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E-Commerce China Dangdang, Inc. (NYSE:DANG)

Q1 2014 Earnings Conference Call

May 15, 2014, 08:00 AM ET

Executives

Sophia Zhou - Investor Relations Director

Yu Yu Peggy - Executive Chairwoman

Susan Zhang - Financial Reporting Director

Analysts

Dick Wei - Credit Suisse

Chi Tsang - HSBC

Henry Guo - JG Capital

Tian Hou - T. H. Capital

Philip Wan - Morgan Stanley

Alicia Yap - Barclays

Long Lin - Brean Capital

Fiona Zhang - Oppenheimer

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter E-Commerce China Dangdang Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, May 15, 2014.

I would now like to hand the conference over to your first speaker today, Ms. Sophia Zhou. Thank you ma'am and please go ahead.

Sophia Zhou

Thank you and welcome to our first quarter 2014 earnings call. With me today are Peggy Yu Yu, Executive Chairwoman; and Susan Zhang, the Financial Reporting Director 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 like to turn the call over to our Executive Chairwoman, Peggy Yu Yu.

Yu Yu Peggy

Thank you. Good morning and good evening, everyone. I'm very pleased to report Dangdang continued its path to profitability in the first quarter of 2014. We began the year on a positive note. Our hard work brought us strong topline growth, the highest gross margins since the second quarter 2011 and the second consecutive quarter of our return to profitability. More important, we met our revenue growth target of 30%. We continued to make good progress in transforming Dangdang from an online bookstore into an integrated online shopping mall with prominent destination categories.

Combined general merchandise sales of RMB1.7 billion from both principal and marketplace surpassed books and media for the sixth consecutive quarter, growing at a rate of 71% year-over-year. We remained focused on developing our destination categories with positive results. Sales of books and media were RMB1.15 billion in the quarter and grew 33% year-over-year. In fashion and apparel, we added a number of well known men's, women's and children's brands to our marketplace. Fashion and apparel accounted for nearly half of marketplace GMV and continued to outpace the growth of the overall marketplace at Dangdang.

Our increased sales across all categories gave Dangdang stronger buying power and our gross margins expanded to 18.2%. While marketing spending increased by 55% year-over-year to support our branding efforts for younger new destination categories, Dangdang's total operating expense as a percentage of net revenues in the quarter came down significantly over the same period last year. Our investments in technical applications in the areas of merchandizing, logistics and customer service and our focus on operating efficiency are gradually paying off.

Now let me update you on some key operational achievements. In procurement, we focus strongly in the efficiency of our warehouse operations. We wrote out the CPFR, the collaborative planning forecasting and replenishment process in all our warehouses. So CPFR, we're to able to replenish inventory faster than before and fulfill more orders at local distribution centers. In March, we began trial operations at our Pianjing distribution center. This newly constructed facility is approximately 100,000 square meters, which includes a 40,000 square meter front delivery center or FDC. We now have four FDCs in use to receive an allocated inventory to support the rise of our distribution centers. The number of orders shipped for the same-day next-day delivery also increased in the quarter.

We increased overall marketing spending this quarter compared with same period last year to build a brand image of a variety of newer categories, including apparel. In addition to have the advertising for branding, we also spent more on low-cost channels, Dangdang's affiliate programs. We acquired 2.8 million new customers this quarter and order size was 38% year-over-year. On the technical front, our big data applications are helping both our customers and our internal operations. For Dangdang customers, the personalized recommendations for them are more relevant than before. Because the enhancement recommendation takes into account our brand attribute, customers prefer price range input from similar orders on the previous buying history.

While internal merchandizing activities, machine learning is helping us with better online space allocation for different products. During this quarter, our operating teams were successful in bridging more traffic from books to apparel and other general merchandize. We continue to optimize our mobile application to improve the customer experience, and so mobile orders increased to nearly 14% of total orders during the quarter. We intend to invest more in mobile Dangdang going forward. At Dangdang, there are more customers who feel confident that they are getting the best price.

On March 24, we emphasized our commitment to low prices with the launch of double payment for any price difference. If a customer finds an identical product at a lower price on another website, we will reimburse our customer with the payment equivalent to price the product difference. We also amended our free shipping policy to be more friendly to customers in far away provinces such as Guangzhou or Tibet. Customers in these areas are required to meet different basket sizes in different product categories to qualify for free shipping. They only need to spend RMB50 now to qualify for free shipping. For customers in other areas, we lowered the free shipping threshold as well.

In summary, in the first quarter of 2014, we had solid revenue growth, enhanced growth margin and realized strong bottomline improvement. We will continue to drive growth to both marketplace and principal business with a strong emphasis on our destination categories.

Let me now turn the call over to Susan Zhang, our Financial Reporting Director, for the financial review. Susan, all yours.

Susan Zhang

Thank you, Peggy. I will now discuss the first quarter results in more detail. Our total net revenues is RMB1.7 billion in the first quarter of 2014, a year-over-year increase of 30%. Media revenue was RMB1.15 billion, which was 33% year-over-year. General merchandize revenue was RMB570 million, up 26% year-over-year. Other revenue, which is commission-based net revenues from our third-party merchants was RMB67 million, a year-over-year increase of 16%.

We grew the number of new customers by 17% year-over-year to about 2.8 million. Active customer increased by 16% year-over-year to around 8.6 million. The average contribution per customer grew 32% to RMB333, up from RMB250 in the same period last year. Total orders in the first quarter were around RMB16.4 million, up 11% year-over-year.

Gross margin was 18.2% in the first quarter, an increase from 17.2% in the same period in the last year and 17.6% in the fourth quarter of 2013. The year-over-year and the quarter-over-quarter increases resulted from strong gross margin contribution from our books and media and the increasing in other revenue, representing the sustained scaling of the marketplace.

Gross profit was RMB317 million, a year-over-year increase of 38.24% and a quarter-over-quarter decrease of 9%, which was the result of a similar decline in revenue in the first quarter, which is traditionally an off-peak season for E-Commerce in China.

Fulfillment expenses in the first quarter, which include warehouse and shipping expenses, were RMB171 million, a decrease of about 7.5% year-over-year. Fulfillment expenses were 9.8% of total revenues compared to 30.8% in the same period last year and 9.4% in the fourth quarter of 2013. The year-over-year decrease in fulfillment expenses as a percentage of total revenues was primarily due to the more efficient warehousing operations and lower shipping cost. The quarter-over-quarter increase as a percentage of total revenues was a result of the seasonal decline in revenue in the first quarter, which is mentioned above.

Marketing expenses were RMB67 million, representing 3.9% of total net revenues compared to 3.2% one year ago and 4.2% in the fourth quarter of 2013. The year-over-year increase as a percentage of total revenues was due to the increased investments in marketing programs to build awareness of Dangdang's fashion and apparel destination category. The quarter-over-quarter decrease as a percentage of total revenues was a result of lower expenditures for marketing programs relative to the fourth quarter, which is typically the peak season for E-Commerce in China.

Technology and content expenses were RMB44 million, which was 2.5% of total net revenues compared to 3.7% in the same period in the last year and 2% in the fourth quarter of 2013. The year-over-year decrease in technology and content expenses as a percentage of total revenues was primarily due to the operating leverage and a reduction in IT headcount. The quarter-over-quarter increase as a percentage of revenues was primarily due to the higher IT staff cost and a seasonal decline in revenue in the first quarter

G&A expenses were RMB37.6 million, which represented 2.2% of total net revenues compared to 2.4% in the same period in 2013 and 2.3% in the fourth quarter of 2013. The year-over-year decrease in G&A as a percentage of total net revenues was primarily due to the larger scale and improved management efficiency. The quarter-over-quarter decrease as a percentage of total revenues was primarily due to year-end bonuses accrued in the fourth quarter of 2013.

Share-based compensation expenses, which were allocated to related line items, were RMB3.2 million in the first quarter compared to RMB2.6 million in the first quarter of 2013, which was 23% increase.

Income from operations was about RMB10.1 million compared to an operating loss of RMB80.4 million in the same period last year, primarily due to our efforts to increase gross profit and the operating leverage. Operating margin was 0.6%, up from 66% in the first quarter a year ago and 0.4% in the fourth quarter of 2013, which represents improving operating margin for the fifth quarter in a row.

Foreign exchange loss and loss of forward foreign currency contracts was RMB17.4 million compared to RMB2.7 million one year ago and RMB17.4 million in the fourth quarter of 2013, which was largely attributable to the depreciation of the Chinese RMB against the US dollar in the first quarter of 2014. But based on the expectation that Chinese RMB would further appreciate against US dollar in 2014, we'll enter into a one-year forward for any current contracts in June in the last year. We had an exposure to following currency risk primarily related to the time deposits where you [ph] house in US dollar. And on the US GAAP, the forward following currency contracts are measured using forward rates in open markets at the date of the balance sheet. We recognized relative date in the fourth quarter of 2013 based on the valuation using the matching price as of December 31, 2013. As this year there was a depreciation of the Chinese RMB, we recognized our loss in this quarter.

Net income was RMB2 million compared to a net loss of RMB72.7 million in the same period in 2013. And net margin was 0.1% compared to a negative 5.5% in the first quarter in last year and represents the second consecutive quarter of making profit.

Now let's move to the balance sheet. As of March 31, 2014, we had cash and cash equivalents, short-term time deposits, available for sale investments and held-to-maturity investments totally of RMB1.39 billion as compared to RMB1.21 billion as of December 31, 2013. We had no short-term bank loans as of March 31, 2014. Additionally, we generated cash growth of operations of about RMB250 million in this quarter.

Turnover days for accounts receivable were 2.3 days in the first quarter of 2014 compared to 4.3 days in the corresponding period in last year, since no customers showed (inaudible) instead of cash on delivery. Turnover days for inventory in the first quarter of 2014 were about 115 days as compared to 120 days in the first quarter of 2013 due to improved inventory management and better product selection. Turnover days for accounts payable were 137 days in the first quarter of 2014, compared to 139 days in the corresponding period in 2013.

Our CapEx in this quarter of 2014 were RMB35.8 million, primarily related to the investment in Pianjing warehouse construction. Finally, our outlook for the second quarter of 2014 is as follows.

We expect our total net revenues in the second quarter to be around RMB19.42 million, representing a year-over-year growth of around 30%. We also expect our GMV from our marketplace to grow at a rate of 80%.

Okay. We will now open the call to questions. Please go ahead. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Dick Wei from Credit Suisse.

Dick Wei - Credit Suisse

The first question is that if management can share about more product mix in the general merchandize in marketplace now and how should we expect the churn is going to be like. And secondly, if you can comment on the progress with the Yihaodian and other more strategic partnerships that you have in mind.

Yu Yu Peggy

In terms of product mix, the combined sales of our general merchandize surpassed that of books and media for the sixth consecutive quarter. And so we are selling more apparel, baby maternity and other stuff than books at Dangdang today. And inside the general merchandize, our apparel is the leading category that accounts for more than half of the GMV from the marketplace. And following apparel, baby and maternity are also performing very strong and followed by household items like (inaudible) inside that. And we expect that the destination category to outperform the competitive or convenient categories going forward.

And to your second question of relationship and the cooperation with Yihaodian, our technical teams are still working on the system, because both companies are B2C companies and having its own very strong technical-oriented solutions. So our engineers and their engineers are working on our (inaudible) and some other things. We expect this cooperation to move forward in the second quarter. And our relationship with Tmall continues to perform. We get orders for our books and media mostly from Tmall customers from smaller cities. So that's pretty much in a nutshell of our cooperation with our strategic partners.

Operator

The next question comes from the line of Chi Tsang from HSBC.

Chi Tsang - HSBC

My first question is you are lowering your free ship interest holding and you have this double payment strategy. I'm wondering if you can talk about sort of what's driving the change in those tactics.

Yu Yu Peggy

It's more of a customer-friendly move than anything else. We've had different free shipping thresholds for different types of products and at different areas. And if someone needs to a RMB39 worth of books or RMB69 worth of baby maternity in order to qualify for free shipping in a given area. And then we realized from our interaction and our customer survey, consumers are complaining that our free shipping thresholds are a little bit complex for them to figure out how much they need to buy from different product category and based on where they live. So in order to make this free shipping thresholds more transparent and easy to use, we lowered the threshold for most part and then streamlined the meaning takeaway the difference between different product categories in some areas. So that was behind the extended move to user-friendly free shipping policy.

Chi Tsang - HSBC

In terms of the double payment then?

Yu Yu Peggy

The double payment is we promise our customers that we offer three long-term value for them, which is better price, better selection and more convenience. And for the better price, we want our customers to be confident that getting the absolutely lowest price. So if they can show us like some portals or pictures that they found something on another website it's identical product with a lower price and now we're reimbursing the price difference and double the payment in that we assure our customers that Dangdang day-in, day-out, year-in year-out giving the best price, which is also a customer-friendly move.

Chi Tsang - HSBC

And my second question is just in terms of marketing cost. So you're seeing marketing cost up a lot year-on-year. What kind of stuff are you spending on? And B, what's the outlook for marketing spend for this year?

Yu Yu Peggy

Let me first talk about what we spend now. We spend mostly on branding activities and advertisement and those efforts to promote our new and younger categories like certain types of fashion and apparel and things like that. So we spend those marketing dollars on branding activities for young and new categories. And the outlook for marketing this year, we think, is probably similar to what we've spent before, but can be somewhat higher. We feel very confident that our standoff margin is very strong and our operating spend is very well controlled. So we are at this stage that we can spend for branding, we can spend for new category. And we have a lot of spending leverage these days.

Chi Tsang - HSBC

And just to be clear, so last year, you spent RMB43 million in marketing. You're saying that you'd spend sort of the same RMB43 million or more than that?

Yu Yu Peggy

Our first quarter spending in marketing basically we did not spend more than 50%, although what we expensed in 2013, that's what I was referring to. I think we spent something like RMB67 million.

Operator

Next question comes from the line of Jiong Shao from Macquarie.

Unidentified Analyst

This is George calling for Jiong Shao. I have two questions. The first one is related to your market size. I know that the GMV of your marketplace was up 100% year-on-year, but revenue was only up about 16%. So the takeaway actually decreased from like 10% a year. It's also about 5.7%. I understand that's related to likely the revenue mix or the product mix in your market size. I just wonder what's the trend going forward. Do you see at some point the takeaway should bottom to recover?

Yu Yu Peggy

Although revenue line was falling, it will pick up again going forward. And in addition to lower takeaway, given different product mix than what we had a year ago, there are particular reasons that the other revenue is lower in last quarter. In the first quarter a year ago, we had a large proportion of other revenue coming from delivery services with marketplace merchants. And later, we realized that some merchants preferred (inaudible) rather than using our own delivery network. And in order to make it very easy for the merchants to make their delivery to our customers easy, we give the liberation to our merchants that they can either use Dangdang delivery courier network or they can use somewhat else. So as a result, cash on delivery and other courier services we use to charter income from merchants wouldn't (inaudible) this year. So the coming of the other revenue was largely attributed to this reason. And other revenue as a percentage of general GMV of marketplace going forward we think is going to pick up again.

Unidentified Analyst

And can you quantify what's the delivery related other revenue in, say, a year ago? Like in first quarter 2013, it's like RMB58 million.

Yu Yu Peggy

We do not give that kind of detailed disclosure, but it's a very large proportion.

Unidentified Analyst

And a follow-up question on the double payment also, the free delivery threshold changed. So I understand that's definitely a very user-friendly move, but just in terms of the qualitative impact on your expenses, can you quantify that?

Yu Yu Peggy

We think the impact of both double payment for any price difference and the free shipping are fulfillment costs and our marketing expense will be very small. And we are gaining a lot of operational leverage in our logistic and fulfillment and the kind of free shipping that we carry forward through this base is very large.

Unidentified Analyst

Can you give us any update on the flash sales business? Any color will be very helpful.

Yu Yu Peggy

Flash sales continues to perform very well. It is significant part of our general merchandize and also marketplace activity.

Operator

The next question comes from the line of [ph] Young Chu from CICC.

Unidentified Analyst

(inaudible) I have two questions. The first is about (inaudible) VAT exemption. Could you quantify the impact of VAT on our gross margins and our revenue growth?

Yu Yu Peggy

VAT doesn't impact our growth much as a percentage. At the same time, we don't even pay VAT tax to the government revenue, we also move the benefit of making a deduction from the tax payment. So percentage-wise, it does not impact the gross margin line. But even with larger topline, the absolute RMB amount from gross margin growth.

Unidentified Analyst

The second question is about our procurement cost. We noticed that the fulfillment cost as a percentage of our total revenue has declined since the fourth quarter in 2013 and that your net sustainable in the future and how we're going to maintain our strategy in procurement infrastructure?

Yu Yu Peggy

Our strategy in fulfillment is to have a very scalable and also best practice tact logistics operation. So we operate our warehouse and we make many, many improvements. And for shipping, our network and the technology we provide for network partners are also helping. So you can see the result that as a percentage of the total revenue, our logistic has come down consistently, because a larger proportion of logistic goes to pay shipping cost, which has very little room to go down. So we think the total percentage cost for logistic has limited room to move downward. But at the same time, we believe Dangdang is remote operational efficiency provider among e-commerce companies in China.

Operator

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

Unidentified Analyst

This is (inaudible) on behalf of Thomas Chong. So the first question is a follow-up on fulfillment cost. So the fulfillment (inaudible) on the R&D in Q1. So shall we expect for the decrease in the following quarters or will it stabilize at a certain level and what is this stable level like around R&D?

Yu Yu Peggy

I think the fulfillment cost has some room for improvement, but very limited.

Unidentified Analyst

So the stable level is around RMB10, right?

Yu Yu Peggy

Maybe, but not a whole lot.

Unidentified Analyst

The second question is regarding mobile Dangdang. So I heard there is 14% of orders coming from mobile side. So is there any update on like order size, mobile and orders for user in the first quarter?

Yu Yu Peggy

The 14% mobile orders from Dangdang is a quarterly result. And it's up a lot over a year ago, but we see we have significant room for improvement to do in the future. Mobile traffic now is close to 40% and we think that right now we are seeing some of the applications, but we haven't seen really, really revolutionary application like what internet did to offline shopping as we witnessed 14 years ago. So for mobile application, we are making gradual process along the line. And we don't see much big difference between mobile orders versus PC orders, but we do see mobile users who access Dangdang and its real products and reviews and other things more frequently than PC customers.

Operator

Your next question comes from the line of Henry Guo from JG Capital.

Henry Guo - JG Capital

So again, on the gross margin, so quite an improvement here. So my question is what is the potential here for company to really continue to spend margin, so what is the long-term level we can think of? Any color would be helpful.

Yu Yu Peggy

The long-term gross margin area at Dangdang going forward through is I think in the neighborhood of low-20s. And now our gross margin is 18.2%. I think we're on track of making progress toward a long-term goal. And the improvement of gross margin this quarter is really great. We see gross margin improvements in books, media, in other revenue from market trades, commission-based and we think that way it's a really very nice progress we saw this quarter.

Operator

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

Tian Hou - T. H. Capital

So the question is related to the general merchandize. So in Q1, the revenue from general merchandize showed a very healthy growth. So I wonder how much that is due to the new tax policy or there is a tax policy applied to this sector at all. So if there isn't any tax policy positive impact, what's the trend of the growth throughout rest of the 2014? And in the general merchandize, I assume the growth of margin on this area is higher than your media product. If so, how much higher can you take that?

Yu Yu Peggy

The VAT tax policy only applies to book and media and does not apply to other types of products such as apparel. That's number one clarification. Number two clarification is the VAT tax benefit does not improve gross margins, because at the same time, we do not pay VAT tax to the government, we also lose the tax payment deduction from the merchants when we used to. So what's 16% is for, it is 16% now. But at the same time, because our revenue base is much larger, even with the same gross margin percentage, the absolute amount of gross profit goes up. The average as a percentage stays the same with tax benefit or without tax benefit. The gross profit amount, because of bigger topline, it gets bigger. So in terms of general merchandize margin difference versus that of book and media, general merchandize carriers lower gross margins than book and media. Book and media have higher gross margin.

And for your question regarding to gross margin trends for the rest of 2014, we expect the gross margin to continue its improvement for the 2014. There could be quarterly fluctuations, but the general trend is our gross margin is going up.

Tian Hou - T. H. Capital

The next question is related to competition. So from March to April, we followed an advertisement from Vipshop, Gome, JingDong, Suning, a lot of the international e-commerce vendors. So it seems like the competition is likely to be more intensive than easy. So what's the strategy from Dangdang's point of view to deal with such kind of competitive landscape?

Yu Yu Peggy

The think that the advertisement you refer to really has not impacted Dangdang's business. And I think that the worst time is no one has much financial discipline. But I'm referring to like still get money burning stage like two years ago. And now with e-commerce companies going public, I think it's very good, because everybody will be in the open area under the same book. And I think the public market for financial disciplinary will make spending and many things will be shareholder-focused and more disciplined. So that's my outlook.

Operator

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

Philip Wan - Morgan Stanley

So my question is about the apparel category. It's a big category and also seems to be more competitive. So for Dangdang since it's going to be a material category for your company, so in the merchants' perspective, what is Dangdang doing better for them to use your platform instead of other platforms?

Yu Yu Peggy

In apparel, it is a very big category and it is also very competitive. And for merchants, Dangdang are doing a couple of things. One is Dangdang are bringing them very mature customers with higher spending power. And Dangdang customer concentration based on our experience of being a book seller for more than 10 years that very well educated office workers that have high income and the concentration of their spending powers went in our merchant participants like very much. And also, we think in apparel itself, Dangdang has deep roles to build, because so far we are only strong in a small segment of apparel, which is (inaudible), office wear for young workers and for casual wear for weekend and for clothing for men and for other family (inaudible) needs, there're many categories that we're very small and we're going to make further investments and bringing more progress in sales.

Philip Wan - Morgan Stanley

And then my next question is about your payments. You mentioned that in a call (inaudible) there are more customers choosing online payment method. So could you share with us the percentage of contribution? And then your best case, what is the impact to your margin?

Yu Yu Peggy

The impact to our margin is very small. The payment targets we paid to such as China Merchant Bank or China Industrial Commerce Bank is 0.0%-some. So the expense-wise, it doesn't make a lot of difference. And in terms of breakdown on online payment versus cash on delivery, I don't have that number on hand now. Philip, we need to track on that number and get back to you later.

Operator

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

Alicia Yap - Barclays

I have a little bit more broaden industry question. When we look at the e-commerce product categories, what are some of the product categories that are not already selling on the online platform that you think may have a lot of opportunities to grow? And then that is something maybe like a new areas we can expand into. And then in relation to that, can you maybe share with us your view on, let's say, the growth rate and also the penetration rate for each of the major categories, for example, like the books would probably be close to 50% market share and all that. And will that more offline to online transition that will be happening and continue to support the growth rate for the online books? And then for apparels and baby products and all that, can you kind of like give us your opinions or your view what is the current online shelf or counter for the total retails for this product category and what are the market shares and the growth rate?

Yu Yu Peggy

To your first question, what product is not yet sold online, which tends to grow faster in the future, I think most products and even services in China today are filled online. It's just the difference of the percentage. Certain categories such as book and media, the online shopping penetration rate is very high, so the upward growth room is a lot more limited than younger newer categories. And for different types of growth product categories, I think they're going to carry very different growth pattern going forward. And I think seems like home furnishing, those are not very standardized and very often merchants and shops are far away from customers. Those types of product category has bigger growth rate to deliver and I think they have less online penetration these days.

And in addition to high penetration of book and media, consumer electronic is another area that has very high penetration. In this category, we see JD, which bought 51, we see Suning, we see Amazon, we see Gome. So consumer electronics is crowded. And the less crowded are less standardized products. And to some extent, a lot of local services have high online penetration rate to deliver.

Alicia Yap - Barclays

And in terms of apparel, I know it's very fragmented still. Do we get a sense of how much is our market share in terms of the overall online retailer that sells or participates under apparels?

Yu Yu Peggy

I would not be (inaudible) low single-digit. Yeah, it is. So it is so fragmented and we've been in this business for over a year and we are performing well, but relatively to what the market can contain, we are very young.

Alicia Yap - Barclays

And then second on the gross margins improvement trends, can we assume is that more will be driven by the product mix on the general merchants side category or is it more the mix between the marketplace which is the combinations versus the direct sales model?

Yu Yu Peggy

We are seeing high gross margins from all categories we are in, meaning books and media. We are delivering higher gross margins. And to compare marketplace commissions versus gross margins from principal sales, marketplace is delivering more gross margin power.

Operator

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

Long Lin - Brean Capital

I did have a follow-up on the mobile. So you mentioned that you will continue to invest on mobile. So can you just elaborate on that like what are some of the areas that you plan to invest in? And also (inaudible) partnerships with like leading mobile players on the mobile internet, if you can share some color on that?

Yu Yu Peggy

For our investment in mobile, most of the investment will be in engineering stuff and to invest in our talented programmers. And mobiles are very application-driven and they need to be packed out for our engineers and then (inaudible) customer needs and also fit our product category very well. So Dangdang customers can have very slick experience in using different mobile applications, whether it's tablets or it's smartphone or it's a regular smaller speed application. So most of the mobile technology investment will be in the area of more engineering to be hired to be brought up by our staff. So that's to your first question.

And to your second question, I think mobile Dangdang will be mostly organic growth from our own customers. And we are seeing Dangdang customers are using both their PC and their mobile application to access us, to buy from us and to get service from us. So we believe that this trend is a long-term trend and it's going to continue. So deliver very strong mobile application for new customers as well as for existing customers who migrate from PC are mighty important to Dangdang.

Long Lin - Brean Capital

For mobile, like you got the 14% of total orders. So what percentage of revenue is from mobile and what percentage of your new customers are actually acquired from mobile?

Yu Yu Peggy

We do not provide further breakdown other than the percentage of orders coming from mobile. But we've observed that our mobile customers in terms of their shopping behaviors, they are very similar to our existing Dangdang customers. And their viewing behavior is somewhat different. And they view and look at and they track our product reviews and compare products and they compare prices more frequently than PC Dangdang customers.

Operator

Your next question comes from the line of Kevin Kopelman from Cowen & Company.

Unidentified Analyst

This is [ph] Andrew Merrick on for Kevin. Continuing on mobile, are you seeing any differences between your smartphone and tablet users? And I'm just wondering are you seeing any differences in the competitive environment on mobile versus PC?

Yu Yu Peggy

Tablet versus smartphone, tablet users tend to have larger size. We think it's because they are richer customers. And so that's something we saw. And for competition itself, I think e-commerce itself is competitive and the competition is driven by products and the categories and the prices. So there's no division between mobile e-commerce versus regular e-commerce. And that's what I see.

Operator

Your next question comes from the line of [ph] Wendy Huang from SEB.

Unidentified Analyst

Hi. This is Debbie calling on behalf of Wendy. I have a quick question regarding your M&A strategy. Given the dynamic change in China's e-commerce space and the lineup of several e-commerce IPOs, what's management's thoughts about potential M&A opportunities in the market? And are we open to any investment from those class 1 internet companies those are on traffic aggregators?

Yu Yu Peggy

Yeah, there is a conventional wisdom going if you want to make it strong in e-commerce, you will need to be thought out either the B or A or the T (inaudible). And I understand people think that traffic is very important. And our point of view is number one, Dangdang has a very open mind. We like to work with any partners that brings us good traffic, quality traffic. And at the same time, having operated in e-commerce industry for such a long time, we definitely understand traffic does not translate into e-commerce sales. If traffic can translate into e-commerce sales, then (inaudible) does not need to sell its e-commerce company to another e-commerce company. So we're seeing that e-commerce company is to have its own core competence to be a vital and important player in the long run. And I think we delivered that in the form of pricing, in the form of product selection and in the form of convenience for customers who shop. So that's why Dangdang can continue to grow at a very reasonable cost, because we are truly attractive to Dangdang customers.

And for vertical categories, the younger categories we're in, we actively look for potential M&A targets that we can get the expertise, (inaudible) and get our product knowledge. And so far, we are still at this looking age.

Operator

Your next question comes from the line of Ella Ji from Oppenheimer.

Fiona Zhang - Oppenheimer

This is Fiona calling on behalf of Ella. I just have a very quick follow-up question regarding your flash sales. So I was wondering are you planning to add more categories going forward and what is your strategy in competing with other flash sales players in the market?

Yu Yu Peggy

Our strategy for our flash sales channel will improve adding more categories. And in addition to apparel, we also have products from baby, maternity, books and media, and household items such as bedding. And we intend to in large product selection as well as product category to our flash sales channel. And I think flash sales is a mode that applies to certain type of shopping behavior that certain customers like a lot. Given hour on a give day, there are 10 or 40 brands and with any number of products and the most price markdown can be 80%. So certain customers just like this idea of (inaudible) in 10 minutes or in two hours. So I think flash sales are types for a certain group of Dangdang customers. And we intend to give them more surprises and more products.

And our sales of other categories like new season sales of apparel on the last season sold-out, which we see at flash sales channel, we intend to grow them as well. And adding brands and adding SKU in certain brands and that goes with our category strategy with baby, maternity apparel and other category we operate.

Fiona Zhang - Oppenheimer

I understand that the revenue contribution from flash sales is still very small, but just wondering do you have extrapolation for its revenue contribution in the long term.

Yu Yu Peggy

Flash sales is a meaningful portion of our total GMV and the commission we get from flash sales are pretty much similar to what we get from other market trade participants.

Operator

(Operator Instructions) There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

Sophia Zhou

Operator, you can conclude the call now.

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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Source: E-Commerce China Dangdang's (DANG) Q1 2014 Results - Earnings Call Transcript
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