LightInTheBox's CEO Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: LightInTheBox Holding Co., Ltd. (LITB)
by: SA Transcripts

Operator

Good morning, everyone, and welcome to the Q4 2013 Earnings Conference Call for LightInTheBox Holding Company, Ltd. Today’s conference is being recorded. At this time I would like to turn the call over to Ms. Margaret Shi, IR Manager of the LightInTheBox for opening remarks and introductions. Please go ahead, ma’am.

Margaret Shi

Thank you, Operator. Hello everyone and welcome to LightInTheBox Q4 2013 Earnings Conference Call. The company’s Q4 earnings results were released earlier today and are available on our company’s IR website as well as on newswire services.

Today you will hear from our Chairman and CEO Mr. Alan Guo who will give an overview of the company’s strategies and recent developments, followed by our President Mark Stabingas who will address financial results in more detail. We are also joined here today by Jennifer Hu, our Acting Chief Financial Officer.

Before we proceed I would like to remind you of our Safe Harbor statements. Please note that the discussion today may contain certain forward-looking statements made under the Safe Harbor Provisions of the US Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. To understand the factors that could cause results to materially differ from those in the forward-looking statements please refer to our prospectus filed with the Securities and Exchange Commission on June 6, 2013. We do not assume any obligation to update any forward-looking statements except as required under applicable law.

At this point I would like to turn the call over to LightInTheBox’s Chairman and CEO Mr. Alan Guo. Alan, please go ahead.

Alan Guo

Thanks, Margaret. Welcome everyone to the LightInTheBox Q4 2013 Earnings Call. Before we comment on the results of the quarter I want to take this opportunity to review how we think about our mission and strategy.

We are building a global, cross-border e-commerce platform. Cross-border e-commerce is one of the fastest growing segments within e-commerce as technology is making it easier and more cost effective to reach and serve consumers on a global basis from anywhere.

According to our research, China-based cross-border online retail is expected to grow to a $9 billion segment by 2015. It’s still incredibly early for global cross-border e-commerce and for us as a company.

We think about our business model in terms of a series of platform capabilities that allow us to serve our global consumers in a fashion that is authentic and native to each one of them. The most significant components, including supply chain management, through which we can integrate suppliers and manufacturers and give them access to markets they otherwise may not be able to reach; our procurement and transportation management capability through which we can deliver products to our consumers and our localization capabilities through which we manage our product catalog and translate content into 27 languages, and offer native-speaking customer services in those languages.

We also employ local merchandising and promotion strategies and enable the most popular local payment options. Localization also includes the ability to connect our supply chain to consumers through mobile services. Our mobile revenue has tripled on an annual basis, growing at more than 5x the rate of our desktop business.

Finally we have built Demand Discovery, an online marketing platform that enables us to spur local product trends and acquire customers globally while also making keyword feeding across categories and languages through big data.

Through each of these services we are intensely data-driven and are leveraging technology to manage complexity in global e-commerce and identify opportunities. Most of this technology is proprietary and has been built by our Engineering Team to suit particularly to our own business needs.

As you know, we began leveraging this platform on behalf of manufacturers and suppliers based in China, and that continued to be our primary focus in the near term. Today we have shipped to over 200 countries and regions. As we develop we expect to focus on additional manufacturers and supplier bases in additional geographies.

During 2013 we added approximately 500,000 items in our catalog and continued to onboard over 40,000 each month. Our onboarding and management tools continue to improve and we are investing heavily in this area.

During 2013 we signed an agreement with additional logistics providers in the United States to expand our transportation and fulfillment capability in-country. This allows us to offer a better customer experience and reduce shipping costs. We expect to open a facility in Europe in the first half of the year and South America before the year end.

As our business scales we envision a small number of regional hubs serving key regions. Additionally we continue to grow our virtual company strategy to allow us to serve markets in a more authentic, local fashion through employees or partner workers in their home countries.

We also announced our acquisition of the US-based social e-commerce startup Ador, our first acquisition since our IPO nine months ago. Through this acquisition we welcome Mark Stabingas as our President and Quinten Shay as our Senior Vice President of Operations. Both of these e-commerce veterans, formerly with Amazon.com, will lead key areas of our business and are great additions to the team.

With this acquisition we have established our US headquarters in Seattle – this brings us closer to our North American customers and allows us to attract talents and disciplines outside China.

Lastly, I want to comment on our success in mobile. Mobile has really changed the way our customers around the world shop and pay for our products and we are pleased to experience continued growth from mobile revenue in both absolute dollars and revenue percentage terms through our LightInTheBox and many mobile applications.

In addition we have also launched our dedicated wedding planning app called InTime on IOS platforms during Q4. As we touched on last quarter, InTime is our first initiative in mobile apps designed for global markets in virtual categories. As we integrate the Ador team, our Beijing and Seattle teams are working together to introduce new features and capabilities to bring worldwide wedding planners and brides-to-be onto the next version of our wedding planning platform.

On that note I will now turn the call to our President Mark Stabingas, who will take you through our financials for Q4 and the full-year of 2013.

Mark Stabingas

Thanks, Alan, and thanks to everybody for joining us on the call. I’m excited to be participating in my first earnings call for LightInTheBox and look forward to meeting many of you and getting to know you in the coming weeks and months.

Before we get into the results, just a reminder that all percentage changes that we refer to are year-over-year changes unless otherwise noted.

As we indicated in the release, net revenues increased 21.6% to $78.8 million for Q4 2013, and increased by 46.2% to $292.4 million for the full year 2013. The quarterly performance was just above our guidance and that was driven by better-than-expected performance from our apparel category and the contribution of our mobile commerce business as Alan referenced.

Total orders grew 61.5% to 2 million in the quarter while average order size declined based principally on changes in our product mix. Total number of customers purchasing in the quarter was up 42% to 1.6 million while repeat customer orders accounted for 37% of total revenue compared to 28% in the same quarter of 2012.

Apparel category revenue grew 13% year-over-year to $21.1 million in Q4 and represented a good first step in putting that segment of our business back on its growth trajectory. We continued to work through some softness in the wedding business in the quarter, but that was offset by our success in expanding product offerings with ready-to-wear fashion products.

We do expect our wedding business to grow sequentially in Q1 based on improvements to our product mix where we’ve added over 2500 new designs in the last six months of the year compared to 1500 in the prior period. And in addition to that we’ve made some pricing adjustments in areas where we needed to be more competitive. As a percentage of total revenue apparel revenue was 26.8% in Q4 2013 compared to 27.8% in the same quarter of 2012.

Revenues generated from electronics and other general merchandise increased by 25.1% to $57.7 million in Q4 2013. We’re seeing significant growth in particular in mobile accessories and are optimistic about extending that offering both in terms of products and geographies.

Geographically, Europe remained our largest market with revenues of $51.4 million, representing an increase of 27.7%. As a percentage of total revenues, revenues in Europe were 65.3%, up from 62.2% in the same quarter of 2012.

Revenues in South America increased by 25.3% to $6.3 million in the quarter and constituted 8.0% of total revenues, while in North America revenues were $13.1 million, up 8.6% year-over-year – and that represented 16.7% of total revenue for the quarter.

Q4 gross profit was $30.8 million, representing an increase of 12.3% from $27.4 million in the same quarter in the prior year; and for the full year gross profit was $127.2 million, representing an increase of 52.2% from 2012.

Gross margin decreased to 39.1% of revenues from 42.3% in the same quarter of 2012. The decrease was due in large part to the change in product mix within apparel, although on a full-year basis our gross margin was up to 43.5% from 41.8% as the shifts that we saw, we didn’t see until the second half of the year.

Total operating expenses in Q4 2013 increased 43.9% to $36.9 million. Fulfillment expenses increased 48.2% to $4.7 million from $3.2 million in Q4 2012 which primarily reflected increases in sales volume and the number of orders that we fulfilled. As a percentage of total net revenues fulfillment expenses increased to 6.0% in the quarter from 4.9% in the same quarter in 2012 and that increase was a result of expansion of our fulfillment facilities in China. And just as a reminder fulfillment expense does also include our payment processing fees.

Selling and marketing expenses increased 59% to $24.7 million from $15.4 million in Q4 2012 reflecting our efforts to grow our customer base. Investments that we made in marketing and related infrastructure helped increase the number of customers served by 42% and the number of orders by 61.5% in the quarter versus the same period prior year.

As a percentage of total net revenues, selling and marketing expenses were 31.4%, up from 24.0% in the same quarter of 2012 as our average order size declined driven primarily by our product mix shifts. We continue to believe that selling and marketing expenses as a percentage of total net revenues will decrease in the long term as we achieve greater economies of scale and utilize channels more efficiently.

General and administrative expenses increased 8% to $7.5 million from $7.0 million in Q4 2012 which reflects the growth of our overall business. As a percentage of total net revenues, G&A expenses were 9.6% which was down from 10.8% in the same quarter of 2012.

Total operating expenses for the year was $132.1 million which was an increase of 53.9% from prior year. This was mainly due to the increase in selling and marketing costs as the number of customers and orders increased. Loss from operations in Q4 2013 increased to $6.2 million compared to an operating profit of $1.7 million in the same quarter of 2012. For the full year loss from operations increased to $5.0 million compared to a loss of $2.3 million in 2012.

Net loss was $5.6 million in Q4 2013 compared to a net profit of $1.1 million in the same quarter 2012. And for the full year net loss was $4.8 million compared to a net loss of $4.2 million in the prior year. Net loss per ADS was $0.11 compared to net income per ADS of $0.01 for the quarter. Each ADS represents two ordinary shares.

On a non-GAAP basis adjusted net loss which excludes the impact of share-based compensation expenses is $5.1 million compared to an adjusted net income again non-GAAP of $1.5 million in Q4 2012. Adjusted loss from operations and net loss non-GAAP for the three months ended December 31 excluded $0.5 million of noncash share-based compensation expenses.

Net cash provided by operating activities was $3.8 million for the three months ended December 31, 2013, compared to $1.9 million in the same quarter 2012 in part due to a $2.6 million increase in our customer order backlog. At December 31, 2013, the company had cash, term deposit and restricted cash of $105.1 million compared to $21.2 million as of December 31, 2012.

In terms of guidance we expect net revenues in Q1 2014 to be in the range of $78 million to $80 million representing a year-over-year growth rate of approximately 6% to 9%. While we won’t issue guidance beyond Q1 we do expect that the rate of our year-over-year revenue growth will increase starting in Q2 this year.

This concludes our prepared remarks and at this point we will start taking questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions.) Your first question comes from the line of Ella Ji from Oppenheimer. Please ask your question.

Ella Ji – Oppenheimer

Thank you for taking my questions. My first question is with regards to your Q1 guidance – 6% to 9% seems to be pointing to a low rate compared to your historical growth trends. Can you give us some color in terms of this direction? Also is there any seasonality that is impacting this factor? Thank you.

Mark Stabingas

Hi, it’s Mark. Yeah, there’s really two things I would respond with. Number one we’re still kind of working through some of the softness in our wedding business in Q1 although we’re seeing progress there and we do expect to grow sequentially. The year-over-year comparisons will still be challenging in the quarter and I think as we’ve said in the guidance we do expect beginning in Q2 that the rate of year-over-year growth will begin accelerating. And so we don’t necessarily believe that the Q1 growth rates would be indicative of long term.

Ella Ji – Oppenheimer

Okay, thanks. And then also with regards to your mobile offering can you share with us some of the operator [data] such as the number of downloads of your mobile app or the active users of your mobile, and how much does your mobile revenue represent as a percentage of your total revenue?

Alan Guo

This is Alan. So I mentioned in my prepared remarks that our mobile revenue grew more than 5x year-over-year. We continue to think that mobile will be one of the most important growth drivers for us in 2014 so we have launched four apps in-house, the Ador-branded apps and we think we’ll continue to actually adopt this strategy.

We also think that the mobile will drive up the higher customer repeat behaviors and in turn increase the efficiency of customer acquisition and also the lifetime value of consumers. But as for the metrics you are asking for I think we are not ready to disclose those for competitive reasons.

Ella Ji – Oppenheimer

Okay. And then lastly can you give us an update of your CFO search?

Alan Guo

So we have kicked off our official search for our CFO. We are in the process of screening résumés and meeting candidates. We feel the process is on track and we want to make sure that we go through the process to find the right CFO who is going to be very strong operationally and to lead the financial organization for the company.

Ella Ji – Oppenheimer

Okay, thank you for taking my questions.

Alan Guo

Thank you.

Operator

Thank you. Your next question comes from the line of George Askew from Stifel. Please ask your question.

George Askew – Stifel Nicolaus

Yes, thank you. You mentioned that of course apparel beat expectations in the quarter, better than expected. How did the other major categories in your business do relative to expectations in the quarter?

Mark Stabingas

Hi George, it’s Mark. I think in general I would say we were, obviously we came in slightly above our guidance so I think that the beat to guidance was in large part due to the apparel business outside of wedding. And I think in addition to that the other categories performed just about as we expected. There’s sort of ups and downs in individual categories but on balance I would say they were about as we expected.

George Askew – Stifel Nicolaus

Okay, good. Thanks for that. And then could you take a moment and talk about per order shipping costs? I mean clearly as the average order size has come down the cost of shipping is presumably a bigger percentage of the purchase to a given customer. Is that becoming a friction point in the business? Are you having to offer more free shipping deals? Can you just kind of address that?

Mark Stabingas

Is your question about our expenses or… I just want to make sure I respond-

George Askew – Stifel Nicolaus

Well it’s really just the expense in general. In other words, I order a wedding dress, I end up paying $20 shipping. If that order size on average is coming down in the company then the shipping cost is not coming down I think; and hence it becomes a bigger percentage of the cost. And that’s either borne by the customer or borne by the company in terms of free shipping. How are you guys handling that issue?

Mark Stabingas

Well, I’d say two things. We’re constantly looking at different shipping promotions and evaluating our shipping pricing in the context of demand. Overall our cost of shipping per order has been stable to down during the year and I think obviously the big thing we’re doing which we referenced is we’re opening up a small number of regional fulfillment facilities. We added an additional partner in the US in Q4; we expect to open a facility in Europe in the first half of the year and we’re looking at South America as well.

So I think in each of those instances the intention is to reduce shipping costs and provide a better customer experience, so we’re sort of trading shipping expenses for what we expect will be lower fulfillment expenses. And that’s sort of our near-term strategy to continue to be able to offer good value to customers.

George Askew – Stifel Nicolaus

Got it, that’s good. Just the last question: in the last say quarter or so, I know that forecasting has been a focus of the company – kind of better calibrating that. What have you guys done in the past few months to help give you better confidence in your forecasts and your guidance going forward?

Mark Stabingas

Maybe I’ll take a crack at that and ask Alan to comment perhaps on some of the longer-term; I can just talk to the process that we’ve been through here in preparation for this quarter. And as you might expect we do a combination of bottom-up forecasting – looking at countries and categories; and then we’re also looking at top-down demand, so we’re looking at demand curves by category and overall, and looking at how those curves compare to prior year.

Obviously in this particular quarter, although we beat guidance we actually had an increase in the backlog as of the quarter end, so that was about 2.6 million orders that we took that we didn’t yet ship during the quarter – an increase of 2.6 million. And so I think we’re learning as a company of course as would be expected and at least the process that I’ve participated here in the last month and a half or so is consistent with what I’ve seen at other places I’ve been.

Alan Guo

Mm-hmm, and just to add on top of what Mark has said, you know, from a CEO perspective I think I felt that over the learnings we had in the past couple quarters, financial forecasting is not only a job for the Finance Team – it’s really a job for the full company. It’s really important for us to nurture the business leaders to better understand their business drivers and also better to have plans to respond to any external changes or external market changes or internal driver changes.

I think that’s just a very wide part of this process as well. I feel that over the course of a couple quarters the business leaders in a variety of functions have become more mature and also more familiar with this type of methodology so that will also continue to be very helpful to help us to increase the rigor of our process.

George Askew – Stifel Nicolaus

Got it, great. Thank you for that.

Operator

Thank you. Your next question comes from the line of Cheng Cheng with Pacific Crest Securities. Please ask your question.

Cheng Cheng – Pacific Crest Securities

Thank you. Just one question on the apparel gross margins: I was just wondering how much it was impacted from a shift in mix and how much was impacted by the pricing adjustments you guys mentioned earlier? Thank you.

Mark Stabingas

Yeah, I think almost all the impact was mix-related. We didn’t really have a change in our pricing strategy in Q4. Obviously we’re selling thousands of products so in any one [quarter] the mix shift might be slightly different. But we didn’t have a fundamental change in pricing strategy in Q4. I think what you might be referring to is the comment I made about some changes that we’ve made since year-end in the wedding category. And so that’s more of a Q1 impact.

Cheng Cheng – Pacific Crest Securities

Okay, thank you.

Operator

Thank you. Your next question comes from the line of Rick Scheer at Opta. Please ask your question.

Rick Scheer – Opta

Thank you for taking my question. Really if I could cover three areas – if I could get an assessment of the businesses, as you’ve expanded both in geographies and product categories how are you tracking and assessing the long-term prospects for those opportunities? And then the second piece would be could you summarize the key initiatives for 2014? And last, how should we think about getting to a point where we’ve got a sustainable operating margin? What leverage points have to be achieved in terms of either sales or customer counts in order for that to manifest itself? Thank you.

Alan Guo

Okay, so for the first question, the way we think about it, the uniqueness of our business model is we will have the capability of accessing a large number of geographies without being physically present there. I think that’s a very big leverage for us to actually try out markets and identify which ones will get more traction and support. But after being in the business for six years I think we have had a pretty good idea which markets that we have better traction in than others.

For example, Europe has been very strong for us and we also show very strong growth in emerging countries like Brazil and Russia. So those will be the geographic areas we will continue to focus and nurture, so that’s number one.

For categories, we actually have a set of criteria of selecting categories which starts with we want to find categories where the market size is very huge. I mean the categories that we play in – the apparel business, the accessories business – those are very big categories. And secondly of course the categories have to have certain unique economics that work for the e-commerce business. I mean typically the product size is smaller and the value is higher (inaudible).

And thirdly we also want to find categories where consumers value variety and choices, value fast time to market – there’s always a constant change of new products, new novelty products. So those are the areas that we would feel strongly about. And moving forward we feel the fashion business including the wedding and also the small gadget and accessory business will remain to be our primary focus for the categories. So that’s kind of the way we think about the categories and countries.

Just one thing to add: we do feel that in some countries we have a by far, way better traction that we do in other countries, so one of the strategies that we’re going to move forward is really going to nurture and acculturating a couple countries where we get the most consumer votes.

And secondly, the second question is about…

Mark Stabingas

The second question was about 2014 key initiatives. Do you want me to take that?

Alan Guo

Yeah.

Mark Stabingas

Yeah, so there’s probably four things that you could map all the activities toward. The first one is getting the wedding business on track and we’ve talked about that. Obviously that’s a big business for us and we still see huge opportunity there and we’re encouraged by the first steps that we’ve taken to get that business growing again.

The second one again is, the second key initiative and focus area is the fast fashion space which we have a lot of momentum in right now and so we want to continue to grow that. Mobile would be third and we talked about the success we’re having there but we think there’s a fundamental shift in consumer behavior underway. We’re certainly seeing that in our business and we think continuing to build on that will be a big part of 2014.

And then the last is diversifying our traffic. So we’re focusing on driving traffic from a more diverse set of sources and our efforts around affiliates are critical to that as are our customer acquisition efforts in mobile. So those are kind of the four things.

I think your last question was where’s the leverage in the model? No surprise there’s three areas – one is marketing. We talked about that, and in terms of the leverage in marketing it is about diversifying traffic, it is about mobile and stickiness in mobile, and it is about repeat customer behavior where we saw a nice increase year-over-year – we went from 28% to 37% of revenue from repeat customers. So we think there’s leverage in marketing, both short- and long-term.

Fulfillment and shipping – we talked about swapping shipping expense for fulfillment expense. I won’t repeat that but again, that’s part of our strategy for establishing some geographic hubs. And then lastly G&A which is really pretty self-explanatory but we certainly feel like we’ll get leverage on G&A over time as we extend our platform.

Rick Scheer – Opta

Thank you.

Operator

Thank you. (Operator instructions.) Your next question comes from the line of [Roger Paradee] with Silver Horn. Please ask your question.

[Roger Paradee] – Silver Horn

Thanks a lot for taking my question. The question is first for Mark – Mark, what is your role? I heard that you’ve announced that you are the President of the group. Can you explain to us what your concrete responsibilities are? And the second question is related to what you just mentioned regarding the activities for 2014. You told us the goals but what are the concrete measures that you’re doing?

Mark Stabingas

I’ll answer your first question which is where am I kind of focusing my time. Obviously initially I’m doing my best to learn the business and meet the people. As you would expect I think functionally I’m spending more of my time with the Finance organization, working with Jennifer; spending some time with the operating leaders particularly on the category management side – just trying to sort of share some best practices that I’ve learned or been exposed to. And then as we get through that I’ll probably spend some more time on business development and opportunistically on M&A which we feel there could still be some opportunities there.

So that’s where I spend my time. I think in terms of the specifics, I think the question I got was what were the sort of key areas that you guys are focused on? Those are the four. I’m not sure I’d be going into very specific details about tactics in each of those areas. I think you should expect that as we’re taking to you in the coming weeks and quarters we’ll be updating you on our progress there but I don’t think we’re going to be sharing the details of our specific tactics and strategies within those areas.

[Roger Paradee] – Silver Horn

And then maybe let me ask it differently: you are confident that after Q1 your revenues will go up significantly then. What gives you that confidence? There must be some activity, some changes that you’re thinking of – and the question is maybe to Alan and Mark at the same time.

Mark Stabingas

Yeah, I think the things we’ve talked about a little bit are number one, first and foremost we are expecting and we’re beginning to see a recovery in our wedding business. And I think particularly as we get to the second half of the year the comps become easier so that turns from a negative to a positive. We are counting on continued momentum in fashion which has been a big part of our success in Q4 and we continue to see a big opportunity there – we think we’re only beginning to scratch the surface.

And then lastly mobile, we’re just very bullish on adoption that we’re seeing of customers accessing our site through mobile devices, downloading our apps – and we think that’s a great way to reach customers, and customers that we get from mobile are by and large stickier customers. And so we think that has all sorts of benefits. I don’t know if you would…

Alan Guo

Yeah, and also just from the whole company perspective we added great additional talents. I’ve talked about Mark and Quinten through the acquisition of Ador but we also hired a number of very senior retail executives in respect for retail and e-commerce companies globally, and I think they have been on board for a period of time and that is a lot of the strength of our team; and also the technology team as well.

So there certainly is significant improvements of our functional expertise team and overall the company’s management team, and also after a couple quarters after the IPO we felt the existing team also learned a lot about how to better manage the business as a publicly listed company. So there’s a lot of growth in the team as well, so that’s also just from an internal perspective we feel we’re in a much better position than when we started a couple quarters ago.

[Roger Paradee] – Silver Horn

Thank you.

Operator

Thank you. As there are no further questions at this time I would now like to hand the conference back to management for closing remarks. Thank you.

Margaret Shi

This concludes our Q4 2013 Earnings Call. Thank you for your participation and ongoing support of LightInABox. We look forward to providing you with more updates on our business in the coming weeks and months ahead. Thank you.

Operator

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

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