, it's a 1-day sales event, and the production and the delivery network of Dangdang's team performed very well. And we think going forward, I like to see more of a, how do I say, normalized shopping behavior because this really created huge jam in web traffic, in boat traffic, in air traffic. And to give -- to truly give customers a very good shopping experience, I really believe in all year long good and satisfying shopping experience.

Zou Jun

And Jiong, and I would add some more color -- one more color to your first question. Usually, fourth quarter is always a peak season for advertising, so usually our merchants will actually put in more advertising dollar in the fourth quarter, so there will be seasonality, and this is what I imply.

Jiong Shao - Macquarie Research

Okay. I just want to have a quick follow-up on the Single's Day event. I assume they argue that the big sales on Single's Day is nothing but borrowing from the future. Could you talk about what did you see on the following 2 days? Did you see a sharp drop off in sales? Any kind of insight you can share with us will be great.

Yu Yu Peggy

For us, the Single's Day really jumped and for the following days and we see that shopping behavior normalized to our annual growth rate and nothing negative, all strong so forth. But I also saw on the news today that some e-commerce companies will ship parcels like 10 days after November 11 and that's going to result in a huge customer return. I think that's going to leave a bad taste in customer shopping experience as a group. So I like to see the whole industry to smooth things around.

Operator

[Operator Instructions] Your next question from the line comes from Thomas Chong from BOCI.

Thomas Chong - BOCI Research Limited

I have one question in terms of the mobile Internet. Can management share about how much of your GMV is coming from mobile and how much of your mobile traffic is coming from mobile, between that how much are coming from your apps and how much are coming from the website?

Zou Jun

Yes. At this quarter, I guess very close to 10%, almost 10% of total orders are coming from mobile. And within -- as I mentioned almost 40% of total traffic are coming from mobile in this quarter. The focus in this quarter is actually not to increase the percentage of traffic coming from mobile, but to increase the customer experience on mobile, increase conversion rate on mobile. So we added quite a few things, such as voice search function on mobile and personalize front page on mobile to improve user experience. And at this stage, of course, we still have more mobile traffic coming from WAP than app. And one thing we're doing in this quarter is actually, again, transitioning from WAP to app instead of just increase mobile traffic as a total number.

Operator

Your next question comes from Maria Sen [ph] from China Renaissance.

Unknown Analyst

My first question is regarding on how's the management view on China online book market growth in next year and what's the strategy on self-procurement general merchandise in next year? And my second question is, I am wondering if the management is concerned -- how about the pricing computation in the first quarter this year?

Yu Yu Peggy

The media segment for Dangdang grow -- Jun, can you remind me of the media segment growth?

Zou Jun

Yes. Actually...

Sophia Zhou

23%.

Yu Yu Peggy

Yes.

Zou Jun

Yes.

Yu Yu Peggy

I pretty much look at the rate for next year close to this, but somewhat slower. Dangdang's market share, I think, is average strong compared with other companies, but this is a highly penetrated market. So Dangdang will remain to be the leading market share leader of this segment. And so we think that what we saw this year is somewhat we're trying to do next year and we say high penetration rate somewhat slower. So that's the direction we're heading. And for self-procurement general merchandise, I think we are going to continue to see shifting between self-procurement and the marketplace. Given the supply chain reality, I think it's going to -- that's going to be the trend. For instance, someone was asking me the November 11 event. One of the important reasons that Dangdang's customer experience is so good during this event is for 2 things. One is, Dangdang's production capacity. We simply can just add our capacity a lot more efficient than a lot of other companies. So we can produce -- procure the parcels in a timely manner. And after that, for routing, Dangdang's customer model is multiple points to multiple customers. If someone from Guangzhou

Ordered -- if someone from Hubei ordered something from Guangzhou, the parcel can move around from Guangzhou maybe to another regional depot of Dangdang, like Wuhan, Chengdu or Beijing, then reroute to Hubei. So the Hubei customer has -- can have very fast shipping speed. But most other online companies, because their parcel can only move one-way from Guangzhou trying to reach Hubei, so Dangdang's regional depot, which is ready from the self-procurement capacity, a very helpful in giving customer very fast delivery and very good customer experience. So I think the shifting will come backwards -- forward and backward. There is no one single clear answer saying, "Marketplace is better or self procurement is better." It all depends the types of things and the supply chain and also who does a better job handling it.

Zou Jun

And Marriott to a question about pricing competition, I think in this quarter what we're seeing is much more rational compared to what we have seen last year.

Unknown Analyst

Okay. I have also a couple questions, how many margins at Dangdang's marketplace are using Dangdang's COD services?

Zou Jun

Actually, more than [indiscernible] offer merchant sign up for COD services. And within the apparel and the fashion sector, more than 85% of the merchants sign up.

Unknown Analyst

More than sorry?

Zou Jun

85%.

Unknown Analyst

85%. Okay.

Zou Jun

Yes, in the fashion, apparel segment.

Operator

Your next question from the line comes from Chi Tsang from HSBC.

Chi Tsang - HSBC, Research Division

I had a couple of questions. Just firstly, just in terms of the marketplace. I mean, that's growing very well and the guidance is also very strong, you're doing very well in apparel. I was wondering if you can give us a little bit more color, specifically as it relates to apparel. I mean, is it a lot of it coming from flash sales or sort of what are you -- why is your apparel sector doing so well within marketplace?

Yu Yu Peggy

I think, it's mostly because of customer attributes and Dangdang traditionally has a very strong female or feminine -- female shoppers. And compared with some other companies, our percentage of female shoppers are larger, and they also have, relatively speaking, more purchasing power. So I think that customer attribute is a very important reason. And secondly, I would say apparel itself is a huge -- is a kind of category that has a huge potential. And I think, it's probably 10 or even more times the size of media. So the addressable market for apparel is much larger. And among Dangdang's apparel segment, I see apparel targeted for young office ladies are stronger than what I saw for, say, male shoppers. So going forward, growing other subsegments inside apparel are very important for us, and having customers to buy online versus they buy from shopping mall offline is also very important for us.

Li Guoqing

And Chi, you're right, our flash sales segment are also growing at a very strong pace. And I think, it's not only generating more page views per user, but also in the order number coming from flash sales already contributed to more than 40% of total orders in the fashion and apparel segment.

Chi Tsang - HSBC, Research Division

What -- in terms of flash sales, what are you folks doing that's different from VIP shops?

Zou Jun

We actually use the marketplace model instead of, let's say, the VIP shop model that require suppliers to put inventory into their warehouses. This is a light model.

Chi Tsang - HSBC, Research Division

I see. And just my second question. You guys lost just $4 million in the quarter on a non-GAAP basis. And I'm wondering, given the dynamics of the fourth quarter for online shopping, you're guiding to a very nice Q-on-Q pickup in revenue. What might cause you not to reach breakeven in the fourth quarter?

Yu Yu Peggy

Trying to break even or make a profit in a given quarter, I think, is very tricky and is something that I try to avoid to do. And I think, grow our customer base, grow our revenue, at the same time, delivering growth margin and operational efficiency takes higher priority.

Operator

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

Philip Wan - Morgan Stanley, Research Division

My first question is about gross margin. Given the change in product mix, should we expect similar seasonality for gross margin going into 4Q? And then I have a follow-up.

Zou Jun

Well, again, right now, our focus is on improving on product mix and improving our strong position in both books and media and marketplace. And also, what you can see is that we are, given that we're continuing to adjust our, let's say, product selection in general merchandise, the margin has stabilized there as well. So we won't see a lot of fluctuation. I mean, generally speaking, we will focus on actually improving our financials.

Philip Wan - Morgan Stanley, Research Division

I mean, just to clarify, you mean improving in a sequential basis for 4Q gross margin?

Zou Jun

Well, for sure, improving on a year-over-year basis. And on a Q-on-Q basis...

Yu Yu Peggy

On a Q-on-Q basis, you always see some kind of fluctuation. And Jun, can you remind me of our GP...

Zou Jun

Last year?

Yu Yu Peggy

This year for the 3 quarters this year, and I think, it was about 7%, 7.6%...

Zou Jun

17.5%, 17.1% and 17.6%.

Philip Wan - Morgan Stanley, Research Division

Okay. And just to follow-up on your earlier remark about strategies to improve cross category sales. One thing, if you could elaborate a little bit more on this, what are you going to do differently as you have done before?

Zou Jun

Well, I guess, in the past, what we have done is cross-sell. When customers come to our website, we'll tell them that we have other things that you may want. We'll say maybe a view of maybe book or maybe products, we may tell them that we have many products, but what we have been doing recently is that we start to actually push message or sending different messages to those people that have bought books before that we are now selling other things that you may want. And we also start to build up brand awareness so that our target customers know that they come to Dangdang for products other than books and media. They come for fashion apparel, they come for their maternity instead of how to sell after they come to this house.

Yu Yu Peggy

And it's also very obvious from our website and or our app site, if you log on, you probably see more apparel baby products than you'll see a movie, a CD or a book, that's another way of redirecting our customers or sort of readdressing their attention in a different manner with product assortment. Another thing that we want to do is we are keeping to increase number of merchants on our marketplace. We believe, with more merchants in more regions and with broader selection, there's something out there for different people and that's another way to give our customer broader product availability and increased cross-selling.

Operator

Your next question from the line comes from Kevin Kopelman from Cowen Group.

Andrew Marok - Cowen and Company, LLC, Research Division

This is Andrew Marok on for Kevin. I was wondering if you guys are seeing any difference in the competitive environment in mobile versus desktop? And was just wondering how you are seeing -- how you saw the macro environment in Q3 and what you're seeing into Q4?

Zou Jun

Well, of course, I guess, most of the e-commerce companies are enhancing their apps on mobile, but up until now, I think, we are one of the leading mobile platform in terms of traffic coming from mobile or business coming from mobile. And now, we have been running the business for 14 years, and we have collected a lot of customer demographic data and user behavior data, which help us to do data mining, which help us, as I mentioned, to provide such product as a personalized front page, personalized recommendation. And also, our user base are those book readers tend to be better educated with higher than medium income in China, white collar, and they tend to have more smartphones or more high-end terminals, which also help us, our users, to actually get used to mobile commerce, ahead of some of other players in China.

Yu Yu Peggy

I also noticed something in the last quarter or more recently. I don't have any hard data on it, but I have seen very good positive customer appraise or reviews on the Weixin payment and this is very young and the customers are saying really glorifying things about how Weixin payment is easy to use and it saves a lot of clicks. So I think that with a better mobile payment provided both by companies like Tencent or merchant bank and to be used by companies like Dangdang, shopping experience and the payment option, payment easiness for our customers will improve in general.

Andrew Marok - Cowen and Company, LLC, Research Division

Got it. And are you seeing any -- anything you're seeing in terms of trends in average order size or purchase habits on mobile?

Zou Jun

Well, actually, of course, purchase order size are smaller on mobile than on fixed line because of maybe people are using more fragmented time. But overall, our revenue per order actually increased to 155 compared to 114 a year ago. So overall, on mobile, we see the same trend as well. And you also ask about, I guess, macro in Q4 and Q3, what we've been seeing is, of course, maybe the offline retailers have seen some impact from the overall economic growth, but we see the offline to online transition are accelerating in China. So yes, it's, generally speaking, good for e-commerce in China.

Operator

Your next question from the line comes from Andy Yeung from Oppenheimer.

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

I just have a couple of quick questions. One is can you just follow-up on the mobile user behaviors? Have you guys seen the mobile users have different purchase preferences in term of the type of merchandising that they purchase and the time when they use the mobile device to make among purchases? And I have a follow-up question.

Yu Yu Peggy

I don't see any particular difference from types of products they buy online versus mobile. But for mobile, the access service feature is a lot more frequent than they access product and other things. They access self-help and our customer service department with their mobile, I think, probably that's because they're using their time to wait for elevator or the time they're stuck in the subway to finish those kind of boring chores. So other than mobile user, service use are very heavy. I don't see other sort of major shifting from types of simplified mobile versus desktop. Jun, do you have anything to add?

Zou Jun

Yes, sometimes, when they buy big ticket items such as TV or cellphone, electronic items, they may use mobile to compare a price instead of placing an order, but that should have limited impact to us because we don't sell much of those kind of products. Most of our products are actually different from those products. So yes, Peggy was right, we don't see much different behavior for us.

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

Okay. Got it. And then, my follow-up question is also for mobile. So for your mobile device right now, how -- what's your way of distributing your applications to the consumers and have you seen the distribution cost for mobile applications going down recently?

Zou Jun

Well, we actually see a lot of the mobile app traffic are organic traffic and the percentage is quite high. And other than those organic traffic, we work with a lot of affiliated marketing sites to -- which should help us distribute our applications. We also, of course, work with the normal [indiscernible] such as app stores, all the browsers and so forth. But overall, yes, organic installation are quite high.

Yu Yu Peggy

Yes. We pretty much rely heavily on organic growth from our mobile users because we believe in the very strong product selection and the competitive pricing that Dangdang offers. So I think that Dangdang's service and product price and quality really hold water. And customers, whether they use mobile to access, they become from a mobile users to a desktop user or desktop user to mobile user, and they are familiar with Dangdang, and marketing and other things, we try to utilize combined or integrated sort of approach to target customers that is good for Dangdang and don't really spend very heavily one channel versus another channel.

Operator

Your next question from the line comes from Hou Tian form TH Capital.

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

I have a question related to your pre-announcement. So you preannounced, and the reason you preannounced because you suspend some low-margin, self-procured product. So I wonder, what is the margin per sale on those low-margin goods? And after you get rid of them or you suspend them, how much could that help you in terms of your growth margin? So when the positive impact could kick in, in your business? So that's my number 1 question. And the number 2 question, I wonder, your expenses lines, and where could we look for room for further margin expansion? That's the 2 questions.

Yu Yu Peggy

Yes, our revenue was probably RMB 62 million short of our guidance, which was -- what's the percentage for? 4%, 3%?

Zou Jun

4%, yes.

Yu Yu Peggy

Yes, 4% less than the guidance we gave before. And it is indeed caused by the low margins. And in terms of how low it is, I would say it's very low single-digit. And when we decide not to make those sales, we pretty much made a business decision based on the fact that we are for sure lose money on those given types of products. And so rather than sacrificing our bottom line, we'd rather forego those RMB 62 million -- or RMB 60 million in sales, so that's a decision we made. I'm not very sure as a percentage it helps in bottom line because when we made that decision, we pretty much look at the incremental costs versus incremental margin contributions and we just decide, okay, we're not going to make those sales and then we move forward. Then your second question, you talk about margin improvements or expense control. For margin improvements, I think, with a marketplace increasing and also our general merchandise margin restoring, so I think the product margin itself will improve in the general direction and if you talk about expense ratio, I think that we have somewhat kind of [indiscernible] types of expense category, G&A or logistic.

Zou Jun

Tian, just give you a few more sort of color. I think, in T&C and G&A, we'll continue to, of course, achieve operating leverage. In fulfillment, basically, the increase in revenue size or order size will naturally help us see a lower percentage of fulfillment and marketing expense. And then, we continue to improve our efficiency in terms of fulfillment operation. For example, in this quarter, we rolled out a function that allow users to choose the combined orders, which will help -- not only help improve user experience, but also help us reduce delivery cost. We also actually optimize our warehouse operation in the middle of the quarter. Now we used to have pick, inspect and pack, 3 links, in the warehouse operation. Now we cut that down to 2. We now have only actually pick and inspect, the inspect will also do the packing. So there are always rooms for us to continue to improve different part of our operations.

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

Okay. That's very helpful. So I also have one small question, which is in terms of the book business. So now, people more and more they are using mobile devices to do the reading, and I know you have a reader or your reading machine. So I wonder what's the change between the book reading and the machine reading, so from your end, what do you see?

Yu Yu Peggy

From our end, we see the number of people really what you call the machine reading increasing, but very comforting phenomena we've been seeing for over a year is the download of digital reading on Dangdang has helped us to get even higher market share for books -- for paper book sales. I think people are doing the cross-reading between machine reading and the paper reading, and the 1 device remind them of another. So for us, we're actually seeing the digital content has been very helpful to our paper book sales.

Operator

Your next question from the line comes from Alex Yao from JPMorgan.

Alex Yao - JP Morgan Chase & Co, Research Division

My first question is on the normalized margin -- I'll look into the medium to longer term, how do you guys think about the normalized margin. I guess, the key variable is how do you think about the revenue mix between marketplace model versus the self procurement model? Any thoughts would be helpful.

Yu Yu Peggy

Before this crazy pricing war or selling below procurement cost craziness start, Dangdang's gross margin was like 20%, 21%, so that's a direction, we are trying to move as a general trend. And with a different mix of revenue between self procurement and the marketplace. I think, it's a very different accounting method and for self -- for marketplace, we only record the commission we get from the merchants. So I think that like a very big, how do I say, add-on to the margin lines and maybe you can elaborate more on this.

Zou Jun

Sure, I guess. At this stage, of course, you can see that our marketplace are growing at a much faster pace than books and media. And probably in the near future, we'll continue to see this kind of growth. As Peggy mentioned, since we book only a net revenue, and right now, it contributes less than 4% of our revenue. But in terms of total transaction value, in this quarter, it's already close to 40%, it's 39.6% of our total GMV, and it's continue to growing. We don't see there -- there's is a lot of headroom for us to continue to grow.

Alex Yao - JP Morgan Chase & Co, Research Division

So 4% of the total revenue from this marketplace model, that will translate to 4% margin improvements, right?

Zou Jun

Roughly, yes. Gross margin improvement, yes.

Alex Yao - JP Morgan Chase & Co, Research Division

Okay. I see. Second question is on the previous comments on Weixin payments. What kind of a unique value does a Weixin payment offer you guys? Is it more than on the PC side or is it on the mobile side, compared to other available payment channels, such as Optipay or online banking? What is the unique value that they can offer? And I don't know if you guys can share with us the percentage of transaction that is completed by a Weixin payment.

Yu Yu Peggy

It's very early and Weixin payment is very young because I follow customer reviews and customer feedback very closely so I saw the qualitative appraisal or qualitative good things customers are saying about Weixin payment. They say it is a lot easier than other types of online payment. And they say that it's very smooth and takes them less steps to complete. Given how Web-spread Weixin is, I think, that's another feature that online customer, online shoppers will enjoy going forward. But I think, given how young this Weixin payment is, it's difficult to come up with a percentage, I don't even look at a percentage. I read customer reviews and they're saying very, very good things about it.

Alex Yao - JP Morgan Chase & Co, Research Division

Got it. For you guys, is it economically more better to use a Weixin payment or use the other channels?

Zou Jun

Actually, I think, WeChat, as Peggy mentioned, is just starting. And the fee WeChat charges basically are very similar to what Tenpay would charge. And there are other functions, express payments, check -- express checkout functions like WeChat, but it's just Weixin is so widely spread, our people are more used or more comfortable using it, but overall, I think, it's quickly picking up, but it's only like 3, 2 months down the road, it's less than 0.5% of our total, let's say, orders.

Operator

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

Alicia Yap - Barclays Capital, Research Division

I have a question on your other revenue line. So I think your marketplace GMV actually grew about 184% year-over-year versus the second quarter it was only 178%. But I think the revenue that you book on the other revenue lines are 3Q is actually lower than 2Q. So I just wanted to understand what are the reasons? Is it because the commission rate change or lower or is it because of a change of the advertising revenue contribution?

Yu Yu Peggy

A lot of it comes from the fact that we're adding a lot of new merchant customers. And as we expand and we are getting new merchant customers into our marketplace, and for those new customers, we give them promotional period and we also give them some other incentives, so that they like to open their shop on Dangdang, and as they see their revenue growth before they incur a lot significant costs. So I think it has something to do with the faces of how mature the customers -- the merchant customers are on Dangdang's marketplace. So I think that's the main reason for the quarterly fluctuation. Jun, do you have anything to add on?

Zou Jun

Alicia, as we mentioned at the beginning of the call, we also introduced progressive commission rate for some of the top sellers, the commission rate of progress, the more you sell, the lower your commission rate. And for some certain large stores that enter into our platform, we may also give introductory reduced store rental fee and those are some of the reasons, yes. But basically, as Peggy have mentioned, it's more like we help those new entrants to pick up their business quickly on our platform and get a decent ROI from beginning.

Alicia Yap - Barclays Capital, Research Division

I see. And then, so how should we look at this line given your guidance for 4Q is about 150% increase? And if some of this trend also continue given that you're probably attracting a lot more new merchants as well?

Zou Jun

I discussed this question also in earlier session. We believe fourth quarter usually is a seasonally good quarter for our peak season for advertising in China. So usually, in the quarter, we'll see higher investment in advertising from our merchants, but that's of course the normal trend.

Alicia Yap - Barclays Capital, Research Division

And then, just to follow-up on this 4Q seasonally strong quarter. I apologize if I missed it earlier. But I wanted to ask, in terms of the sales and marketing spend, so how should we actually expect the spend to be trending in the fourth quarter, given it's a heavy promotion period? And what should we be looking at in terms of percentage of sales because I think, previously, 4Q has been a little bit higher?

Zou Jun

Actually, Peggy talked about this earlier and we are pursuing a balanced growth in terms of customer number, as well as revenue per order. And what we are seeing is that we already have [indiscernible] of 2.9 million new customers in the third quarter. Revenue per also grow to 155 compared to 114 a year ago, which means we will not like spend money relentlessly just to pursue new customers. We're going to pursue both customer growth at a reasonable rate, as well as a bigger basket size from every customer. And we do not expect actually like extraordinary heavy spending in this quarter.

Operator

We have come to the end of the question-and-answer session. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

Zou Jun

Thank you.

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